The Berkshire Hathaway company is run by Warren Buffett. If you had put your money into Berkshire in 1965, you would have 1,900 times more money now than you did then.
One of the most well-known portfolios is made up of Berkshire's stock investments. But its huge success isn't just because it came out at the right time. Berkshire doesn't worry about when to buy a stock like many other investors do. Instead, it focuses on finding the right companies at the right price. Time will work out on its own.
If you look at the huge gains Berkshire made in so many companies (American Express and Moody's both had long, steep climbs while they were in the Berkshire portfolio), you'll see that it doesn't really matter if Berkshire could have done even better if it had bought a certain stock two months earlier or two months later.
If you like the company's fundamentals, management, and growth plan, you usually don't have to wait for the stock to bottom out or bottom out and start to turn around.
One big thing breaks this rule, though. When a stock has lost more than half of its peak value, which is a big drop, you need to be extra careful with it. And you shouldn't do anything until the price of the stock goes back up.
Even this safety measure is not enough for companies that have dropped a lot. A drop this big means there is a big problem. It could be a financial scandal, a CEO who is taking money from the company, falling sales or profits, products with old technology, or just bad press.
Even if you wait for a stock to go back up, its rise could be due to good news that won't last. If that's the case, the stock's rise might not last.
To return to Berkshire...
The 33 stocks in Berkshire's portfolio, which are worth $42.7 billion, were bought over a long time. In 1988, it started buying stock in its "big four" companies, which are American Express, Coca-Cola, Gillette, and Wells Fargo. But a stock bought ten or fifteen years ago is old news. And one bought 1-2 years ago (think Google again) might as well be from the Stone Age.
Choosing the right company at the right price is a big part of investing. For example, it is no longer a good time to buy Google. The right company last year. The wrong company this year.
Five of these 33 stocks are relatively new investments: Home Depot (HD), Lexmark International (LXK), Tyco International (TYC), Anheuser-Busch (BUD), and Kingfisher (KGFHY).
Don't run out to buy these companies right away. Only one of them should be thought about. (I'll say more about that later.) For example, since Berkshire bought Anheuser-Busch stock, it has been surprisingly weak. And three of the others have problems.
In the last 25 years, only three of Berkshire's stocks have lost money. During that time, its average annual return was 20,3%, while the average return for the S&P 500 was 13,5%.
But a list of the remaining 27 stocks in the Berkshire portfolio won't help you much, other than to satisfy your curiosity about which stocks are in this top-performing portfolio. None of these businesses can give you a lot of money right away.
The average return on the Berkshire portfolio is a very impressive 20,3% per year. But here's how to play this game to get even better results, much better results:
- Make sure that the business is in an interesting market. A surging market helps upside. It also makes it easier for a company to get a piece of the market if it has something to sell.
- Find a way to make a lot of money. The company should have SOMETHING up its sleeve that can pay off really big. This could be an idea, a product, a piece of technology, or an asset.
- Keep your eyes open for new people and good ideas. I just don't believe the old management team when they say they found God and can bring the company back to life.
Keeping the above three things in mind as I looked for companies outside of Berkshire's portfolio, I found three likely lightning strikes.
One company is on its way to becoming a multibillion-dollar tech company, but its market cap is less than $90 million. The company failed because of both bad management decisions and the tech crash. It now has a new CEO who has a lot of experience turning things around. More than 100 patents are held by the company (more than one of which has billion-dollar applications).
Last year, another company, this one in the real estate business, made more money than ever before. But between September and March of this year, the stock fell more than 50 percent. This was partly because people were worried about a "real estate bubble." But there is a huge demand for its products, and the majority owner of this company thinks it is such a great deal that he wants to buy it all. The price of this company could very well double in the next few months.
The third company has done well before. It is being worked on by Microsoft, Apple, Sony, Yahoo, Napster, TiVo, and Walt Disney. And for more than a decade, it has increased earnings by 20 percent or more. Still, since the start of 2004, the price of a share has dropped by more than 44 percent. The company has never been worth less than it is now, and its future has never looked brighter. If its shares were priced based on what they were really worth, they would go up by more than eight times what they are now.
These three companies have a real chance of giving you a return on your investment of up to 1,000%. You can get a free report that tells you more about them. You get the report when you join The Wealth Advantage, our new high-end investment service. It will show you how to invest like Warren Buffett, but with a much bigger upside.
