Berkshire Hathaway's (BRK.A)(BRK.B) Charlie Munger believed strongly in the power of concentrated portfolios, holding only a few stocks outside of his BRK.A stock, such as Alibaba (BABA) and Costco (COST). Personally, I like to diversify beyond just a few holdings and generally hold about two dozen stocks in my portfolio at any given time, given that my strategy relies heavily on opportunistic capital recycling rather than purely buying and holding stocks for decades to come. However, there is a lot to be said for Mr. Munger's approach, as it simply requires making a few really intelligent decisions and then having the discipline to let time and the power of compounding do its work.
That being said, if I were to hold only three stocks for the next decade, they would be Enterprise Products Partners (EPD), Newmont Corporation (NEM), and Virtu Financial (VIRT). Many investors may wonder why I would pick these three stocks, especially Virtu Financial and Newmont Corporation, which have been relative underperformers in recent years and have business models that do not seem poised to deliver significant outperformance over the long term. This is very true, and even Enterprise Products Partners has been a bit of an underperformer in recent years, with its stock price being down by almost 25% over the past decade.
My reasoning is that all three of these stocks appear undervalued, have strong balance sheets, are projected to return meaningful capital to shareholders in the coming years, and especially when held in combination, provide some of the best macroeconomic protection against what I see as major storms likely to hit over the next decade.
#1. EPD Stock
If I could hold only one stock, it would be Enterprise Products Partners. EPD is the ultimate high-quality, high-yield dividend growth stock with a very strong balance sheet (A- credit rating), low leverage ratio, significant liquidity, well-laddered debt maturities, and a defensive and diversified business model across the midstream energy value chain. With sufficient scale, proven and well-aligned management, and an impressive track record of delivering double-digit returns on invested capital year after year through all sorts of energy and macroeconomic cycles, EPD also has a solid growth profile and long-term contracted cash flows.
It offers a very attractive current dividend yield of about 7.25%, which has been growing at about a 5% CAGR and should continue to do so for years to come. When you put all this together, I see it as highly unlikely that EPD will underperform over the next decade relative to the broader S&P 500 (SPY) and believe it has a high chance of outperforming. Combined with its very low-risk profile, it makes for a great core holding, especially for someone who values tax-deferred income like I do.
#2. NEM Stock
I also would hold Newmont Corporation despite its very weak recent performance. Newmont has a very strong balance sheet that is set to only get stronger in the coming months as it sells off non-core assets and is poised to buy back several billion dollars of its shares, which should serve as a tailwind for the stock price. It has some of the world's best assets in geopolitically low-risk regions and one of the cheaper valuations in the sector, comparing favorably with other blue chips like Agnico Eagle Mines (AEM).
Additionally, Newmont has significant exposure to gold and copper, two metals with high upside potential over the next decade. Copper could benefit from the electrification trend, while gold (GLD) should do well if the global economy stumbles, given runaway deficit spending, the weakening of the US dollar, and soaring geopolitical risks. For example, if war were to break out in the Far East, gold would likely soar. The Central Bank of China buying gold hand over fist also serves as a major tailwind for gold prices over time, and Newmont, with its leverage to gold prices and location in low-risk geopolitical regions, could be a major beneficiary.
#3. VIRT Stock
Meanwhile, Virtu Financial is a market maker that has had its periods of highest profitability in the wake of market crashes. Given my concerns about soaring geopolitical risks, potential conflicts involving China that could plunge the world into a depression, and concerns about lofty valuations of the current S&P 500 alongside weakening economic conditions in the United States, Virtu Financial could thrive in a major economic crash.
Virtu Financial is also buying back stock very aggressively, with the CEO loading up on shares, and it pays a nice dividend. Lastly, it has exposure to Bitcoin (BTC-USD) as a market maker, and if the crypto trend, options trading, and further digitization of assets continue to expand significantly over the next decade, Virtu Financial could be a major beneficiary. Therefore, I see several viable paths for it to generate market-level or even market-beating returns, even if there are no major market crashes that spike its profitability. As a result, it adds significant risk mitigation and rounds out the risk-reward of my portfolio, giving me an asymmetric position relative to the vast majority of stock investors currently buying the "Magnificent 7" stocks or the broader S&P 500 at very rich valuations.
Investor Takeaway
As you can see, these three holdings are unorthodox and probably not what you would expect in a concentrated portfolio for the next decade. However, given my relatively pessimistic outlook on global geopolitics and the state of US fiscal and economic affairs, it makes a lot of sense to position my portfolio like this. Even if the world remains at peace and the economy continues to hum along, Enterprise Products Partners, Newmont Corporation, and Virtu Financial are positioned to deliver very solid total returns, especially given their current attractive valuations and exposure to major long-term trends like the ongoing infrastructure boom, the attractive outlook for copper, and the rise in digitization of assets.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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