Create Your Own Miniature Berkshire Hathaway

rainingmoneyOne of the very first things I did when I initially started investigating investing and a potential strategy that could work for me and my goals was read about Warren Buffett. Of course, it’s almost impossible not to run into the guy and his amazing story as a general citizen, let alone as someone who’s actively seeking knowledge about how to go about investing in a successful manner.

I won’t bore you with all the details of his life, but I’m currently re-reading his biography, “The Snowball: Warren Buffett and the Business of Life”, and I can’t help but continue to find inspiration in what he’s done and how he’s gone about doing it.

While I’d like to write a lengthier post someday specifically pointing out some great concepts about Warren’s personal life, I’d like to discuss the transformativeΒ business decision to take control of Berkshire Hathaway Inc. (BRK.B) and how it can apply to regular investors like you and I.

Rolling A Snowball

In the early 1960s, Warren Buffett began buying stock in Berkshire Hathaway, feeling that its stock was priced below its intrinsic value. After a rebuffedΒ buyout offer from Berkshire management, Buffett actually increased his ownership stake until the point he was able to take over the company. At the time it was a failing textile business, which is an awfully strange business from which to launch the greatest investment empire the world has ever seen. However,Β this vessel had an extraordinary captain.

What’s important to note at this point is that Buffett started to invest in the insurance industry soon after taking control of Berkshire. HeΒ purchased National Indemnity Company in 1967 for $8.6 million, and later began buying up GEICO. These decisions were crucial, as it allowed him to abandon the sinking ship that was the textile business at Berkshire, while simultaneously leveraging the float of insurance operations. See, the float is the money that is collected from premiums, pooled up to be used until some or all of it is paid out later through claims. Prudent underwriting allows a decent enough spread between premiums and claims, which creates a profitable enterprise. But leveragingΒ thatΒ float money by investing it intelligently through superior capital allocation really compounds one’s results. And that’s effectively where Buffett started seriously rolling his snowball.

Capital Allocation

Berkshire now owns a variety of insurance operations, and these are at the core of his mighty empire. However, Berkshire is far from just a massive insurance operation, and that concept is at the heart of what I’m discussing today.

Buffett used that float money and incoming capitalΒ from early operations to create a truly unique and enviable company with wholly owned subsidiaries in businesses like: Dairy Queen, Fruit of the Loom, Helzberg Diamonds, NetJets, and BNSF, along with major equity stakes in public companies, including: Wells Fargo & Co. (WFC), The Coca-Cola Company (KO), International Business Machines Corp. (IBM), and American Express Company (AXP). Berkshire has also recently announced plans to buy the fifth largest auto dealership in the US, which means Berkshire will literally be invested in planes, trains, and automobiles.

Berkshire has its fingers in all kinds of pots. Think media, energy, banking, insurance, clothing, jewelry, transportation, real estate, retail, technology, food, and consumer goods. When one area of the economy – like energy – is weak, the odds are good another area of the economy – like real estate – will pick up the slack. In the meanwhile, Buffett, via Berkshire, is collecting a constant influx of capital with which he can allocate as he pleases. This capital comes his way not only through the float that the insurance operations generate, but also via profits from the wholly owned subsidiaries and dividends from the equity stakes in public companies.

Creating Your Own Berkshire

I don’t think it’s all that impossible to create a unique and miniature Berkshire Hathaway of your own. Although, miniature might be the understatement of the century since we’re talking about a company with a market cap north of $300 billion.

So let’s delve into what kind of steps are necessary to create your own mini Berkshire (the how) and what that end result might look like (the why).

Load Your BB Gun

Buffett often refers to the capital that piles up as a result of his insurance operations, private subsidiaries, and dividends from equity stakes in public companies as his “elephant gun”. Berkshire has now grown to the point to where it takes massive acquisitions to really move the needle for the company. And you can see this with some of his more recent moves, including the purchase of BNSF and deal involving Heinz. These are elephants, and thus need elephant guns to take them down.

However, the good news is that you andΒ I do not need an elephant gun to take down targets that will move the needles for us. We aren’t dealing in acquisitions worth billions of dollars, but stock purchases on the order of $1,000 or $2,000 at a time can make a materialΒ difference in our day to day life. And targetsΒ of this size simply need a BB gun to take down.

What’s even better news is that it’s a lot easier to get your hands on a BB gun than it is an elephant gun. Thus, it’s possible to a much smaller degree to replicate what Buffett has done, and I’ll admit that I’ve basically been imitating Buffett somewhat as I’ve marched from being worth less than zero to managing a portfolio slowly nearing $200,000. They say imitation is the sincerest form of flattery.

I look at my BB gun as the savings I’ve been able to generate by living below my means. I’ve never made a lot of money – up until 2010 I had never made more than $40,000 in a single year (my annual SS statements depressingly remind me of this fact). And even during the last year or so of working in the auto industry I made north of $50k. Certainly not the type of income that moves mountains. Now that I’m writing full-time I’m making even less. However, I’ve already discussed that saving more is more effective than earning more.

The excess capital that you’re able to generate through the difference between your job income and your expenses is your BB gun. Load that thing up and go hunting! Because taking down targets only allows you more ammo in the future to take down even bigger targets. Shoot, reload, and shoot again.

Invest In High-Quality Businesses That Throw Off More Cash Flow

So you may not have world-class insurance operations that build up an elephant gun, but Buffett wasn’t working with the kind of capital he is now if you look back to where he started in the early 60s.

The good news is that the excess capital you’re able to generate through your own hard work is just the start. The key is to leverage that capital by investing in great companies that pay regular and reliable dividends, and increase these cash payouts regularly.

See, the increasing cash payouts these investments send your way gets funneled into your cash pile, slowly growing the size of your BB gun. And it’s no secretΒ that you can invest in the same public companies that Buffett does.

Buffett has major investments in Coca-Cola, IBM, and Wells Fargo. So do I. And so can you. These are all publicly traded stocks that anyone with some cash and a brokerage account can invest in. What’s even betterΒ is that all of them have a propensity to not only hand out regular cash payments to shareholders via dividends, but they also have histories of increasing these cash payouts. While Wells Fargo’s track record was interrupted by the financial crisis, Coca-Cola has a 52-year streak of increasing its dividend on an annual basis. IBM has a 19-year streak. You see where this is going.

Look to own stakes in businesses with low debt, great management, high returns on equity, solidΒ margins, numerous competitive advantages, and histories of excellence.

I currently own minority stakes in 51 different businesses. And this collection of high-quality businesses should send me near $6,000 in dividend income over the next year. That $6,000Β is a decent little BB gun all by itself, but will soon turn into $8,000, then $10,000 and eventually $20,000. And it will continue to grow thereafter. This cash flow is extremely flexible and can be used for personal expenses right now, but actively and selectively reinvesting it assures that it will grow over time. I’m combining this $6,000 with all the savingsΒ I’m also able to generate via living frugally, thus supercharging the capital I have available to allocate. That’s $6,000/year extra I have available to me to allocate. $500 per month. That’s real cash flow that is almost assuredly coming my way no matter what, and even better it’s highly likely to continue increasing for the rest of my life before you even factor in continued capital input and allocation.

Regularly generating free cash flow of your own by maximizing your income potential while simultaneouslyΒ minimizing expenses and then allocating this capital into great companies that will assuredly send you more cash flow over time is a surefire way to create a situation where you’re basically inundated with cash. You’ll have to grab an umbrella for all the cash that will be raining upon you, which is a most wonderful situation for a capital allocator to be in. It’s the situation Buffett has found himself in, and it’s a situation you can find yourself in as well. You may then have to wonder whether or not it’s prudent to invest in an umbrella manufacturer.

