Today is all about Warren Buffett.
That’s because over the weekend, Buffett’s conglomerate, Berkshire Hathaway, held its annual shareholder meeting in Omaha, Nebraska.
And although the main attraction was a six-hour Q&A session with Warren Buffett and Charlie Munger, what’s really important are the subtle insights into Berkshire’s stock picking strategies that were shared throughout the entire weekend.
Keep in mind, Warren and Charlie have been notoriously reserved with the intricacies of their strategy in the past, which is why today I’d like to lay out three insights that we know they employ, and explain why they’re also great tools for retail investors like you…
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Berkshire Strategy #1: Diversify
If you’re a Berkshire Hathaway shareholder, I recommend making your way to Omaha for the annual meeting one of these years.
That’s because to truly understand the brilliance of Warren and Charlie, it’s helpful to see the convention center floor on the week of the meeting.
This is where vendors from Berkshire’s largest subsidiaries set up exhibits for shareholders to learn about the individual companies, and even purchase products at discounted prices.
The diversity is blinding.
Just on this single exhibit floor are brand-new RVs from Forest River that are available to tour… Models of houses by Clayton Homes where the staple paper toss competition takes place… And then there’s exhibits by Geico, World Book, Brooks Footwear, Fruit of the Loom, NetJets, See’s Candy and dozens more.
Berkshire’s portfolio is incredibly diverse which allows them to spread risk still without sacrificing returns. And you should be doing the same in your portfolio!
We ecommend that you don’t let any single investment account for more than 5% of your total portfolio value.
Berkshire Strategy #2: Invest in What You Know
Did you notice how basic the companies I mentioned above were?
A candy company, a shoe manufacturer, an underwear maker, an insurance giant and a book publisher. Buffett never invests outside his “circle of competence.”
This is arguably Buffett’s most important strategy that not enough investors follow.
To best sum this up, let me take a page from Peter Lynch’s book One Up on Wall Street.
In reference to his market research for Dunkin Donuts, Peter states, “Among amateur investors, for some reason it’s not considered sophisticated practice to equate driving around town eating donuts with the initial phase of an investigation into equities. People seem more comfortable investing in something about which they are entirely ignorant… Shun the enterprise that can be observed and seek out the one that manufactures an incomprehensible product.”
In short, you shouldn’t be investing in semiconductor companies if you don’t know an APU from a CPU. And you shouldn’t be buying small-cap biotechs off a “hot tip” if you don’t know the difference between a Phase 2 and Phase 3 clinical trial
Believe it or not, these basic companies that Berkshire invests in can produce the same returns as the high-flying biotech and tech sectors — hence Mr. Buffett’s current net worth of $89 billion…
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Berkshire Strategy #3: Moats Are Not Lame
Moats are always a popular topic during the annual meeting in Omaha as one of Buffett’s stickiest investment nuggets throughout the years has been his advice to invest in businesses that have “wide, sustainable moats around them.”
But what does he mean by this?
He’s referring to the buffer that certain companies have that helps them maintain a competitive edge and keep rivals at bay.
They come in many forms. On Saturday, Mr. Buffett gave two examples of strong moats currently in Berkshire’s portfolio that are not easily susceptible to rivals.
The first was insurance giant Geico who benefits from economies of scale, brand recognition, and most importantly low prices.
And then there’s See’s Candy, whose moat consists of a large, loyal customer base, especially on the West Coast, that can’t be easily swayed by rival candy makers.
So there you have it!
Spread it out. Keep it simple. And buy the moats.
Next time you’re looking to put money to work, think about these three strategies that helped Buffett make billions before you pull the trigger.
Now let’s get to the 5 “Must Knows” of the week…
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5 “Must Knows” for Monday, May 6th
Fresh Trade Fears — On Sunday, President Trump tweeted that the current 10% tariff on select Chinese goods will be increased to 25% this week due to slow progress in the negotiations. This put the recent optimism of a deal in question as the two sides are scheduled to begin their next round of talks on Wednesday in Washington.
U.S. futures and stock markets around the world fell sharply on the news.
Earnings Season Rolls On — We’ve got another week packed full of earnings reports. Here are some of the biggest names that I’ll be watching.
On Tuesday, Electronic Arts, ABInBev, Lyft, Allergan, Lumentum, Papa Johns, Match Group Inc, Crocs, Marriott Vacations Worldwide and Ferrari report earnings.
On Wednesday, The Walt Disney Company, Chesapeake Energy, Roku, Etsy, Marathon Petroleum, McKesson, Albemarle and CenturyLink report earnings.
On Thursday, Dropbox, Cronos Group, Overstock, Booking Holdings, Cardinal Health, Norwegian Cruise Line, Duke Energy and AMC Entertainment report earnings.
And wrapping up the week, JD.com, Viacom and Marriott International report earnings on Friday.
Insights to Watch — With this many Fortune 500 companies on deck to report earnings, there are bound to be countless insights into not only these individual companies, but their respective industries and the economy as a whole. Here’s what I’ll be watching:
As expected, Lyft’s stock price has taken a beating since it IPO’d a few weeks ago. But how is the company faring after gaining access to fresh equity capital? And how do they plan to turn a profit in such a cutthroat industry?
And second, are consumers spending money like we’d expect now that the unemployment rate is low and the “wealth effect” has had time to work its way through the economy? Find out this week as consumer discretionary stocks like Norwegian Cruise Line, Booking Holdings and Marriott report earnings.
The Boeing Saga Continues — More information came out yesterday about Boeing’s dealings with its software flaw. According to a company statement, Boeing knew months before the deadly Lion Air crash that a cockpit alert wasn’t working the way the company had told buyers of the 737 MAX. However, the company didn’t inform the Federal Aviation Administration until after the plane went down. As expected, the stock is down sharply on the news.
Uber IPO — The most awaited IPO in recent history is set to hit the markets this Friday. Ride-sharing juggernaut Uber right now is expected to price between $44 and $50 per share, which would value the company at around $90 billion.
But before you buy shares of this hot stock, remember our IPO game plan — Don’t buy in the first few days or even weeks, as institutional investors are likely to sell shares for quick gains during this time. Instead, wait for the stock to fall after the hype wears off.