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:

1. Beat the Dow by 10% over the long term.
2. 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…

Everyone wants to know what happens next. That’s the nature of market crashes. When will it end? Was that the bottom? What if it falls further?

The questions are asked a hundred different ways and the only good answer is: “I don’t know.” But that’s not what you’ll hear.

Instead, everyone also has an opinion. Many will go out of their way to express it. The trouble starts when people listen and act on it.

Warren Buffett dealt with this situation in 1966. The Dow had a rough six months to start the year. It declined from 969.26 to 870.10. That’s a loss of 8.7% after dividends, a tame decline compared to 2020. A few of his partners felt obligated to tell him what would happen next. This was his response: Continue Reading…