Focus On Value In Addition To Quality

Of course, you’ll want to invest in high-quality companies when the price is advantageous relative to value, but avoiding businesses that are low in quality and unable to produce generous cash flow and increase their dividends for lengthy periods of timeΒ is even more important. After all, getting a great deal on a turd still leaves you holding a turd at the end of the day. However, even the greatest businesses in the world can be poor investments over the short and medium term if the price is paid is far too high.

Buffett is infamous for his ability to swoop in on great businesses precisely when they’re experiencing troubles that are transient in nature. Deciphering temporary problems from long-term fundamental issues is difficult, but, generally speaking, great businesses tend to continue being great more often than not. I believe, as does Buffett, that betting on quality will serve you well over the long haul.

This ability to buy when everyone else is selling requires one to be an independent thinker. Acquiring consensus in your decisions is not only not necessary in order to be a successful investor, but it can actually be a hindrance. Don’t worry about what everyone else is doing or what mood Mr. Market is in. Focus on fundamentals, focus on value, and focus on quality.

Buffett is of course also able to swoop in and buy when everyone else is selling because he generally has a lot of cash on hand. Some of this cash is necessary due to the insurance operations within Berkshire; however, that cash pile gets built through the power of cash flow. Do not discount the power of savings and cash flow, as the aforementioned inundation of cash allows you to buy precisely when the apex of maximum value is reached, which can lead to exemplary returns and higher yields over the long haul.

Pretend Like You Own The Entire Company

Berskshire owns quite a few companies outright. These are now wholly owned subsidiaries that send all of their free cash flow up the chain to parent Berkshire, where Buffett is able to allocate that capital in the best way he sees fit for Berkshire Hathaway shareholders (which includes himself).

So it’s easy for Buffett to fancy himself a business owner because he is one. Through Berkshire he directly controlsΒ many different companies. Although these subsidiaries have independent management teams and they run fairly autonomously, Buffett is the boss.

However, by owning stakes in publicly traded companies you’re an owner as well. You quite literally own a piece of a company when you buy stock in it, which is why it’s important to think like an owner. This line of thinking should course through your veins because by buying up stock in a company you should be pretending as if you own the entire company. After all, why invest $1,000 or $10,000 in a company if you’re not willing to buy the entire thing? Anything less than a completeΒ commitment toΒ an investment means you may start to question your thesis and fold when the stock price falls. Instead, a drop in a stock price should be seen as an opportunity if you really believe in the company and its future prospects.

Diversify

Berkshire owns a multitude of businesses under its umbrella, both via wholly owned subsidiaries and equity stakes in public companies. And these businessesΒ are widely diversified throughout different sectors of the economy. This level of diversification means no one business can crater the mothership, which is how I recommend a miniature Berkshire Hathaway be built as well.

I currently controlΒ what I believe is already a teeny, tiny Berkshire Hathaway of my own. I have exposure to insurance, food, consumer products, rail, energy, finance, natural resources, real estate, national defense, technology, healthcare, retail, and telecommunications through my investments in 51 different high-quality companies. And my ownership stakes in these companies is increasing month after month, partly due to the increasing cash flow they provide me.

Diversification is probably the only free lunch an investor has. While going big on a few companies can lead to excellent returns if you’re right, it can lead to possible portfolio destruction if you’re wrong. I have a lot of faith in my ability to pick outΒ quality at a value, but I’d rather not bet my financial independence on just a few companies. Unforeseen and unfortunate events may hit one or two companies, but the oddsΒ of 50 or more companies all suffering unexpected issues at the same timeΒ is extremely unlikely outside of a major recession, which is the exact opportunity that someone with regular and increasing cash flow relishes.

Berkshire has itsΒ fingers in a lot of pots. And I like that strategy. Different companies excel at different times, and some companies go through extended periods of low growth due to restructuring, acquisitions, or just poor economic conditions. However, if youΒ ownΒ companies in areas of the economy that’s booming while others are more or less busting your prodigious cash flow remains…well, prodigious. Which means your role as supreme capital allocator (or thou who lives off of dividend income) isn’t challenged or hindered.

Conclusion

I’ve spent more than four years of my life building what I believe to be a miniature Berkshire Hathaway. I’ve done my best to comfortably live below my means, which has allowed me to generate the consistent cash flow necessary to invest in great businesses that pay and increase dividends. And these investments have provided further cash flow all by themselves, supercharging the capital I have available to allocate.

Combining more cash flow with an eager desire to invest only in the best businesses around means the portfolio grows and becomes higher in quality over time. My ownership stakes in businesses become larger, the cash flow they send me increases, and my wealth and freedom grows. I may not ever become a billionaire, but I am a guaranteed millionaire. And, frankly, that’s more than enough for me. I need approximately $20,000 per year to live a comfortable life.Β Thus, a $500,000 portfolio throwing off 4% in dividend income would get me there. A tiny Berkshire Hathaway, indeed.

Diversification, quality, value,Β and ownership are all themes you’ll want to master if you’re interested in building your own mini Berkshire Hathaway. It won’t be easy or quick, but over time you’ll be sitting on a portfolio with dozens of great businesses within it, throwing off more cash flow with which you can reinvest and further build out your ownership stakes. Eventually, it’ll throw off enough increasing cash flow for you to live off of. It won’t be quick or easy, but keep in mind that 99% of Warren Buffett’s wealth was built after his 50th birthday.

Full Disclosure: Long IBM, KO, and WFC.

What do you think? Are you busy building your own Berkshire Hathaway?Β 

Thanks for reading.

Photo Credit: chanpipat/FreeDigitalPhotos.net

Note: Affiliate link included.

Edit: Corrected the word “coarse”. Also edited the 21st paragraph.

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136 Comments

  1. As a fellow Buffett lover, I have two suggestions:

    Have you ever been to the Berkshire meeting in Omaha? I’ve been the past two years and it is fantastic. Very inspirational. Much of what is said in the meeting never gets reported by the mainstream media. I guarantee that you’ll learn something. We will be there in 2015 too. Join us!

    As great as Buffett is, I like Charlie Munger even better. He is very private, so you don’t read nearly as much about his as you do Buffett. For a window into his mind, check this out: http://www.poorcharliesalmanack.com/

  2. DM,
    I read the Warren Buffet Way many years ago. Helped to put me on the right investing path when I was younger.

    That’s a good way to think about your portfolio and your own finances. Buffet is extraordinary. Time (and maybe a little bit of luck) has indeed worked in his favor, but what he’s done has certainly not been easy. Eddie Lampert the CEO of Sears comes to mind as someone who is smart, very wealthy, and a follower of Buffet and Graham’s ideas. And look at Sears now, things are starting to go bad (or have been bad for a while now).

    And don’t forget Heinz (amount many many others)! I owned that one when he bought it.
    -RBD

  3. I’m busy building away like yourself. Much like Berkshire, I am working on diversifying not just my dividend growth stocks, but into other asset classes like peer-to-peer lending and real estate. Eventually I’d like to purchase an actual business and run in passively as well, something like a car wash or laundromat. Simple, straight-forward businesses that cash flow and are easy to manage.

    Build away Jason, your million awaits.

  4. Another great inspiration post DM,

    That’s exactly I am trying to do. I’m building a mini Berkshire Hathaway, and it is generating around $3750 per year now. Also, I bought around $10 000 worth of high quality dividend growth stocks last week while everyone is selling.

    I am planning to add more if Mr.Market goes further down.

    Cheers,

  5. I view myself as a mini Berkshire Hathaway. Every month, I get some cash flow that needs to be invested. My sources of cash flow include money I saved from my day job salary, dividends and some money from side hustles.These three sources of cashflow are exponentially increasing my dividend snowball

    Dividend Growth Investor

  6. Great read Jason. I never thought of it like that, but I wholeheartedly agree. Most investors look up to Mr. Buffet, for good reasons. I’m trying to build that snowball one flake at a time! He wasn’t handed a silver spoon and made his own way, which I respect. While I’ll never have his buying ability, I will do it on the small scale with continual investments over the long haul that will eventually produce a nice size snowball. I just added some more MCD, XOM and COP today with the down market. I’m loving this dip to magnify our buying power!

