Continuing from the first part where I talked about why I think picking stocks is a good idea for me, and how I go about finding and vetting those companies, in this part I’ll talk about how I’m assembling them into a portfolio.
I’ve divided my portfolio into four parts.
The bedrock companies - Slow(er) growing, mature, large/mega cap companies, ideally ones with still some growth potential, proving the “how much bigger can this get” gang wrong every year
The stable compounders - Low double digit growth, EPS, FCF positive and growing, margins expanding with a long runway for growth for decades
The growthy growth - The adtech, SaaS, PaaS companies growing very quickly while still mostly unprofitable, but ideally with good, expanding margins and free cash flow
The long shots - The ones with more of a story than cash flows as of now, but immense potential
As far as allocation goes, I started with the intention of having 30% in X category, 40% in Y category and so on, but the market doesn’t work like that. A few winners over the short term can change those allocations very quickly, so chasing and rearranging portfolio to maintain them seems a little damaging. I’m just going to keep a “healthy” allocation across the four categories moving forward. So much for a clear strategy.
Over the last couple of years as I’ve been buying stocks, I’ve seen there’s a lot of overlap between these as well. Amazon, Google and Microsoft are megacaps that are also growing 30-40% YoY. Visa and Mastercard are definitely bedrocks in our economy but are they the same league of boring as a utility company selling us water? So without making it too complicated, here are a few examples of my holdings across the four buckets:
The bedrock companies - Visa (V), Mastercard (MA), Taiwan Semiconductor (TSM), KKR, Amazon (AMZN), Google (GOOGL), Adobe (ADBE), ASML
The stable compounders - Autodesk (ADSK), Trex, Nvidia (NVDA), Lam Research (LRCX), ServiceNow (NOW), Lululemon (LULU), Adyen (ADYEY)
The growthy growth - The Trade Desk (TTD), Datadog (DDOG), Mercadolibre (MELI), Crowdstrike (CRWD), Twilio (TWLO), MongoDB (MDB)
The long shots - Inmode (INMD), Dermtech (DMTK), Inari Medical (NARI), Novocure (NVCR), Fiverr (FVRR), Upstart (UPST), Teladoc (TDOC)
Portfolio Allocation
These is how my biggest holdings look as of today:
This list probably gives an idea of how concentrated a portfolio am I looking to make. One of the side effects of taking this “Learn about the world through businesses” pill is that it is really easy to collect way too many of them. But I like that. I’m not too comfortable making one business an outsized part of my net worth, unless, it has earned the right to be there. My largest holding is The Trade Desk (TTD) and it has also been my biggest winner. So while at one point, at a 14% allocation it was nearly double the size of my second largest holding, I was comfortable having it that way because TTD had been an enormous winner. I had no intention of cutting down a deserving winner to add to some other company that hasn’t been performing as well.
As far as new money goes, I like (i) Initiating a variety of small tracking positions, (ii) adding money to them in very small increments over the next few months and years as the companies continue executing well, and finally (iii) to stop adding new money to a position that reaches over 3% of the portfolio. Why, you ask?
Here’s a quote from Tom Engle, a contributor to The Motley Fool, which has helped shape my philosophy:
“If a company is the next great growth stock, a little is all I need. If it isn’t, a little is all I want.”
Regular disclaimers for butchering quotes I write from memory do apply, but I find this one to be extremely true. I see no reason to be overweight on a position from the beginning. I’d rather watch a company grow overtime and slowly reap the benefits compound for decades, or see it implode and be happy to have minimized my losses, but that’s just what I’m comfortable with.
Lastly, my holding strategy is the simplest part. If all of the above have been done well and I’ve truly been able to buy world class companies, I’m not selling! As long as an awesome company continues to be awesome, I’m happy to stand by, add to my shares and applaud the management. If it suddenly starts to bleed, maybe its time to move on. Overall though, selling is the least stressful or exciting part of this process for me.
That might be a good thing or a bad thing. We’ll see!