2 Stocks for a Lifetime

Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Note: This post contained incorrect information about IBM's net income growth. It has been corrected.

Investing can seem like a daunting task, but it does not have to be that way. Rather than trying to put your eggs in too many baskets, why not just pick a basket or two with characteristics similar to the vaults of Fort Knox? In reducing the number of baskets to watch, you get to keep a more concentrated eye on the slightest change affecting your nest of eggs. I believe this method is far superior to picking 50 companies for the sake of diversification. If you wish to eliminate unnecessary distractions in managing your nest egg, reducing your holdings may be a viable option as long as you remember why you are doing it: redirecting your attention from many holdings to focus more intensely on a few. Let’s look at two companies which I believe can be bought and held for a lifetime, both of which combined make up 50% of my investment portfolio.

The first stock, Berkshire Hathaway (NYSE: BRK-B), currently makes up 38% of my portfolio. I have built out this position over the last 18 months, a time when the stock skirted very near to its reported book value. It was also during this time that Warren Buffett, Chairman and CEO of the company, announced that the company would repurchase shares of Berkshire Hathaway at 1.1 times book value or lower. On Dec. 12, 2012, the company announced it had repurchased $1.2 billion worth of shares and would now initiate repurchases at a price of 1.2 times book value or below. The treasure trove of great operating companies, an insurance business which consistently makes an underwriting profit, the world’s greatest stock picker (now joined by two younger but excellent investors), and a willingness to buy back shares when they are cheap--Berkshire Hathaway is one company I would not hesitate holding for a lifetime.

My second pick is Markel Corporation (NYSE: MKL), which currently holds a 12% weighting in my investment portfolio. Similar to Berkshire in many ways, Markel strives to build shareholder value through profitable insurance underwriting, acquiring attractive operating businesses, and managing a $2.3 billion investment portfolio. Tom Gayner, President and Chief Investment Officer of Markel, has a long history of out-performing the S&P 500, much to the benefit of Markel shareholders.

More recently, the company has announced that it merge with another large insurance company, Alterra Capital Holdings (NASDAQ: ALTE). What makes this merger so interesting is the multi-billion dollar fixed income portfolio held at Alterra, which will come under the purview of Tom Gayner. With fixed income securities earning a pittance in today’s low-interest environment, the transition to equities may provide a big boost to Markel’s book value down the road. As you can see in the chart below, Markel has grown its book value at a fast clip, and I believe that trend will continue due to the company’s great management team and operational focus.

<img src="http://media.ycharts.com/charts/475576bf90217141f4cf1d319cc95d2e.png" />

data by YCharts

If concentrating on two solid companies does not allow you to sleep at night, following some of the moves these great investors make may be the solution you are looking for. Coattailing successful investors can be a great way to find excellent investment ideas. In November of 2011, Warren Buffett shocked many in the investment community when he announced Berkshire Hathaway’s $10.7 billion investment in International Business Machines (NYSE: IBM). Being one to typically avoid companies in the technology sector, Mr. Buffett explained that IBM had transformed its business operations and appeared to be more of a services business than a technology company. The chart below clearly shows the company's operational excellence, with net income climbing 27% in the last three years, in addition to its diluted shares outstanding declining 12.5% over the same period. The double whammy of increasing earnings and declining share count makes this a particularly interesting investment possibility.

<img src="http://media.ycharts.com/charts/bafb6a816dc24c58b556bde64658f749.png" />

data by YCharts

A smaller, more focused investment portfolio is not for everyone. The daily gyrations of the market can make you seriously question holding just 5-10 companies at a time. If that is the case, you are better holding a number that better fits your philosophy or temperament. There have been a number of very successful investors whose philosophies have ranged from holding a handful of stocks to holding hundreds of stocks. What is most important is that you stick to a philosophy that works for you.


RoyalScribe owns shares of Berkshire Hathaway and Markel. The Motley Fool recommends Berkshire Hathaway and Markel. The Motley Fool owns shares of Berkshire Hathaway, International Business Machines., and Markel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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