  7. Mr. 1500,

    It’s a dream of mine to go to the annual meeting in Omaha. I hope to go in 2015. I haven’t had a chance yet because I’ve been so busy over the last five years, but my schedule has opened up a bit now. We’ll see what I have going on, as I also have a desire to go to FinCon next year. But visiting Berkshire’s shareholder meeting would be a dream come true. I’m keeping my fingers crossed. πŸ™‚

    I agree with you on Charlie Munger. He’s incredibly intelligent as well. He’s perhaps not as, say, charming as Buffett, but that doesn’t take away from the amount of value his writings and interviews bring to the table.

    Thanks for stopping by. I’ll keep you in the loop if I end up making it in 2015.

    Best wishes.

  8. Today was a good day to add Munich RE to my portfolio. It’s nice to sit in the same boat with the Oracle.

  9. RBD,

    I WISH I would have read about Buffett when I was a youngster. I’d probably already be financially independent, and I’m not kidding. Oh, well. Makes for a more interesting story this way, I suppose. πŸ™‚

    Great job owning Heinz before the 3G/Berkshire deal. That’s being in the right place at the right time!

    I would never discount the value of luck. I believe success is a lot of hard work, but luck is usually thrown in there as well. Of course, we’re all lucky just to be living in 2014. I don’t know much about Eddie Lampert, but that speaks well to the point of diversification. If you hold a portfolio of many businesses, and Sears is just one part of that at, say, 3% or whatever, then you’re fine even if it goes to zero. Plus, Sears has been a long-winding story. There have been plenty of opportunities to get out.

    Thanks for dropping by! Appreciate the support.

    Cheers.

  10. W2R,

    That sounds like a great plan there. Diversifying across other assets with low correlation to one another certainly makes the journey to financial independence much less bumpy.

    A car wash or laundromat where you’re perhaps the only player around and you’re priced competitively would probably lead to solid results. I love common stocks because diversification costs pennies, as the transaction costs are minimal. Not the same with a local business. However, I’ve also long had a desire to own a local pizza shop. It really goes against my plan, but perhaps once I’m already well past my goal I could look into it.

    Maybe we’ll one day both wholly own businesses of our own. Then we really will control miniature Berkshires. πŸ™‚

    Best wishes.

  11. FJ,

    Thanks!

    I’m with you all the way. My BB gun has been shrunk with the move from working in the auto business to writing for a living, although I’ve been particularly active over the last week or so. I love to buy when others are selling. πŸ™‚

    When Mr. Market is in a bad mood I’m in a good mood!

    Let’s hope the good times keep on rolling. Keep up the great work there with deploying serious capital at a time when stocks become cheaper.

    Take care!

  12. DM,

    Thanks for another great article. Like many of us here, I’m like a kid in the candy store with all the deals in the stock market right now! (Only the candy is more expensive and, unfortunately, I can’t afford to buy much of it right now). So far I bought more shares in V, JNJ, and GE. And, just this morning added a bit more of BRK/B, UL, and DIS on my credit card via Loyal3. Hope the red in the market continues for a little longer so we can all get our candy!

    Did you ever think of not only recreating BRK/B but actually invest in it directly? It doesn’t pay dividends now but likely will in the future. Tim has written many good things about the company’s prospects: http://theconservativeincomeinvestor.com/2014/08/25/berkshire-hathaway-breaking-the-traditional-rules-of-income-investing/

    Scott

  13. DGI,

    Sounds like we’re 100% on the same page. I cut out one of my income sources (my day job) to focus on another (side hustle), but I do hope to get the capital available for allocation back up to par at some point here. We’ll see.

    Although I didn’t directly apply for the “job”, being a capital allocator is the best position I’ve ever had. And I’m sure you feel the same way. πŸ™‚

    Cheers!

  14. DGJ,

    Definitely. Volatility is another word for opportunity, in my view. And that’s why I’ve been busier than usual deploying capital. Shoot and reload. πŸ™‚

    I hope you’re busy unloading on great targets over there as well.

    Thanks for dropping by!

    Take care.

  15. SAD,

    The good news is that while none of us will ever approach what Buffett has done, we don’t have to. Creating something that amounts to just a sliver of the type of success he has had will be more than enough for most of us. Buffett could probably sneeze $500,000, yet that’s all I need to really be completely free.

    Keep up the great work over there. Replicating a Berkshire Hathaway on a very small scale is a great path to success, in my view. And nice work picking up on some of the energy plays. I may have to dip into emergency cash if some of the supermajors and energy companies keep going like this.

    Best regards.

  16. Eki,

    Fantastic! It is indeed nice to be in the same boat as Buffett. πŸ™‚

    I think that way every time I collect my Coca-Cola dividend or pop open a can. Good stuff!

    Cheers.

  17. Scott,

    Haha. I hear you all the way. It’s the greatest candy store I’ve ever been to, that’s for sure. πŸ™‚

    I’m precluded from investing in Berkshire due to the lack of a dividend. They may pay a dividend in the future, but that’ll likely be when Buffett is gone. So you have to wonder how much of an advantage loss that will be. He’s set it up so that it can run just fine without him, but I guess we’ll have to see if Todd and Ted are up to the task of allocating capital even partially as good as Buffett, which will probably be impossible on a return basis due to Berkshire’s immense size.

    Thanks for dropping by!

    Best wishes.

  18. The last line you wrote is very powerful – “but keep in mind that 99% of Warren Buffett’s wealth was built after his 50th birthday.” This is a great reminder to us that dividend investing is a journey. It is not something we create overnight.

  19. Ha, Munger is the opposite of charming!

    Do try to go in 2015, at least to Berkshire. Buffett and Munger are not young. The PoPs (Planting our Pennies) are also going and they are a lot of fun.

    Oh, and you HAVE to hit FinCon. It is fantastic and gets better every year.

  20. The challenge I see with Eddie Lampert and Sears is that he follows the Value half of Buffet’s playbook without remaining fully faithful to the Quality half of it. The concept of “there’s cash in trash” (buy cheap and it’s doesn’t matter what you buy) can work out well for a short-term or medium-term trade, but if you want to make a long term buy-and-hold investment, trash will catch up to you. After he spotted the real estate arbitrage opportunity in Sears, it seems he should have either sold off or turned around the underlying retail operation, rather than just hold it. I’m sure the effort was to turn it around, but that is really hard, especially in a gigantic company, and one working in retail. It’s just not clear to me what value proposition Sears offers its customer. So, unless you’re confident you can flip or turn around the underlying business (the PE model), probably better to pay a bit more for good businesses.

    By the way, the plunge over the past few days has been a good opportunity to load up on some quality players at a discount! I picked up some more COF and some KMI. Feeling good about both!

  21. Hello,

    I just wanted to talk about Berkshire and diversification real quick. Berkshire has actually only diversified through necessity. In the beginning when his Bb gun was much smaller he took extremely confident and large positions in comparison to his capital. Now in order to move his needle he is effectively forced to buy entire companies, which in turn diversifies him even if he doesn’t want to be diversified. He’s often said he wishes he had 1million because he could take his much larger concentrated positions to out perform.

    I just thought it was interesting that you talk about diversification while talking about replicating Berkshire Hathaway. While they are diversified now, that diversification was achieved because there was no other option.

  22. Hmm, I think it may be “course through your veins” instead of coarse. Wouldn’t want rough stuff scraping through my veins πŸ™‚

    Honestly, I’m having the time of my life here with this selloff. Can’t remember seeing prices this low for many many companies. If only my BB gun had more ammo! I’m hoping this dip continues for a while.

