“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
This is a quote from the Oracle of Omaha himself, Warren Buffett. The Berkshire (NYSE: BRK.B) CEO was alluding to the fact that if you become an expert in certain industries, you won’t need to spread your portfolio across a number of different sectors. Rather it will be more profitable to concentrate on where your expertise lies.
Here at MyWallSt, we are big believers in diversification, so much so that it’s one of our 6 Golden Rules for investing. In spite of his quote, Buffett is also a fan of diversification. Berkshire owns around 50 stocks, ranging from Apple (NASDAQ: AAPL) to StoneCo (NYSE: STNE) to Occidental Petroleum (NYSE: OXY). He has established his circle of competence in insurance, energy, and financials, yet Buffet still practices diversification across a range of sectors, including technology, which he famously avoided for so long. While his quote is more of a thought experiment than any serious advice to follow, it has spurred me to think of what would be in my portfolio if I could only own two stocks.
Amazon
“Nobody gets fired for buying IBM Amazon.”
Amazon (NASDAQ: AMZN) is now enjoying the golden boy status once held by IBM (NASDAQ: IBM) back in the day, and rightfully so. There really seems to be no end to Amazon’s runway as it slowly takes over the world. The beauty of investing in Amazon, especially in a concentrated portfolio, is that it is itself incredibly diversified across a number of future-relevant industries.
There is, of course, the e-commerce behemoth that accounts for about half of its revenue and is growing every day, but when buying Amazon, investors are also investing in Amazon Web Services, the world’s leading cloud computing platform and Bezos’ biggest cash cow. Amazon is only behind Google (NASDAQ: GOOG) and Facebook (NASDAQ: FB) in the $500+ billion digital advertising industry, and its streaming service Prime Video is competing with Netflix (NASDAQ: NFLX) and Disney (NYSE: DIS) for your evening viewing.
International competitors to Amazon have popped up in the form of MercadoLibre (NASDAQ: MELI) and Sea Limited (NASDAQ: SE), as well as a new focus from those closer to home in Walmart’s (NYSE: WMT) partnership with Shopify (NYSE: SHOP) and the launch of its own subscription service to compete with Prime, Walmart+. However, the e-commerce industry has grown significantly in recent months and there is plenty of space for more competitors. It’s hard to see Amazon slowing down anytime soon. Even at a $1.5 trillion market cap, it looks like one of the safest bets in the market right now for a long-term buy and hold.
Square
While I played it safe with my first pick, I thought it only right to go out on a limb for my second. I touched on future relevant industries earlier, and I see few with a brighter runway than the war on cash and the evolution of banking as we know it. Square (NYSE: SQ) is one of the leading innovators in this space and I feel like it has plenty of room to grow over the next 5-10 years. Its Cash App has become a direct competitor to Paypal’s (NASDAQ: PYPL) Venmo, it’s now a licensed bank meaning its Square Capital branch of loans for its customers is set to take off, and while initially hit hard by the global pandemic thanks to its exposure to small and medium-sized businesses, a global shift away from cash to card payments will benefit the company in the long run.
The payments industry is set for a serious facelift over the next 5 years and I think Square will lead the way, ahead of some of the big names like Visa (NYSE: V) and Mastercard (NYSE: MA). For such a developed nation, America is surprisingly underbanked and the service Square provides will go a long way to solving this issue. The one question mark that follows the business is invariably around leadership, with many concerned about CEO Jack Dorsey’s side-gig running Twitter (NYSE: TWTR) splitting the zen master’s focus. However, the success of the company for the past 11 years is a testament to his management prowess. The only way is up for the most innovative player in the payments space.
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