We have two types of investors in this world: the smart investors and the dumb investors. Eugene Fama, of Efficient Market Hypothesis fame taught the dumbest investors to become a little bit smarter by telling them to switch to passive investing. It’s the kind of investing that mimics the performance of the S&P 500 or any other broader index for that matter.
On average, we learn in academic studies that retail investors will typically underperform the market when you add in transactional costs. By becoming passive investors, this is a great improvement. But it doesn’t change the fact that these investors are still leaving plenty of money on the table.
The smart investors don’t try to imitate the S&P 500. There are plenty of better ways to invest. For the past 30 years, Warren Buffett has publicly claimed that he can beat the market and he does so regularly. Our research tells us that by imitating Warren Buffett’s top-five large stocks, these dumb investors would have annihilated the market by 30 basis points from 1999 to 2012. And the same stocks even outperformed the market by 37 basis points from 2008 to 2012.
A phenomenal alternative to dumb investing is opening up an IRA account and imitating Buffett’s top five large-cap stock choices. From quarter to quarter, the list of Buffett’s top-five picks does not change all that often or typically for that matter. Yet it still managed to outperform the market by 4% per year over the last 10 years or more.
There’s no denying that Buffett’s top picks can’t beat the market every month, or even every year for that matter. A strategy for investing does not need to consistently beat the market in order to work as a better choice. Generally, there are often better small-cap stocks available, and that’s why we prefer not to invest in large-cap stocks. But, if you’re curious about Buffett’s top-five large-cap picks, here’s what you should consider:
- Wells Fargo: this is the largest position in the Berkshire Hathaway 13F portfolio. The company has invested over $19 billion in the stock. Ken Fisher, Donald Yacktman and Tom Russo also have big bets on Wells Fargo.
- Coca-Cola: this is Berkshire Hathaway second largest position, and they have over $15 billion worth of shares. Bill Gates also has a huge position in Coca-Cola stock.
- IBM: it’s Berkshire’s third largest position at the moment. This is more of a controversial pick. One billionaire – Stan Druckenmiller – has actually been shorting the stock as of late. Some investors have concerns that IBM’s older technology is going to be replaced by the newest cloud technology. It’s the reason why IBM trades at much lower multiples in relation to the market. This could also be another one of the prime examples of how Buffett outperforms the market by pulling another rabbit out of his hat.
- American Express: the fourth biggest Berkshire pick was trading at $10 less than just five years ago. But it is now trading at $85 per share, and is quite possibly the greatest performing large-cap financial stock in the past five years.
- Procter & Gamble: this stock comes in at number five on Buffett’s top large-cap list. This common company is often overlooked by most investors, but since Bill Ackman got involved, the company has gained 40%.