    Out of curiosity, if you ever opened a pizza shop, what would you name it?

  23. Hi DM,

    great write up, especially with the recent events on the market. Many people are dumping their stocks because of market noise.

    I’m certainly building a mini berkshire ( oh and I do own a few BRK B stock – so Mr. Warren is working for me), the only thing I hate about a falling market is that I don’t know what to buy first. But I guess this is a luxury problem.

    Cheers,
    G

  24. Great post! I wouldn’t mind having a company that’s just 1/1000 the size of Berkshire! Oh, and side note on diversification. Berkshire owns 80 something businesses, but the top 5 makes up the majority of the income. So Berkshire is pretty concentrated a revenue and income level, even though they own a lot of companies.

  25. Hi DM,

    Nice post. Your mini BH is growing nicely. I am sure you will reach 250K in no time. Have you decided on what company you are opening your second brokerage account with? I believe your brokerage account is only SIPC protected up to 250K. I need to open a second one myself but its hard to bet Scottrade’s fees and service. I have been you Optionshouse for two years now and like their platform and fees but they don’t offer unauthorized asset protection like Scottrade or any of the rest of the big brokerages. Time to switch.

    Thanks,
    Frank

  26. Another way at looking at diversification is investing in companies that are themselves diversified. Good companies like JNJ, BBL, GE, and UL tend to be “mini mutual funds” in their own sectors, so buying those limits the potential illusion of diversification when you really aren’t. For example, you may think you are diversified in basic materials because you own six companies in the sector, but if they’re all precious metals miners, are you really diversified. However, if you only own BBL, they mine how many different metals and minerals, so you’re pretty well diversified there. Gotta view diversification not just in number of companies owned or sectors covered, but on the scale of individual subsectors and companies.

  27. John,

    It’s a long, long journey. But it’s also incredibly rewarding and fun all the way along.

    I’m in it for the time, not the money. But it’s certainly fun watching freedom come my way one dollar at a time. πŸ™‚

    Keep walking the dividend road, my friend.

    Cheers!

  28. Tad,

    Like I said in the article:

    “After all, getting a great deal on a turd still leaves you holding a turd at the end of the day”

    Quality is just as important as value.

    Nice job picking up more KMI. It’s currently one of my biggest positions, and my second largest dividend payer. Not sure if I’ll pick up more or not, but it is awfully tempting. Especially after the dividend raise today and the recent drop. Kinder is keeping up his end of the bargain with the clockwork increases.

    Best regards.

  29. took2summit,

    Buffett has also admitted that that strategy wasn’t optimal at times, because he was chasing after the “cigar butts” of the world instead of going after the high-quality stuff. Munger turned him away from some of the Graham teachings and toward looking at long-term quality. As I said, there’s a lot of money to be made by betting big on a few plays, but also a lot of money to be lost.

    Cheers!

  30. Seraph,

    I figured I’d have at least one error in a 3,000-word piece. Thanks for catching that. πŸ™‚

    I’ve been busy as well, and having a lot of fun with it. I haven’t made three separate stock purchases in one month in quite a while, so it feels good to be back at it. I could probably even scrounge up enough cash for one more if I really wanted to be crazy, but then I’d have to take it easy in November. Trying to space things out a bit.

    Hmm, a pizza shop. I’m torn between something snazzy, like “Slice” and something simple, like “Jason’s Pizza”. It’s just my “pie in the sky” dream. πŸ™‚

    Best regards.

  31. Geblin,

    Haha. I hear you on what to buy when everything is dropping. I mainly stick to my long-term plan, although energy’s major drop has me interested there where I wasn’t before (it’s already 15% or so of my portfolio). It’s definitely a first world problem to have. πŸ™‚

    Mr. Market’s bad mood has definitely put a lot of us in a good mood!

    Take care.

  32. Henry,

    What five companies are those? And what percentage of revenue and/or profit? I didn’t know Berkshire broke down subsidiaries’ revenue and/or profit like that.

    I’d love to know! πŸ™‚

    Cheers.

  33. Frank,

    Glad you enjoyed the post. πŸ™‚

    I’m currently looking at TD Ameritrade, Fidelity, and WellsTrade, and Schwab in no particular order. I’d like to go with a company (TD, WFC) that I’m invested in, but I won’t do so at my own detriment. Those four make the cut for me because they all have branches in my city, are all well-capitalized, have plenty of assets under management, and have been through the thick and thin. I’d have to be confident in a company’s prospects over the next 20 years to feel comfortable having a substantial chunk of my assets residing in their coffers.

    Best wishes!

  34. DD,

    That’s a great way to look at diversification. You can go further by looking at the diversification from a domestic/international standpoint, as many large US multinationals generate substantial portions of their revenue from international markets. So you may look at your portfolio and think you need to own a bunch of international companies when you already do, even though they’re based in the US.

    I tend to look at diversification at the company level before adding it to the portfolio. Owning dozens of high-quality companies that are well-diversified all by themselves makes for a very diversified portfolio. And that then lends itself to low odds of facing significant income loss in the event of a major recession.

    Thanks for stopping by!

    Best regards.

  35. Hi DM,

    I’d like to think I’m building my own mini Berkshire, but my portfolio is a pretty wide mix at the moment – I suspect a few of my stocks would not quite meet the ‘quality’ requirement of Buffett (some are closer to the ‘cigar butts’ that Graham used to invest in – hopefully with a nice big margin of safety πŸ™‚ ).

    My biggest challenge is never having a loaded elephant gun – I don’t quite have the patience to build up such a large cash holding. I like to regularly deploy this capital into new stocks. It’s times like these when it’s a little frustrating not having more cash to invest!

    Cheers,

    Jason

  36. Thanks for the feedback Jason. I am looking into Merrill Edge because it offer 6.95 per trade and it offers fraud protection. I like your choices just don’t want to pay more than 7 per trade. I am cheap. lol.

  37. I like a lot of what Buffet says and does to be sure. He seems like a nice guy; lots of philanthropy and playing ping pong with Bill Gates at the yearly meetings http://www.youtube.com/watch?v=oP1nAvi85g0 (Another reason for you to go perhaps!)

    And I think most of us here reading, posting and making investing blogs have the same general idea that investing in solid dividend paying companies is the way to go. Its just a matter of rolling that snowball along a little bit at a time, and like Buffet hopefully it will keep growing and growing!

  38. I think of my dividend growth portfolio as a holding company, similar to Berkshire Hathaway, but on a much smaller scale. Furthermore, I am -proud- to be a part owner of all the companies in my portfolio. Everytime as Waste Mangement truck or Sysco truck swings by I get a warm, fuzzy feeling.

    But the best thing about my own little holding company is that I don’t have to lose sleep over near-term market fluctuations. The dividends keep coming in just fine.

  39. I’m a mini BRK by owning BRK.B! That’s the extent so far and as you outlined above, it’s the one company I have done months of research on to feel completely comfortable with wherever it goes.

    I have a post I need to write on BRK (for my wife) and this definitely has given me a kick in the pants to get started so thanks for the amazing post (I’m sure I’ll be referencing it!) πŸ˜€

  40. I think one of the keys to your success will be the fact that you need so little to live off of. $20k per year is great. Heck I know people that think nothing of buying a new car for $40k every year. Ive always thought saving and living below ones means are easy ways someone can become content and achieve financial success

  41. Dear DM,
    nice post!
    I’m just not sure 100% about that Buffet is so diversified. If you take the over all portfolio, yes you can see that have around 70 different nice company in a multitude of areas. But if you check closer you will see that 4 company represent 55 to 60% of the all portfolio weight. This is for me hight concentration!
    Your personal approach and your portfolio is much more balanced and diversified! in my eyes you are more near to Walter Shloss a great old student of Ben Graham . Same school two different approach, same great long term result!!

