FACT is that one "incompetent", dishonest or rogue employee can wipe out a company’s assets and make a good business bad. Large Caps have simply become LARGE caps because in MANY cases DEVELOPED VALUABLE BRAND names. The" Salad Oil" incident in 1960s (look it up if you don’t know about it) which WEB put 40% into American Express (AXP) influenced WEB's thinking that even if American Express (AXP) lost all its assets, the BRAND NAME had a "HUGE INTRINSIC VALUE" which can not be "quantified on a balance sheet". WEB "repeated" this type of investment with GEICO whose real assets were reduced to almost zero but the "GEICO FRANCHISE" had a large INTRINSIC VALUE. WEB has been "hammering" BNI and I can assure you that he sees some kind of "INTANGIBLE (land drilling rights, mineral rights easements) that us DONT SEE. Think you are going to be able see things undiscovered assets like WEB does? Lots of luck.
The difference we have in my opinion is that in the past 17 years I have ALWAYS adopted a "heads I win Tails I Break EVEN" when I have allocated capital. While you have taken a more "enlightened" aggressive way of allocating capital with a higher upside but also a higher downside as well. Both of our methods are satisfactory but mine is "less risk" oriented being that my "earnings" were my major source of "survival" and one magic formula "EGY” type of stock can cause my family to "eat less".
One guru favorite is Home Depot (HD) which is in my opinion "UNDERVALUED". I feel HD is a typical "value investing play” and I personally think that over a 10 year span it will turn out great. I do not own any HD, NOT because I don’t think it’s cheap but because 98% of my portfolio is in CONSUMER Goods, Pharmaceuticals or Berkshire Hathaway (BRK-A) (whose portfolio is loaded with consumer companies and High ROE large moat companies like Nebraska Furniture Mart, Dairy Queen). Home Depot's earnings are "influenced" by hurricane season and the overall strength in the housing market. The FACT is that NO RETAILER (including Wal-Mart) has the same DOMINANCE than a "brand name" like Marlboro, OREO JELLO, Kool Aid, BUD LIGHT, LISTERINE, DAIRY QUEEN, Gillette, CREST etc which is evidenced by the fact that 18 of 20 of the top S&P companies from 1957-2004 were either Pharma or Consumer Goods companies and the bet on BRK is a bet on the "jockey" as well as the horse (which owns MANY large moat brand names)
I only bought Altria for 9 years and it was 100% of my stock portfolio until 2 years ago. Now it and KFT is 70% of my portfolio and BRK JNJ and BUD are another 28% WMT is 2 %. (although I like WMT and how cheap it is). Readers please do not tell me how "risky" having 50-100% of my portfolio in one stock IS or WAS. (Altria had 60+ brand names with $100 million in sales when I bought them and my basis in KFT on some purchases is now under $5) All my companies are large multinationals which were purchased with a low PE and have high ROE/ROC and bought near their 52 week lows.
Most importantly NONE of my portfolio EARNINGS are "materially" affected by a 9/11 type event or a slowing worldwide economy. True, beer and tobacco are not necessarily growth stocks in the US but the high steady cash flow will help aid "buybacks" and the INTERNATIONAL GROWTH which is a "hedge" against America losing its economic dominance which will raise EPS without increasing sales.
Conversely "smaller cap" stocks will take "longer" to reach its intrinsic value if times get bad, especially if those companies are dependent on "discretionary" income. The combination of lower earnings and less "liquidity" in the market will cause stocks to take "longer" to reach intrinsic value and prolonged "bad times" will almost certainly reduce intrinsic values.
My portfolio while "defensive" in nature is recession proof and the large institutions which "mirror" the S&P will "invariably" have to purchase my stocks while the small cap stock holder does not have that luxury. I understand that some use options in case of a calamity, I wish I was knowledgeable enough to comment on this but I am not.
What I find amusing is that many investors "believe" they are value investors and model Warren Buffett but forget Rule 1) DONT LOSE MONEY and 2) DONT FORGET RULE 1.
I have 50 capital allocation decisions in stocks. Among the 50 buys over 17 years in stocks EVERY investment over 2 years old is up "double digit annually" and my "worst investment" so far was a purchase of JNJ at $64 in February which is less than 1/100% of my total portfolio. With "averaging down" my basis in JNJ is now $61.03.
Those of you who own companies with less than "35 year moat" or Stocks with a market cap under $1 billion or companies which are dependent on "discretionary" income should consider "options" as a way to "hedge" against a calamity. Over 80% of my portfolio SURVIVED the great depression where unemployment was over 20% and legendary value investor Ben Graham went broke. Business is a game of SURVIVAL of the "fittest". No one can predict the FUTURE, me included. Will JNJ's 120 year moat somehow "disappear"? Perhaps. But I will take my chances
Finally I leave you on a positive note. Buying LOW PE ( 16 or lower), GOOD dividend HIGH ROE HIGH ROC, 35 years or MORE LARGE CONSUMER GOODS MULTINATIONAL companies with LARGE MOATS and HOLDING THEM UNTIL the PE is 25 or MORE or the ROC ROE falls under 20% is your BEST PROTECTION against having 50% or more of your net worth wiped out.