It might be one of the most controversial statements I've ever
made. You aren't likely to hear anyone else say it, as it goes
against one of investors' longest-held beliefs.
I thinkdiversification actually hurts your returns.
I'm not saying you should have a portfolio of just two or three
holdings. But at the same time, I'm not at all concerned with
having a portfolio of dozens of holdings that represent every
sector of themarket .
After all, it's impossible to outperform the market if your
portfolio is the market.
Instead, I think investors should focus exclusively on their very
best ideas. The ideal way to do that is to own a basket of no more
than 20 or 30 of the world's greatest businesses. I only say that
many because I don't think individual investors should put more
than 5% of their money in one stock.
Still, those 20 to 30 companies should be the best companies you
And I'm not alone in thinking this way...
Consider that Warren Buffett's
Berkshire Hathaway's (NYSE:
top five holdings make up 75% of his company's portfolio.
"If it's your game, diversification doesn't make sense.
It's crazy to put money into your 20th choice rather than
your 1st choice. It's the 'LeBron James' analogy. If you
have basketball phenom LeBron James on your team, don't
take him out of the game just to make room for someone
Of course, you know how successful Warren Buffett has been in
beating the market. But he's not alone...
For instance, I've found something Icall the "WGB Retirement Fund."
It consists of only 12 stocks, but it's beaten the market for the
past 1, 3, and 5-year periods... and has nearly tripled the S&P
over the past decade. (Haven't heard of the "WGB Retirement Fund"?
You can visit this link to learn more.
Of course, all of this begs the question. If you're going to invest
in only a handful of stocks... which ones should you buy?
I like to own what I call the "World's Greatest Businesses." These
are the kind of companies that dominate their market and reward
shareholders each and every year with billions of dollars in
dividends and share buybacks (along with several other traits I'll
share in just a moment...)
Take a company like
, for example. It's without a doubt one of the World's Greatest
When most investors think of Coca-Cola, they think there is no
money to be made. After all, it's a large company, it has been
around for more than 120 years, and its best days of growth are
seemingly behind it.
But the numbers tell a different story...
During the past decade, Coke's dividends have increased 155%.
Its per-shareearnings are up 149%. And most importantly, the stock
has nearly doubled its investors' money during one of the most
turbulent periods in market history. Not bad for a company whose
"glory days" were supposed to be long gone.
To be fair, I think Coca-Cola is richly valued now. I wouldn't buy
the stock at these levels, even though I think it's a great
But what makes a company like Coke one of the World's Greatest
Businesses... allowing it to beat the market for decades? And more
importantly, how can investors use this information to find other
great businesses to own?
I've been actively researching this topic for several years, and
during that time I've identified 11 traits that are consistent with
the World's Greatest Businesses.
I urge you to print this list out, set it by your computer and
consult it every time you're thinking about making an investment
decision. I'm convinced it will make you a better investor.
1.) The World's Greatest Businesses sell their products at premium
2.) The World's Greatest Businesses sell products used in
3.) The World's Greatest Businesses have a global reach and appeal
for their products.
4.) The World's Greatest Businesses are highly scalable.
5.) The World's Greatest Businesses sell things that consumers
can't live without.
6.) The World's Greatest Businesses face little or no regulation.
7.) The World's Greatest Businesses have unlimited growth
8.) The World's Greatest Businesses dominate their competition and
have clear competitive advantages that keep rivals at bay.
9.) The World's Greatest Businesses generate enormouscash flow with
low capital spending requirements.
10.) The World's Greatest Businesses return billions of dollars to
investors in the form of dividends and share buybacks.
11.) The World's Greatest Businesses have extremely highprofit
margins, or at least margins that outpace their industry averages.
Now, it's rare that any company will have all of the
characteristics I just listed.
For example, cigarette companies sell addictive, high-margin
products. And as a result, companies like
Philip Morris International (NYSE:
have been some of the stock market's best performers... delivering
gains of hundreds of percent over the years. On the other hand,
both companies face stiff regulation.
Meanwhile, a fast-food restaurant like
has a scalable business, but it doesn't sell its products at
premium prices. That doesn't mean it isn't a great business... or a
great investment. McDonald's stock is up more than 300% in the past
Action to Take -->
So while few companies will meet all 11 traits, the more of these
characteristics a company has... the more likely it is to not only
beat the market, but continue earning you money year after
-- Paul Tracy
[Note: If you're interested in learning more about the "WGB
Retirement Fund" I mentioned earlier, visit this link. This "fund"
made of just 12 stocks is beating the market year after year... and
some of America's largest pension funds are investing millions in
these companies. Get the details -- including how you can invest in
this "fund" today -- by following this link.]
Paul Tracy does not personally hold positions in any securities
mentioned in this article. StreetAuthority LLC owns shares of MO,
PM in one or more if its "real money" portfolios.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.