When it comes to diversification, I find myself agreeing with the late Charlie Munger. "The whole secret of investment is to find places where it is safe and wise not to diversify," Munger once said.
For an investor focused on speculative growth stocks, diversification is the name of the game. When the risk associated with any individual stock in your portfolio is high, spreading out your investments is essential. Ideally, the few big winners will more than offset the many losers.
An alternative strategy is to avoid highly risky stocks altogether. Instead, identify opportunities where the risk is low and few things need to go right for the stock to do well. That's Munger's investment strategy in a nutshell, and it's mine as well.
The top three stocks in my portfolio make up 32% of the total value. The remaining 68% is split between 21 other stocks. This is more concentrated than many investors would be comfortable with, but I'd be uncomfortable going too far in the other direction.
Here's why I have nearly one-third of my portfolio invested in Intel (INTC -9.20%), International Business Machines (IBM -1.05%), and AT&T (T 1.02%).
1. Intel
Chip giant Intel needed a culture change, and it got one with CEO Pat Gelsinger. The company had become complacent, letting its manufacturing technology lag behind third-party foundries. Eventually, rival AMD staged a comeback in the PC and server chip markets, and Intel was left scrambling.
It can be risky to bet on turnarounds, but Intel stock is a unique situation. Gelsinger hatched a plan to reinvigorate Intel's manufacturing operations and build out a foundry business. One of the company's most valuable assets is its manufacturing expertise, and the only thing holding it back was a lack of urgency. That urgency is now here, and Intel is delivering. By the end of 2024, Intel expects to regain its manufacturing edge with the next-generation Intel 18A process.
Intel is a case of a company that had great assets but was using them poorly. It's now on the right track, and its manufacturing push allows it to benefit no matter how the semiconductor industry evolves. Intel is my largest holding because it soared 90% in 2023, but I won't be selling anytime soon. I think the Intel of the future is going to be worth a lot more than the Intel of today.
2. IBM
IBM has been in my portfolio for a long time. The company has struggled to adapt to a changing technology industry, but it's had one enormous advantage that has persisted over the years. IBM's relationships with clients, primarily enterprises and large organizations, span decades in some cases. As IBM rejiggered its business to focus on hybrid cloud computing and artificial intelligence (AI), those clients are turning to the company to help bring them into the future.
How does a major enterprise with a vast IT infrastructure cobbled together over decades modernize operations, boost efficiency, and cut costs? IBM's consulting arm, its hybrid cloud and AI platforms, and strategic partnerships with leading cloud computing providers combine to form solutions that deliver results.
After disposing of underperforming businesses and making some key acquisitions, IBM is finally in a place where it should be able to grow revenue and free cash flow consistently. It's not the fastest grower, but the stock is still priced pessimistically at just 14 times free-cash-flow guidance for 2023.
While IBM doesn't have the same long-term growth potential as Intel, the stock is a solid value worthy of a top spot in my portfolio.
3. AT&T
Telecom giant AT&T made some serious mistakes over the past decade. The company racked up mountains of debt buying media companies in an effort to transform itself into a media conglomerate. That strategy was an abject failure. Film studios, TV networks, and streaming services are very different types of businesses than AT&T's core wireless and broadband services.
AT&T has now mostly shed those media assets and has refocused on wireless and fiber internet. The stock market still doesn't trust the company. AT&T stock trades for just 7 times free-cash-flow guidance for 2023 despite consistent subscriber gains. Free cash flow should rise in 2024 as the company's pace of capital spending cools down a bit.
AT&T has the least impressive long-term growth prospects of the three stocks on this list. Slow growth is the best investors can hope for. But given the rock-bottom valuation, slow growth is just fine. AT&T is my third-largest holding because I think there's far too much pessimism baked into the stock price. As the company regains its footing after its media debacle, I'm betting that the market will wise up and award the stock a more generous multiple.
