Warren Buffett used a three-bucket approach in his portfolio during his partnership days. It’s a nice example of how to think about portfolio construction.
Each of Buffett’s buckets filled a role in meeting his long term objective. That objective can be broken down into two parts:
- Beat the Dow by 10% over the long term.
- Outperform in bear markets while matching performance during bull markets.
The only way he achieves either objective is by building a portfolio that looks nothing like the Dow. How did he do it?
First, he used a conservative deep value strategy. Stocks selling at a deep discount, with a wide margin of safety, offered a lot of room to be wrong on valuation but still make money.
With that strategy as a base, the three buckets did the rest — what he called Generals, Workouts, and Controls: Continue Reading…