  42. I’m wondering when you are going to get around to announcing your wedding date to all of us. Hmm. Anyway, I’m a long time lurker chiming in and follow you obsessivelyβ€”just viewed your submission over on seeking alpha. I only have one question: Why do you choose to have so many stocks in your portfolio rather than develop upon current positions? It’s truly a burning question of mine since I am working heartily at the same goal as you. I’m finding that 20 positions is my limit (to feed the dips and oversee the management and progress of these companies). Please do tell DM! Am I wrong to feed and grow existing positions rather than scouting out β€œsprouts” just because opportunity knocks?

  43. My fellow Canadians will recognize the term TFSA and for our friends around the world, Canadians can put a total of $31,000 as of this year in a registered tax free investment account holding stocks, bonds etc ( that figure increases by $5500 a year, and you never pay tax on it) Well, today was the day that I finally maxed out my contribution and couldn’t resist pullbacks in some of our best dividend companies, some of which have paid out dividends since the 1800’s. My shopping list was BNS, TRP, ENB, FTS & BCE. I have Canadian, US & Global index funds in non registered accounts but today was load up the TFSA with dividend stocks day.

  44. They’re listed in the annual report. Let’s see…

    You have the two major insurance companies: GEICO Gen Re. There’s MidAmerican Energy, BNSF, and Lubrizol. Heinz is on the list too, but Berkshire owns 50% of the company, unlike the other 5 holdings.

    BRK earned about $20 billion in 2013. About $3.8 billion came from BNSF, $1.5 billion from MidAmerican, $3 billion from the insurance holdings, the insurance holding float is around $77 billion, which is primarily the stock investments. And Lubrizol another $1 billion or so. So about half of BRK’s come from the big 5.

    On the equity/book value, i think it’s a lot more. BNSF has around $45 billion in equity on the books for BRK I think.

  45. It’s funny – I was doing a consulting project for Walmart management at the time of the KMart-Sears merger, and one of the senior guys says – direct quote – “what do you get when you take two turds and stick them together?” So, in another life you could have run a Fortune 5 company πŸ™‚

  46. Jason,

    Hey, there is certainly a lot of money to be made in “cigar butts” if you know what you’re doing. Requires a more hands-on approach, and usually the holding period isn’t long-term…but money to be made. πŸ™‚

    It takes a while to build up a steady fountain of cash. Buffett didn’t get to where he is today overnight. As I mentioned, most of his money was made after his 50th birthday. But once you hit water, that fountain should spurt more and more for the rest of your life.

    Thanks for stopping by.

    Cheers!

  47. Tawcan,

    Glad you enjoyed it. I only try to create content I’d enjoy reading. πŸ™‚

    I know you’re busy over there creating your own mini Berkshire. Let’s keep it rolling!

    Best regards.

  48. DW,

    I’m also a fan of many things Buffett. I don’t agree with everything he says or does, but I largely find myself nodding along as he speaks and goes about life. I certainly would love to follow his model in philanthropy later in life, once my assets allow substantial giving. We’ll see.

    Thanks for dropping by. Keep that snowball rolling over there! πŸ™‚

    Cheers.

  49. Spoonman,

    I’m with you 100%. A little holding company that we control, and find ourselves in the positions of CEO, CFO, CIO, President, and Chairman. πŸ™‚

    It’s good to be the boss!

    Best regards.

  50. Steve,

    Haha. Nothing like going right to the source. πŸ™‚

    Do you have plans on going to the annual meeting sometime in Omaha? I’d love to go in 2015. I’m keeping my fingers crossed that I’ll find the time/money to go.

    Cheers!

  51. Dan,

    The power of frugality and savings is not to be overlooked. There’s a ton of abundance in the US right now, and it’s almost crazy to me that more people aren’t walking around financially independent. $20k/yr in the US in the 21st century still puts you at the peak of human quality of life going back to the beginning. It’s a huge advantage to be alive right now.

    Cheers!

  52. Stefano,

    Ahh, Walter Schloss. Really underrated investor, and not discussed enough. I’m guilty as well. I love his frugal nature; he was probably just as infamous for it as Buffett. I know he used to hold a lot of stocks at one time, but I think he would go kind of heavy into one if he felt the case was compelling enough.

    Berkshire may have a more concentrated public stock portfolio than I’d personally like, but you have to keep in mind the portfolio is just one part of the mix. Berkshire also wholly owns a number of subsidiaries that produce prodigious cash flow as well – companies like GEICO and BNSF, among others. So they’re pretty well diversified across businesses on the whole. πŸ™‚

    Thanks for stopping by!

    Best wishes.

  53. divys,

    That’s a good question there in regards to portfolio positions. Ultimately, you have to do what you’re comfortable with. However, I already laid out my ideas on this in a previous article:

    https://www.dividendmantra.com/2014/04/why-i-eventually-want-to-be-invested-in-50-companies-income-diversification/

    Dividend cuts, while unlikely among major high-quality companies, do occasionally happen. Thus, the more companies I’m invested in, the less a dividend cut will really affect me. Furthermore, the whole idea that there are only 20 really great companies out there, or that my 40th idea isn’t as good as my first idea is, in my view, bunk. I just invested in Unilever for my 51st stock. Does that make it somehow less attractive than my 20th or 30th investment? I don’t think so, and that’s because I believe there are at least 100 truly excellent companies out there that pay and grow dividends. Another point I disagree with is that it’s somehow difficult or extremely time consuming to keep up with 50 or more stocks. Most of the companies I’m invested in are major multinationals that just don’t require my input or attention. I don’t follow Coca-Cola or Johnson & Johnson on a daily basis. I get emails about quarterly results and I’ll check in on them once per year. Other than that, it’s just following stock prices to see if an opportunity to buy arises.

    I hope that helps.

    Best regards.

  54. Brian,

    Nice job loading up. I think you picked a great day to max out. πŸ™‚

    I also hold BNS. I like that bank’s long-term prospects, especially with its international exposure. Glad to be a fellow shareholder!

    Keep up the great work.

    Best wishes.

  55. Henry,

    I just found some of those numbers looking through the 2013 annual report. I obviously don’t comb their financial statements that deep since I’m not a shareholder or interested in becoming one. I’ve skimmed through them before and found them broken out by “insurance operations”, “manufacturing”, “insurance operations”, etc. But I see now where those numbers come from. They actually break it out further on page 66, when looking at earnings before income taxes.

    However, they’re a bit more diversified than you lead on. BNSF is the biggest business. That’s about 19% of the company’s profit. MidAmerican is about 7.5%. The insurance profit is broken out by different companies. BH Reinsurance is about 6.5% of the profit. GEICO another 5.5%. Then you have the insurance investment income – which is diversified within itself across the stock portfolio. I couldn’t find Lubrizol broken out separately for some reason, but if it’s $1 billion then that’s another 5%. So that’s 43.5% across five companies. Berkshire lists investment income of about $4.7 billion of earnings before income taxes, which is a substantial portion of the business all by itself and obviously well-diversified across the portfolio. I would say BNSF is the one business that leads to a lack of diversification, as that was a big business to swallow up. But I guess it takes time to absorb something like that and continue building around it. Take out BNSF and they’re actually pretty well scattered across businesses.

    Thanks for getting back to me on that! πŸ™‚

    Cheers.

  56. Mike H,

    Haha. Yeah, I figured I’d add that in; it would have an interesting story behind it. It looks like the vote is in. I’ll go with that! πŸ™‚

    Take care.

  57. Tad,

    Yikes. That’s bad news there. I guess I don’t get how some people don’t see things the way they are. Some companies have just plain had their run.

