It may seem like a good thing to focus on your very best investment ideas, especially if you know the ins and outs of the company you’re looking at. That said, skipping the “diversification” step carries more risks, especially if you were wrong about a company, its growth trajectory, or if your valuation isn’t quite in the right place. Undoubtedly, perhaps one variable in your Discounted Cash Flow (DCA) model was broken, leading to a margin of safety that was not as wide as you initially thought.
Either way, the right number of shares in a Tax Free Savings Account (TFSA) portfolio will be different for everyone. For some, the sweet spot is 20 names. For others, less than 10 is sufficient. And for those who aren’t afraid to do a little extra homework, forty-plus holdings can still make sense.
Personally, I think an index fund that is exchange-traded can help you cover a lot of the bases you may be missing. And furthermore, I think it’s good to have a handful of names that you believe in. While di-worsification can become a problem for an inflated portfolio, I think over-diversification does less harm than under-diversification, at least for most retail investors who would rather have a backup plan than invest too much in so few companies.
Berkshire Hathaway: One stock that offers sufficient diversification
However, if I could only buy and hold one stock, this is how it would have to be Berkshire Hathaway (NYSE:BRK.B). After Warren Buffett, the Oracle of Omaha, retired early this year, the new CEO is Greg Abel, who happens to be from Alberta. While the man is not as legendary as Buffett, he is a hand-picked industry veteran who can get the job done well. With Berkshire you already get quite a bit of diversification, with insurance, railroads, retail, energy and many other companies providing an interesting, lower-tech alternative to the S&P 500 or TSX Index.
The best thing about Berkshire is that it doesn’t pay dividends, making it a great choice for a TFSA or non-registered account (especially if you tend to reinvest dividends anyway). Indeed, it is better to let Berkshire reinvest what it would otherwise have paid to shareholders.
Perhaps the best thing about owning Berkshire stock as a Canadian is that the lack of a dividend means no 15% dividend tax withholding, which can hit especially hard with a TFSA if you own a higher-yielding US name.
In short
Either way, it’s a nerve-wracking time for Berkshire Hathaway shareholders (shares are down about 8%), especially as Abel (did I mention he’s Canadian?) is getting ready to write his first annual letter as the conglomerate’s top boss (due out at the end of this month).
While time will tell how Berkshire will function under its new top boss, I think it will largely remain business as usual. What’s most exciting is what kind of acquisitions and investments the company will make first now that it’s Abel, not Buffett, who has to give final approval.
#buy #hold #stock