Buffett’s Top 5 Stock Picks

The top 5 investments of Berkshire Hathaway Inc. as at 15 May 2012 are:

Ranking	Company	Sector	Holding Value
1.	The Coca-Cola Company (KO)	Consumer GoodsNon-cyclical	$15.31 billion
2.	International Business Machines Corp (IBM)	Technology	$12.88 billion
3.	Wells Fargo & Company (WFC)	Financial	$12.71 billion
4.	American Express Company (AXP)	Financial	$8.78 billion
5.	Procter & Gamble (PG)	Consumer GoodsNon-cyclical	$4.92 billion

 

It is advocated that you construct a balanced portfolio with a mix of defensive and cyclical stocks.  As you can see from the top 5 investments of Warren Buffett’s company, Berkshire Hathaway Inc., he practises this too.

37% in defensive or non-cyclical stocks

Defensive or non-cyclical stocks typically remain stable throughout the different phases of the business cycle.  They will normally perform better than the market during recessions.  However during a boom in the market, they will perform below the market.  Defensive stocks include utilities and consumer staples such as food and tobacco.  2 out of the 5 top investments of Berkshire Hathaway Inc. are in defensive or non-cyclical stocks which consist of The Coca-Cola Company and Procter & Gamble.

Balance 63% in cyclical stocks

Cyclical stocks rise quickly when the economy is growing strong and fall rapidly when the economy is in a recession or slowing down.  The 9 sectors considered cyclical include:

• Basic Materials

• Capital Goods
• Communications
• Consumer Cyclical
• Energy
• Financial
• Health Care
• Technology
• Transportation

39% in financials

Historically, financial stocks are one of the first stocks to rally as the economy begins to heal.  Financials are in the business of lending money.  When the economy recovers, businesses and individuals will first start paying off their debts first.  In an expanding economy where businesses start to prosper, banks will be one of the first to benefit from this expansion.  This will in turn translate to the increase in the price of the financial stocks.

24% in technology

You can hardly find anyone who does not have a computer or a smart phone nowadays.  Everyone is a consumer of technology.  Newer technologies are becoming more like utilities where people are snapping them up as they fear of being left behind in the technology curve.  Emerging markets such as China and India appreciate high tech gadgets and make up huge markets that are growing fast.  Businesses do not mind investing in upgrades in their technology as technology promotes efficiency which will help companies to cut costs.

Proper diversification is the key

An effectively diversified portfolio is crucial to solid investing.  By diversifying the stocks in your portfolio, you will ensure a balance and proper management of the risks involved in your stocks investment.  The top 5 investments of Berkshire Hathaway Inc. as at 15 May 2012 clearly illustrate diversification.

The timeless adage about not putting all your eggs in one basket is validated simply because if that one basket falls, all your eggs will break, and you may be left broke.  When you diversify your stocks investment, you are literally putting your investment eggs into many baskets.

 

Picture courtesy of: mytotallyproperty

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