    Thanks for adding that. I’ll consider updating my resume. πŸ™‚

    Best wishes!

  58. DM,

    Just bought some kmi the other day and they already raised the dividend! I also bought some xom. My small portfolio is now 40% in energy. How much did you worry about diversification when you were just starting out?

  59. Fantastic post, Jason. It is a very clear and comprehensive small tutorial on investing.
    I’m a WB fan myself. I’m finishing the last chapters of The Snowball and I find a lot of inspiration in the book. But it is also clear that his wealth did not come for free, he has put a lot of hard work and endurance in building his empire. I believe that at many occasions it could have gone wrong (Berkshire, Blue Chip Stamps, Salomon Brothers, etc.) I think his real strength is that he sets himself a goal and then he gives 100% of his energy and more to achieve it. For me that’s how he inspires me most in achieving my own FI goal 
    Cheers

  60. Jason,

    great writing – great story.
    Creating a baby Berkshire might include becoming a mini Buffett as well.
    I find quite a few aspects of that in your story and the points you made in this posts.

  61. Jason,

    That’s very inspiring thank you for taking your time to post such great post. I’ve bought the Snowball myself and I will read in due time.
    But I have read Damn Right! The biography of Charlie Munger VC of Berkshire and from what I’ve read in your post those two pals are very similar.

    Thanks once again and keep inspiring

    Steve

  62. Thank you for another great, motivational piece. I have always enjoyed anything buffet, and am amazed that more people in this country do not study him. As you said previously, there is really no excuse to not have financial independence living in the US given all the opportunity, and great examples such as Mr. buffet. Exercising frugality is key. I am thankful for my immigrant grandparents who taught me how to get by with less, and to appreciate all of the opportunities and luxuries in the US. Have you ever considered purchasing shares of BRK.B? This would go against your dividend strategy obviously, but i am sure it is a bit tempting! I look forward to keeping up with your blog. Given the recent pullback, i am sure you have plenty of ideas on how to deploy more capital! Best Wishes

  63. We are planning to make an epic roadtrip to Omaha for the annual meeting in 2015 – if you go you will have to let me know because it would be amazing to meet up! πŸ™‚

  64. Nice article DM! I enjoyed reading your thoughts on Buffet and just added “Snowball” on my Amazon wishlist.

    I just bought JNJ on the dip this morning after it went from 106 to around 97 within a 2 week period.

  65. While I think your investments are quite safe, I do not think you can really make this statement:
    “That’s real cash flow that is coming my way no matter what, and even better it’s surely increasing.”
    While there is a good chance that most of your dividends will continue to climb and pay out regularly. There is a some risk that dividends can be cut.

    I really appreciate your posts and read regularly on top of reccomended many of them to peers, but that comment does not sit well with me as it is just not true.

  66. dividend electrician,

    Nice buys there. KMI continues to look like a very, very attractive stock here for the long term. They’re certainly less exposed to commodity pricing issues due to their largely fee-based business. They do have some direct exposure to oil, but it’s a small part of the overall business.

    Diversification was something on my mind when I first started, but not nearly as much as now. Your allocation is going to be all over the place when you’re first starting simply because you have a small asset base you’re working from, and every purchase swings the percentages around quite a bit. It’s not something I would really overly concern myself with until you start to get near $50k. At that point, you’re working with a pretty substantial asset base and I would start to fine tune the portfolio and get the long-term picture in place. At least, that’s pretty much how I did it.

    For the record, I’m about 15% energy right now. That’s probably a touch high for me.

    Best regards!

  67. Jos,

    I agree. Buffett was truly “tap dancing” to work all of those years because he enjoyed almost every aspect of his work. His work became is life and his life became his work. But it wasn’t “work” in the traditional sense where you haul off to an office and get ordered around. He was “painting his masterpiece”, so it was a joy for him. And I think that makes it easy to put in 100% effort.

    The Salomon Brothers incident was really interesting. I don’t think Buffett was “tap dancing” to that position for the little while he was heading up the firm. πŸ™‚

    Thanks for stopping by and adding that. The work ethic aspect of all of this is really huge. Not just to get your seed capital from a day job, but also to constantly do the due diligence necessary to be a great capital allocator.

    Best wishes!

  68. Stef,

    I can think of worse things to be than a miniature Warren Buffett. πŸ™‚

    The guy is really an idol of mine. Not just all the business stuff, and the money…because there’s lots of people who have done well at business or investing and made a lot of money. But just the way he goes about life, his demeanor, his belief system, etc. I hope to walk a similar path, but one that is also my own.

    Of course, I won’t pass up the money… πŸ™‚

    Thanks for stopping by. I hope all is well over on your side of the world.

    Best regards.

  69. Steve,

    I haven’t read Munger’s biography. Thanks for mentioning it. It’s on my list now. πŸ™‚

    Appreciate the support. I hope you found some value in the post and some of the themes throughout.

    To our success!

    Best wishes.

  70. Italianpride,

    I’m glad you’ve seen the light, my friend. If we’re really being honest, it’s almost unbelievable that a substantial portion of our society here in the US isn’t financially independent. To enter old age in poverty with all the opportunity, abundance, technology, and support around us is just mind-boggling to me. A modicum of self-control, self-awareness, and critical thinking can completely change your life and financial outcome. I’ve never said that saving, investing, or financial independence is for everyone. And I don’t judge those that prefer to spend all they have. No problem for me. However, the people that do so and then wallow in their own misery as they enter “retirement” with nothing earn no pity from me.

    BRK.B as it stands now is not an investment I’ll consider. The lack of a dividend really precludes it for me, as I need 100% of my resources focused on building my own miniature Berkshire to get to where I want/need to be. We’ll see if they pay a dividend in the future, but that will likely be after Buffett is long gone, which makes you wonder what advantage they’ll have in the future. I think Ted and Todd will probably do a great job if they take over CIO duties, but those are BIG shoes to fill.

    Thanks for dropping by!

    Cheers.

  71. Steve,

    Absolutely! That would be awesome. I’ve gotta make it this year. Who knows how long Buffett and Munger will be around. It would be a dream come true just to be in the same room. πŸ™‚

    Cheers!

  72. luckydog17,

    You’ll enjoy it. It’s an easy, but long read.

    Great job snagging up JNJ there. It’s my largest position, but I wouldn’t mind at all adding here. If there is any stock in my portfolio that I have complete and unwavering confidence in, it’s JNJ.

    Take care!

  73. No doubt you have your own BRK. Lot’s of good companies that generate profits and dividends that you can invest wherever is the best business/stock you find.
    That’s really what WB has been making all over this years. He doesn’t throw away the dividends (except one year, back in the past) but re-invest all he can.

  74. nunomiguelconceicaoT,

    I’m a lot like Buffett in that I want to collect the dividend income, but I don’t want to pay it out. πŸ™‚

    Perhaps more “do as I do” and less “do as I say” going on there, and that’s basically what I’m recommending.

    Thanks for dropping by!

    Take care.

  75. Scubatoad,

    You’re right. I probably should have re-worded that to β€œThat’s real cash flow that’s almost assuredly coming my way…”

    However, it would probably take nuclear war to put the 51 companies in my portfolio in a position to where they all have to simultaneously cut their dividends. I honestly can’t think of any other scenario that would happen under. And if nuclear war hits, we have a lot more to worry about than dividend cuts.

    Best regards.

  76. Another reason why I continue to frequent your site. Your commitment to your content and readers in providing timely and constuctive discussion is outstanding. I know the time and effort that goes into this and I think you will continue to be rewarded with new readers because of it.

  77. I’m slowly building a mini mini Berkshire Hathaway lol but it’s encouraging to see your progress and know that it isn’t impossible. It’s all about discipline and consistency

  78. Scubatoad,

    Thank you. Very kind of you. I’m doing the best I can to create great content that’s valuable and inspirational, but the readership is amazing. I’m blessed. πŸ™‚

    Take care.

