For many of us, a portfolio of mutual funds and ETFs is perfect. Whether we have passive funds that track an index like the S&P 500, or active funds in which a portfolio manager chooses a basket of securities, we leave the hard work of choosing individual securities to the professionals.
But for some of us, we feel like we could do a little better by choosing securities ourselves. It’s not that hard. Research is readily available on brokerage websites and even Grok and ChatGPT can help us decide.
I buy a healthy selection of mutual funds, but I also take a portion of my portfolio and buy a selection of shares of businesses that I love.
Read here and here and here for some thoughts on how to choose companies in which to invest.
Basket?
Well, yes, sort of.
A basket just means we’re buying a selection of securities rather than just one.
Here’s an example. Back in 2021/2022, we were still in the midst of Covid and supply chain issues. One of the impacts was that we couldn’t get enough computer chips. And since computer chips are in everything from our games to our cars to our dishwasher, this was a big deal.
While reading about this, I thought to myself, “hmmmm, we can’t get enough of these computer chips. Maybe an opportunity???”
And not knowing a lot about computer chip manufacturing, I did some reading and research and bought a basket of computer chip companies. I bought Taiwan Semiconductor, Intel, Broadcom and Nvidia.
I don’t have enough knowledge or insight to pick a winner, but I suspect there will be some big winners amongst the top companies in the industry.
And 3 ish years later, Nvidia is the big winner, Broadcom and Taiwan Semi have done well, and Intel has lagged. Overall, the group has beaten the S&P 500. Who knows what the future brings, but good start.
Why Not Just Pick Winners?
That would be better.
If anyone has a repeatable process, please post in the comments below.
And that’s the point. We can look back today and see, “Gee, if we’d only put all of our money in Nvidia, we’d have been much better off.
But, Then Again…
Intel looked really good. It was a trusted American company with a long history of success.
We all wanted to see this when we bought a new computer.
In 2021, Intel’s price to earnings ratio was much lower than the others. It looked like a bargain. And it paid a 5% dividend.
Intel looked solid.
What if we bought Intel instead of the basket? It wouldn’t have gone so well.
Rinse and Repeat
I did the same thing earlier this year. With the AI boom and our aging electrical grid, I saw a possible opportunity in energy. I don’t know much about the companies in the space so I did some reading and picked a few distributors, producers and energy exploration companies.
You can read about it here.
I bought shares of 9 companies. One is down 6%, one is up 6% and as a group they are down 1.4%. All of the companies pay a pretty generous dividend, so I should make out OK.
I expect some of the 9 will do well and some of the 9 will do poorly, but I can’t tell you which ones.
With chips, I was lucky. The boom happened right away. With energy, I think it may take a while for this to play out.
Sometimes I Forget
You’d think this would be easy to remember.
But I forgot back in 2020 when I got excited about Realty Income. It’s a real estate investment trust (REIT) that buys properties and rents them to companies like 7-11. It’s a great business and pays a 5% dividend. It’s known as the monthly dividend company. How can you go wrong?
I went all-in when I was early in my retirement and looking for quality dividend payers. Rising interest rates weren’t good for Realty Income and despite the solid dividend, I was down about 25%. Unfortunately I didn’t buy a basket of REITs. I just bought one. Oops.
Same play with General Mills. Solid American company, 5% dividend and I was excited about their entry into the pet food market. All-in.
General Mills dropped 25%.
And to be fair, Realty Income and General Mills are great companies that have rewarded shareholders. They were not good investments at the price at which I bought shares. But who knew?
Buying a basket of dividend payers would have been a better move. Or at least spreading out my purchases over a few months, rather than going all-in with one big purchase.
Expensive lesson. Despite my research and building a thesis, I can be wrong. Gasp!
Yup, remember Under Armor, Whirlpool, VF Corp, Intel, Devon Energy, NextEra, and UPS, just to name a few. Great companies, bad timing. I lost money on each of these.
Wrap Up
I just took a look and I own 70 stocks.
Some are up, some are down.
I’m surprised that Costco is down this year. It is a superior operator and with inflation stubbornly high, I can’t understand why it is at a 52-week low. Costco is down 4.3% YTD even though I proclaimed my love for it here.
Caterpillar on the other hand is up over 62% this year. It is up more than both Broadcom and Taiwan Semiconductor. Caterpillar doesn’t do tech and AI, it makes really big vehicles.
I wouldn’t have called that one back in January of this year.
And that’s exactly the point. We never know.
I’m confident Costco will go on to new highs. I can’t tell you when. It may take years.
And Caterpillar will come back to earth. It’s unlikely it will be up 62% again next year, but it could be.
Buying a basket of stocks is a good way to manage risk. We won’t always choose the best, but some companies will likely boom while some bust.
Doing some research, creating a thesis, eliminating the companies that don’t pass our test, and building a diverse portfolio can help us participate in big winners and will also prevent us from panicking when our favorite company has a bad year or 2 or 3 or even 5.
And Another Thing…
Let me expand on some are up some are down. My investing goal is to make money. If I can’t routinely beat the S&P 500 then I should just buy an S&P 500 fund.
I lost almost $30,000 on VF Corp. That stings.
But I’ve sold some of my shares of Apple, Amazon, Netflix, Starbucks, Safety Insurance, Alphabet, Broadcom, Nvidia and many others along the way as they’ve grown in value. I made money on the sales and my remaining shares have continued to grow.
I have more than 20 sales that have each gained far more than VF Corp has lost.
And I continue to hold many of these companies, as well as 60 or so others. And as a basket, the 70 active companies that I hold are beating the S&P 500.
The point is that even the best investors make mistakes. But if we do our research and diversify, we’ll likely have more Caterpillars and Apples and Amazons and Netflix than we’ll have VF Corps. And our winners can double many times over where our losers can only go to zero once.