Motley Fool: Diversity in one stock

If you’re looking to build a solid foundation for your portfolio, consider shares of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), the conglomerate led by legendary investor Warren Buffett.

Berkshire’s core business is insurance, which it provides through its wholly owned GEICO subsidiary and some huge reinsurance operations. In addition, Berkshire owns dozens of other businesses, including familiar names such as Benjamin Moore, Duracell, Fruit of the Loom, Pampered Chef, Dairy Queen, Forest River, Business Wire, Justin Brands, BNSF Railway and many others.

Berkshire operates in a wide variety of businesses, such as energy, jewelry, furniture, auto dealerships, real estate brokerages and private jets. With many billions of dollars in cash, Buffett is always looking for new and lucrative acquisitions.

In addition to its subsidiaries, Berkshire also owns a massive stock portfolio worth more than $200 billion. It contains more than 40 different stock positions, including Apple, Bank of America, Wells Fargo, Coca-Cola and American Express.

In short, Berkshire offers a diverse investment portfolio, much of it hand-selected by the greatest investor of all time – all in a single stock. The company is also focused on rewarding shareholders through growth. (The Motley Fool owns shares of and has recommended Berkshire Hathaway.)

Ask the Fool

Q: What’s a “beneficial owner”? – R.R., Salinas, California

A: A beneficial owner is the true owner of a security, such as a stock or a bond. It’s common these days for a brokerage to hold the stocks you’ve bought in your account in “street name” (i.e., the brokerage’s name) instead of putting the shares in your name. The shares still belong to you, though – you’re the beneficial owner.

Meanwhile, if someone sets up a trust fund naming you as the beneficiary, the assets in the fund may not be legally owned by you, but you’re the one who will benefit from them – hence, “the beneficial owner.”

Q: When I read that a certain stock is good as a long-term investment, how long is that “long-term”? – G.L., Vail, Colorado

A: It’s a bit of a vague phrase and means different things to different investors, but it generally means years rather than days or months. Stocks can be volatile from day to day, but a good long-term investment is likely to grow in value over the years as the underlying company does well. Aiming to hang on to great stocks for many years is a good strategy for building significant wealth, as great companies can grow for decades.

For tax purposes, though, a long-term investment is one you’ve held for at least a year and a day before selling, and it can qualify for a lower long-term capital gains tax rate – currently 0% or 15% for most of us, and 20% for high earners. Gains from assets held for a shorter period are taxed at your ordinary income tax rate, which could be 10% to 37%.

My dumbest investment

From 1943 to 1945, I was encouraged to invest in war bonds with my soldier’s pay. I bought Series E zero-coupon bonds that matured in 10 years, and I was promised that I’d get a 33% return at maturity. After 10 years, the term was extended for another decade, and then again – for an eventual total of 40 years. The interest rate varied over that period, of course.

In 1983, I redeemed the oldest of my bonds – and discovered that the money I made on them wasn’t enough to cover the cost of inflation. I learned to be cautious when investing in bonds. – W.M., Kansas City, Missouri

The Fool responds: Bonds are often recommended as “safe” investments, and it’s true that government bonds are quite safe, backed by the strength of the U.S. government. But in exchange for that very low risk, you often get low returns.

Per the research of Wharton Business School professor Jeremy Siegel, stocks outperformed bonds in 96% of all 20-year holding periods between 1871 and 2012, and in 99% of all 30-year holding periods.

Bonds can be great when interest rates are higher (they were in double digits in the 1980s!), and corporate and municipal bonds offer higher rates (with higher risk). But if your money has many years in which to grow, focus on stocks – perhaps via a low-fee broad-market index fund, such as one tracking the S&P 500.