Welcome to another Friday of earthly delights! We’ve had some new folks join our numbers in the past few months, so I thought I’d catch you up on the Real Money Portfolio and what it represents… and why I write about it for you. After that, I’ll catch you up on my thinking on a few of these stocks that have generated some news recently, and on a few new trades.
Sometimes people ask me what my investing philosophy is, and I don’t really have one… but I should at least be able to explain my thinking a little bit for you.
My overriding strategy is to try to build a long-term portfolio primarily dependent on two kinds of stocks: those that have sustainable competitive advantages in growing industries, where the business is real and growing and the possible growth over a long period of time can be remarkable (but the prices often seem very high); and those that have long-term potential to steadily compound earnings at a solid rate of return, and can be bought at reasonable prices.
Dramatic revenue and earnings growth is the engine that creates huge short-term gains in the market as new industries are created or new competitors emerge (and sometimes huge long-term gains, when that rare company that can dominate for decades emerges), but compounding, the ability of a company to reinvest its earnings into growing the business a little more each year (or sometimes a lot each year), is what gives me confidence in the sustainability of my portfolio, and what I hope to continue to rely on to create long-term portfolio growth.
The first group, the growth industry leaders, is what has been most popular in the market in recent years, so that’s a large part of the reason why my portfolio has done well — stocks like NVIDIA, Apple, Alphabet, Facebook and Amazon have sustainable competitive advantages, and they are dominant players in growing industries that have tended to be natural “winner take most” businesses, despite the tendency of technology stocks in the past to be brutalized by competitive pressures from new entrants… and the market has certainly noticed this, which is why most of them are pretty expensive at the moment.
The second group is not quite as much in favor, but certainly isn’t rashly undervalued right now — I’d put the insurance conglomerates in that group (Berkshire Hathaway, Markel), as well as the steady dividend growth stocks with solid and unsurprising businesses (Kennedy-Wilson, Medical Properties Trust, Starbucks, Hershey, etc.). These are the stocks that have the strongest likelihood of becoming “hold forever” investments, with either strong cash flow compounding for the business itself or, in the case of dividend payers, a great tailwind from compounding reinvested dividends. And some “growth” stocks and technology, and here I’m particularly thinking about Apple and Alphabet, are really morphing into compounding machines as they channel their cash flow into building new businesses (or, in Apple’s case, massive buybacks and dividend hikes).
And as I try to build positions in those stocks that I anticipate being able to own for many years, or even decades in some cases (though I do keep an eye on reasonable stop-loss triggers for downside protection, particularly in the “growth” stocks), I also speculate on interesting stories around the edges — smaller and riskier growth stocks that I think might be onto something bigger, and might grow into deserving their valuation, and special situations where I think stocks are simply misunderstood or valued improperly given their current earnings or dividends or growth potential. Sometimes I learn about these from teaser ads, sometimes just from screening ideas or watching the comings and goings of the market.
And then I get a little crazy with smaller “bets” that create a fair amount of churn in the portfolio, including options s