New investors need not overcomplicate matters when building their first portfolios. Sure, it’s a good idea to diversify across industries and even geographies. However, when you get started, there is no shame in going for an ETF (exchange-traded fund) or a large conglomerate that can offer you a great deal of diversification (sector-wide and geographically) with just one bet.
Further, don’t feel the need to bet on penny stocks that may have surged by double- or even triple-digit percentage points over the past few weeks. Chasing performance and momentum is a risky endeavour that could expose you to considerable risks. Risks that you probably shouldn’t be taking as a new investor looking to save up for a wealthy retirement. Indeed, greed is a powerful emotion that can lead investors off the trail, potentially toward danger.
New Canadian investors: Please invest! And don’t speculate too much!
As a new investor, don’t chase performance, and don’t chase hot trends from a tip you got from a friend who may be inclined to brag about a quick gain. Just like in gambling, you can get lucky with a dangerously risky stock. And though gambling may be right for some, I’d argue that as an investor, it’s better to invest wisely so that you can put increase your odds of a rich, comfortable retirement.
There’s a huge difference between investing and playing your luck with a speculative gamble. In this piece, we’ll focus on two proven, profitable large-cap stocks (blue chips) that can build wealth over a period of multiple years. And right now, they’re going for pretty modest multiples. I think both names are perfect for any beginner investor who’s contemplating what their first stock should be.
Berkshire Hathaway
Up first, we have the legendary conglomerate run by Warren Buffett, one of the greatest investors of his time. Berkshire Hathaway (NYSE: BRK.B) is a U.S.-traded security that I believe is worth exchanging your loonies for greenbacks for. With the Canadian dollar’s recent run past US$0.76, I’d argue it’s a great time to consider diversifying in U.S. names.
Berkshire is one of the stocks that offer a great breadth of exposure to numerous industries. Insurers like GEICO, a railway in BNSF (Burlington Northern Santa Fe), clothing plays like Fruit of the Loom, fast-food plays like Dairy Queen, and the list goes on. Further, the company sports a magnificent portfolio of stocks, including the likes of tech giant Apple.
I view Berkshire as a basket of wonderful businesses run by some of the most prudent, brilliant investors out there. While Warren Buffett won’t always be there to pick stocks, his values, I believe, will last for decades.
Finally, Berkshire doesn’t pay a dividend, so the stock is all about capital gains. If you’re young, the lack of a dividend is a good thing. I’d much rather Berkshire reinvest what it would have paid in dividends than have to collect a payout that may be subject to taxation.
Fairfax Financial Holdings
For those who’d rather stay in Canada for a wonderful basket of businesses, there’s Fairfax Financial Holdings (TSX: FFH). The company is run by Prem Watsa (known as Canada’s Warren Buffett), who’s a wonderful value investor who’s been known to make gutsy contrarian moves.
Year to date, FFH stock is up more than 21% — near a new all-time high. Can the good times keep going? I’d argue that yes, they can, given Watsa’s abilities and momentum in the company’s solid insurance business.
I still think the stock is dirt cheap, even after the hot surge. The $24.12 billion company is well on its way to the spotlight. And I think new investors would be wise to nibble away at the name over time.
Bottom line
Instead of penny stocks, sound companies that offer a broad range of exposure may be a better bet. Berkshire and Fairfax are two solid plays that I believe make great starter stocks for any new investor.