  79. The Lion’s Shares,

    Haha. I hear you. I’m on the same page. A teeny, tiny version. πŸ™‚

    It’s definitely all about discipline and consistency, my friend. Stick with it and you’ll end up far beyond you ever imagined.

    Best regards!

  80. DM, been a reader for quite some time and finally felt like dropping a comment in the river of praise.

    I consider myself a late bloomer, i.e. I’ve got a few years on you and a couple kids and a wife to support while subscribing to the practice of frugality so capital for dividend-earning assets can be raised. Being 100% debt-free by design helps, but still; it ain’t easy πŸ™‚

    Coming from someone who also depends on web income for extra cash to deploy, also has a strange pizza shop (in a beach town, preferably, with a killer indoor/outdoor bar/patio) dream, and has come close to pulling the trigger on a dividend/financial freedom blog of my own for several months now, thanks for the inspiration.

  81. DWC,

    Thanks for deciding to leave a comment today. Really appreciate it! πŸ™‚

    I can imagine you’ve got a steeper mountain to climb than I do with a family to support. But the great thing is that you’re not letting that hold you back. It’s easy to create excuses. It’s much more difficult to create results.

    Maybe we’ll open up a pizza shop together some day. I’ve already got the beach town locked! And I hope you put a blog together. The more the merrier. Our community has grown so much since I first started blogging a few years ago, and it’s really wonderful to see that interest pick up as others chase after financial freedom. I’m really glad to know that I had something to do with that.

    Stay in touch!

    Best regards.

  82. DM,

    You know what? I think I might try to get a site up sometime relatively soon, even if I’m only adding content every now and then. I could employ the “no time” excuse given a full-time job, having a website to run on the side already, and family to tend to, but I think I’d enjoy it and offer a different perspective on the path to FF, not too mention the added motivational fuel it would provide to push forward (I officially started my personal dividend adventure last December).

    I’ll drop you a note off the comments in the near future so we aren’t cluttering this up. Otherwise I’d shoot the breeze endlessly on this stuff πŸ™‚

    Best,

    DWC

  83. Hey Jason,

    Even though I don’t have any insurance float to play with, I can still benefit from investing in insurance companies themselves! On a side note I am a bit excited with the recent pull back, although cash is a little restricted as I paid out the remainder of that house deductible at the beginning of this month… hard to save no though when you see stocks moving to better values. I may just transfer in a grand or two and rebuild my emergency fund later this year :).

  84. Guys, if you are looking to diversify into a second brokerage firm Merrill Edge is a great choice when you have capital already. If you move $50K worth of securities there your trades are absolutely free (up to 30 times a month).

  85. Great write up. Like many of the other individuals commenting above think if my dividend investments as a mini Berkshire. I too have read The Snowball (no small task it is a long book!).

    I just recently ordered Poor Charlie’s Almanack not purely investing but I hear it is a worthwhile read (rather large too 300+ pages).

  86. Kipp,

    Absolutely. I only have AFL right now, but eventually plan to expand my insurance holdings. As those insurance companies profit from their prudent underwriting and use of the float, I will as well via increasing dividends. πŸ™‚

    I hope you’re able to scrounge up some cash! I’ve been quite busy this month with three stock purchases. Might have to cool my jets now.

    Cheers.

  87. Steven,

    I don’t really have a desire to start moving around capital, but I may look into Merrill Edge. I’d just have to open a new checking account and keep $1,500 in it to avoid the maintenance fee (from what I can see). Then once I cross over $50k (shouldn’t take too long) I’d qualify for Platinum Preferred Rewards where I’d get the $0 trades. Seems very reasonable. πŸ™‚

    Cheers!

  88. You guys can thank me for footing the bill while you make all those free trades with Merrill πŸ˜‰

    My employer’s 401k is with Merill and self-directed is $14.95 a trade plus $140 annual. Total ripoff on a captive audience, but self direct still ends up way less fees than being in their funds with ~1% expense.

  89. Quality piece again as expected :). I was also thinking about reading the Snowball again, but decided to read all the shareholders letters first. Those should be really interesting.

    I added to my own mini-Berkshire buy buying some JNJ today.

  90. Funny thing about Sears, according to Tim McAleenan’s blog. With the spin-offs and acquisitions of the spin-offs by other companies, buying and holding Sears in 1993 would today give you shares of Sears Holdings, Sears Canada, Allstate, Discover, Morgan Stanley, and Land’s End. And apparently, you would have absolutely DESTROYED the S&P 500.

    I thought that was interesting.

  91. God, I wish Buffett would start paying dividends. There are so many businesses in the Berkshire empire that I would love to own a piece of, but it’s not worth it without that dividend. Maybe one day that will change, and we too can get our hands indirectly on Geico, Benjamin Moore, and Dairy Queen.

  92. Great article DM! I remember reading lots about Warren Buffet when I started my investing journey, but I never saw the practical application until recently. I’m rebuilding my Berkshire from scratch after selling my REITS when they started dropping in the second half of 2013. I’ve been waiting for a major correction to start and it looks like we’re in the beginning stages of one, Cross your fingers it gets worse!

  93. Ville,

    Thank you! I hope you enjoyed it. πŸ™‚

    The shareholder letters are timeless. You can’t go wrong there.

    Great job adding JNJ. I’ve honestly been thinking of picking up some shares here, but it’s already my largest position by dollar weight by a good margin. However, JNJ is probably my favorite long-term stock. Tough not to get a little excited around it.

    Thanks for dropping by!

    Cheers.

  94. Joey,

    Well, look at that. That’s fantastic, right?

    Just another reason why stocks are my favorite asset class. You don’t get your hands on those kinds of businesses as a bond holder.

    I’m guessing it would have been tough to continue holding Sears through thick and thin, but also goes to show you how long-term buy-and-hold investing works in your favor.

    Thanks for sharing!

    Cheers.

  95. Joey Batz,

    I hear you. It’s kind of a β€œdo as I say, not as I do” type scenario with Berkshire, since he loves investing in companies that share profits with shareholders (especially when he’s a large shareholder), but doesn’t particularly enjoy handing out cash to his own shareholders. Can’t say I blame him since he’s been the greatest capital allocator of all time.

    However, it’s possible to invest in businesses just like Berkshire’s private subsidiaries. Great insurance companies like Travelers, Chubb, and HCC are available to us. And you can invest in a paint company like Sherwin-Williams.

    Best regards!

  96. Arizona Trader,

    I’m crossing my fingers, bud. Believe me. Cheaper stocks would be my best friend, especially since I don’t make as much money as I used to. I’m hoping we see another 10% downside. I guess we’ll see what we get!

    Thanks for stopping by.

    Best wishes.

  97. Speaking of “cheaper stocks,” it’s interesting to see that BAX is still falling while the market jumps on the stream of Fed QE comments — especially after they just beat on earnings. I was finally able to reload some capital this AM but will exercise patience.

  98. Hi Jason,

    Without a shadow of doubt you are my 3 idol after Buffet and Munger :). On the serious note, I saw your blog at first and I have said to myself this is exactly what I was looking for in my life.

    I am on the beginning of my journey and at 28years-old I hope to be as smart as you.

    Value top notch on the post.

    Cheers

  99. DWC,

    I obviously like BAX quite a bit. I’ve loaded up before. Earnings are set to jump quite a bit next year, plus you have the spin-off. Value abound. πŸ™‚

    Cheers!

  100. Steve,

    You’re far too kind. I wish I was even in the same universe as those two guys. πŸ™‚

    It looks like you’re starting off at the same as me, as I started just before my 28th birthday. I think that bodes well for you. By the time you’re in your late 20s you’re smart enough to know better and capable enough to do something about it, but not jaded enough to just let that knowledge pass you by.

