Investing in America’s Most Admired Companies

Regular readers know that I believe in building a diversified investment portfolio using index funds. However, I know that there are some investors who think they can do better with a more concentrated strategy.

Many individual investors I have spoken to prefer to make concentrated bets on individual stocks, and some even have a large portion of their net worth invested in the stock of their employer!

Needless to say, I think investing a sizable percentage of your total wealth in your employer’s stock is a terrible investment strategy. Not only does it result in a poorly diversified portfolio, but in a worst case scenario you could find yourself out of a job with a worthless portfolio….remember Enron and Worldcom?

Whenever I make the case for greater diversification, the response I get it always the same: “Yes, but it’s a great company!”.   In other words, these investors acknowledge that diversification may be a good idea for other people, but they don’t believe that it applies in the case of their company.

Testing a Simple Investment Strategy

In this post, I look at the risk and return for a simple strategy that makes concentrated investments in “great companies”.   Each calendar year the strategy invests 100% of total wealth in the most admired company in America.  I’ve chosen the most admired company for each year based on a survey conducted by Fortune Magazine.

Fortune has published the list of America’s most admired companies every year since 1983.  In the table below, I’ve listed the most admired company for each year and the total return (including dividends) that the company’s stock earned in the year that it was voted to be #1.  I’ve also listed the S&P500 returns for each year.

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