I break down my stock holdings into three distinct buckets: long-only stocks, long-only stock index funds, and long-short stocks and options (for income primarily). From these, my long stock holdings are by far the largest bucket as you can see in the following pie chart—from a November 2019 post:
I have been gradually whittling down my index fund holdings and replacing them with individual stocks as I find good businesses to own. I started doing this several years ago but thanks to this prolonged bull market, I still have good bit of index funds left. You can see my full portfolio here. As for stock options, I have them for generating income so that asset type doesn’t grow much. For background on how I use stock options, see this post.
It is my individual stock holdings that have been growing the fastest. That is partly due to the stock market gains but also helped by my opportunistic buying of good stocks whenever the market drops. [See this on how I took advantage of the stock market volatility in 2018.]
Looking at my individual stocks alone, this group is certainly getting very top heavy. Consider this: My top-10 stocks now make up 55% of my holdings. And my top-20 stocks are well over 77% of the total. The rest (about twenty other small positions) make up the remaining one-fifth.
You can see from the table that more than half of these positions are in technology companies. It’s no surprise that they are mainly why my portfolio is so top heavy today. High Tech stocks like Amazon, Apple, Microsoft have outperformed the overall stock market in the past decade.
Would I consider rebalancing my positions? No. It is an unconventional thing to say but I let my winners run. As long as I believe in their long-term prospects, I wouldn’t reduce my positions. Peter Lynch said it aptly:
Selling your winners and holding your losers is like cutting the flowers and watering the weeds.
I follow his approach.
Out of my top-20 holdings, which of the businesses are in danger of getting permanently damaged in the next recession? None, I believe. Tesla? Perhaps. It is a young disruptor that by no stretch of imagination dominates its industry today. Even then, I suspect Tesla is in the process of crossing the chasm, so to speak. It’s a highly volatile stock. Just six months ago, it wasn’t even on my top-20 list. It could fall off the list just as soon.
None others, though. All are dominant in their markets, have unique technology, product or brand, and competitive strengths that make them hard to be displaced. These businesses are like flowers, not weeds. I’d continue watering them.
What’d Buffett do? For fun, I looked at Berkshire’s (BRK.A) stock holdings. As of its February 2020 13-F release, Berkshire Hathaway’s top-20 stock holdings are as follows:
As you can see from the table, Berkshire’s top-10 holdings are an astounding 82% of its overall stock portfolio. Top-20 make up nearly 93%. Now that’s a whole lot more consolidated portfolio than mine is. Does Warren Buffett ever consider lightening up on some of these for the sake of rebalancing. I don’t think so.
It is possible that a decade from now, my own stock portfolio will be as concentrated as Berkshire’s. I let my winners run just like Warren Buffett does. His portfolio is far more concentrated today due to its age. He has holdings there that he bought many decades ago. My longest duration investment is merely two decades old (Amazon) and majority of others are seven to twelve years in the making.
One other reason why Berkshire’s portfolio is so concentrated today is Apple. Buffett made a significant bet on it two years ago and the stock has done wonderfully well since then. Since 2016 when Buffett began purchasing Apple stock, I estimate that he has nearly 100% gain on his cost basis. So Berkshire’s current high concentration (of 31%) in Apple is both a result of Buffett making a big bet (~15%) and then getting it doubled in three years.
For what it’s worth, I have had Apple in my portfolio for much longer (since 2011). It’s my #2 holding today after Amazon. The difference is that I didn’t make such a big bet on Apple as Mr. Buffett did. Fortune favors the bold! But I am doing well too, and happy with my Apple shares.
Among my flowers, there are very few that I have added to in the last twelve months. Though this just changed with the market drop last week—more on it in a future post.