    Thanks again. I’ll be following your journey!

    Best regards.

  101. DM,

    Value abound indeed! I already own a decent slice of BAX and it’s currently on my hit list for an addition depending on what Mr. Market does in the near future.

    Happy Friday!

  102. I have been wanting to do this as well and was planning on it for 2015 while the guys are both still around and in great spirits.

    I would love to meet some fellow frugal financial independence seekers if people wanted to meet up for something.

  103. Great post, Jason! Very informative and educational read.

    As always, I like the analogies you put into your articles: Miniature Berkshire, BB gun, etc. It makes investing so much more understandable without trivializing the risk associated with it.

    This may be a weird question, but I wonder how you check up on your own Berkshire? With over 50 stocks in your portfolio I can imagine it being difficult to follow their strategies and policies closely.

    I think I’m going to pick up a copy of Buffett’s biography too!

    Best wishes,
    NMW

  104. Pingback: Weekend Wrap-Up, October 19 | I Will Be Done By 50
  105. NMW,

    Thanks! I’m definitely trying to make this easy to understand, because the financial industry tends to make it seem like it’s more difficult than it really is.

    As far as following 50+ stocks, it’s not really that hard or time consuming. Most of the companies I’m invested in don’t require me to check up on them all that often. Most of the hard work/due diligence is done when first initiating a position. It’s not like Johnson & Johnson, Coca-Cola, Norfolk Southern, Philip Morris, or Kinder Morgan really require my input or close attention. If they did, they wouldn’t be blue chip dividend growth stocks and I likely wouldn’t have such large investments in them. I spend more time tracking the smaller companies I’m invested in, which just so happen to be smaller investments for me. So it’s funny how my smaller investments tend to take up disproportionate portions of my time. Equally so, it’s because most of my capital is tied up in companies that I can trust that I have the available time to pursue interesting opportunities here and there.

    Best regards.

  106. I’m a big Buffett fan and have over time become a fan of your story and journey. The ‘guaranteed millionaire’ idea is very powerful

  107. 30 Something Dude,

    Thanks so much. I really appreciate it. πŸ™‚

    I agree that basically guaranteeing yourself millionaire status early in life through just a few years of hard work is a powerful concept. I could stop investing for the rest of my life and my portfolio will still grow to seven figures. Doing some heavy lifting early in your life gives compounding a long runway to work with.

    Thanks for dropping by!

    Best wishes.

  108. I have read Snowball twice as well as all of the annual letters – LOVE Buffett stuff. The only thing you are missing (and it is almost impossible to replicate) is float. The float would supercharge your efforts.

  109. Evan,

    Me too. I love pretty much all things Buffett. Unabashed fanboy here. πŸ™‚

    I did mention the float, and then kind of relayed that into a conceptual post about how we can go about creating a very small scale Berkshire by using our own free cash flow to fund income-generating investments which will further add to the cash pile. Obviously, none of us will own our own insurance company anytime soon. However, we don’t need to either. Just achieving 0.1% of Buffett’s success will be more than enough for just about anyone.

    Thanks for dropping by!

    Best regards.

  110. Great article DM. I am an investor who lives in Taiwan where is far away from the U.S. I have not been to the U.S., yet. However, I bet 50% of my net worth on US stock market where I believe that is the most suitable market for long term investors. I will increase my investment over time.

    In Taiwan, there are thousands of investors deploy similar investment strategy to yours. I am also a big fan to Mr. Buffett.

    I am fortunate enough to find your blog and read some of your articles. They are quite inspiring. I like your BB gun idea. Think like an owner and create cash flow and allocate capital to roll a snowball. It’s not only a great analogy but a practical execution plan.

    I will definitely share your articles to my friends and I believe that they will also love your articles like I do.

    Keep Rolling! 謝謝你! (it means thank you in Chinese.)

    Joseph Chu

    I am long V, VZ, WFC, WMT, MCD, IBM, CCE, VIAB, AXP

  111. Joseph Chu,

    Thanks so much for stopping by and sharing that!

    Glad to hear this idea/strategy is alive and well in Taiwan. That’s fantastic. Sounds like there are some smart investors over there. πŸ™‚

    “It’s not only a great analogy but a practical execution plan.”

    That’s really at the heart of my message. I try to inspire people through simple and easy-to-understand analogies that also happen to be executable ideas for just about anyone. Investing isn’t hard, but it’s also not easy to routinely save large portions of your net income and consistently stick to a plan for years on end. However, I find it fun. Furthermore, I find the idea of living below your means a lot easier to swallow than working into old age.

    Appreciate you helping spread the message. Thank you so much.

    Keep up the great work over there! Glad to be a fellow shareholder with you in V, VZ, WFC, WMT, MCD, and IBM.

    Best wishes.

  112. To both of you that think you want to own a business – look before you leap. I own a small manufacturing business and I like to think that it runs by itself, but the reality is that it doesn’t. This business generates a lot of cash flow for me and there are tax advantaged benefits that I have been able to use to grow my IRA/401k holdings which I am plowing into dividend growth stocks. Earning money from a dividend income stream is so much easier and has much lower risk than owning a business with multiple employees (I have 25). Both of the type of businesses that you each mentioned sound more like owning a job than a business – do not own a business unless you can make a lot (2-3X) more cash flow than you can from employment. That pride of ownership thing that gets touted is only worth it if you can truly make a lot more $’s because the risks and the headaches are a lot higher. Bottom line is – go into business that will make you more money than you can from an employer, but don’t do it as an alternative to employment. And don’t forget – some day you have to sell your business. Stocks can be sold in seconds – businesses take years to sell at very great expense.

  113. Bill,

    Great points there. My thoughts on owning a business outright was really a bit tongue-in-cheek. I think one of the most attractive aspects of stocks is their liquidity. It’s wonderful to know that you can get in and out of the retail market or the energy business in mere seconds.

    I’ve kind of accidentally become an entrepreneur of sorts in that this blog has become a business in the fact that it takes considerable time to run and it generates income for me. But it’s obviously a lot different running a blog and freelance writing than it is to run a physical business where I have employees, inventory, etc.

    Thanks for the perspective. Point well taken!

    Cheers.

  114. If you ever want to discuss small business ownership let me know. I love to discuss the subject and the advice is free. I have owned my business since 1992 so I am not quite a dividend aristocrat, but the business has been paying me dividends for 22 years now. I have a lot of knowledge on all aspects of business ownership – legal, financial, technical, HR, etc. I specialize in boot-strap financing. I am getting close to retirement and have thought about setting up a Blog on the subject of Business Ownership – not a novel concept. It would be something for me to do when I am retired.

  115. Bill,

    Appreciate the offer. If I ever decide to temporarily lose my mind and open up a “Papa Jason’s” or “Pie in the Sky”, I’ll be sure to give you a shout. I’m sure you have invaluable knowledge on the subject.

    I hope you set up a blog. I’m sure it would provide a lot of value to the community! πŸ™‚

    Cheers.

  116. Or, you can simply just buy stocks in Berkshire Hathaway. No need to diversify, Warren has already done it for you. No need to look for undervalued stocks, Warren has already found them for you. No need to figure out where to invest your dividend income, Warren takes care of that too.

    Why try to be smarter than the greatest investor ever? Just relax and let him to the work for you. πŸ™‚

  117. Andrew,

    Sure, a lot of roads lead to Rome. Many ways to achieve financial/investing success. The way proposed in the article is a great way. Investing in BRK has historically been a great way as well. Though, if your objective is to live off of dividend income, BRK simply won’t work.

    In addition, Warren won’t be able to find them for you when he’s no longer with us. I hope he lives a long, long time… But time isn’t on his side, unfortunately.

    Cheers!

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