I like what-if exercises. They require both reasoning and imagination. And even if the scenarios never actually happen, thinking about them can nonetheless help in the real world.
One example that has crossed my mind recently is what would I do if I could only invest $10,000 in one stock. It actually wasn’t all that difficult to come up with an answer for this hypothetical question.
What I’d look for
There are thousands of stocks that trade on U.S. stock exchanges or over the counter. I didn’t look at every single one of them to find the best alternative. Instead, I first considered what I’d look for most in the one stock.
Anytime you’re in a situation where all of your eggs are in one basket, you’ll want to make sure that basket is very secure. Minimizing risk was a top consideration for me. At the same time, though, I’d want my $10,000 to grow over time.
The best way to minimize risk is through diversification. If we included exchange-traded funds (ETFs) as an option in this what-if exercise, the Vanguard 500 Index Fund ETF would be my top pick. It’s diversified across 500 companies spanning multiple industries. The S&P 500 index that it tracks has also been a consistent winner over the long run.
However, I didn’t allow myself to “cheat” by going with an ETF. My mission, therefore, was to find a stock that offered some diversification along with solid growth prospects.
The first stock I thought of was Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). I even already own shares of the company (the much less expensive class B shares, by the way).
Berkshire certainly offers significant diversification. It’s almost like an ETF. The conglomerate is a major player in energy, insurance, railroads, and more. In addition to its core businesses, Berkshire owns dozens of other subsidiaries.
We can’t forget Berkshire Hathaway’s equity holdings. Berkshire has positions in nearly 50 publicly traded companies. They include some of my favorite stocks I currently own such as Apple and Amazon.
Buying Berkshire shares would also put one of the greatest investors of all time to work for me — Warren Buffett. Despite all of these advantages, though, Berkshire Hathaway is only my runner-up.
The one stock I’d buy
There’s another stock that offers most of the pluses that Berkshire Hathaway does. But it’s much smaller than Berkshire is, so I think it has an easier path to grow over the next few decades. That stock is…Markel Group (NYSE: MKL).
Some refer to Markel as a “baby Berkshire.” The nickname is appropriate. Like Berkshire, Markel has a big core insurance business. It owns controlling interests in businesses in multiple industries.
Markel owns positions in over 100 stocks, including 12 that I currently hold in my personal portfolio. Take a guess which stock is Markel’s largest position. It’s none other than Berkshire Hathaway. (Berkshire also owns a stake in Markel.)
Actually, Markel and Berkshire own quite a few of the same stocks. But I like that Markel is more focused on technology — an area that Buffett has moved more slowly to bet on in the past.
Another consideration that I haven’t already mentioned is valuation. Markel’s shares trade at a reasonable forward price-to-earnings ratio of under 17x. That’s cheaper than Berkshire’s forward earnings multiple of 21x.
Markel offers greater diversification than Berkshire does. It’s in an even better position to deliver strong long-term growth, in my view. And it’s attractively valued.
I’m glad that I’m not limited to investing $10,000 in only one stock. But if I had to, I think Markel stands out as the best pick.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Amazon.com, Apple, Berkshire Hathaway, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Amazon.com, Apple, Berkshire Hathaway, Markel Group, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.