The Fun 10% of My Portfolio

portfolioAs much as I love the S&P 500, my portfolio would be pretty boring if I didn’t invest in anything else.  With that said, I like to invest 10% of my portfolio in different stocks that I come across from time to time.  That’s not to say that every idea is great.  I am not a perfect investor, and even the best fail.  I still think it is fun to diversify my portfolio with different stock ideas.

 

While there is no one right way to invest, there are plenty of wrong ways.  For instance, people have been trying to emulate Warren Buffett for decades now.  He is a “buy and hold” investor that identifies high performing companies that he plans to hold on to forever.  There are other people like Peter Lynch, who buy companies that they base on knowledge and gut feelings.  Lynch use to say if his back started to hurt that he knew it was time to sell.  

 

In terms of my own investment philosophy, if I buy a company, I need to personally like the company and feel comfortable with their management.  There are companies out there that I would never frequent, even if the financials look promising.


portfolioA good example of this is Harley Davidson.  Although an iconic motorcycle brand, I don’t know anything about motorcycles nor am I interested in them, which makes it difficult to determine the long-term prognosis.  I also don’t know anyone who drives a Harley.  I’m not sure if that’s because I run in a small circle or because this brand appeals to people twenty years older than me.  Like I said, I understand that this criteria may limit me, but that’s okay.  I’m only risking 10% of my portfolio, so I’d rather feel good about the risk I’m taking.

 

In some ways, investing is like legalized gambling.  I have had friends that have asked for my advice on which stocks to pick and how to make quick money in the market.  So, I’ll share my strategy for selecting stocks and also give a couple specific examples of stocks that I am currently invested in.

 

portfolioResearch

I read as much as I can about the company and what people have to say about it.  I even read reviews on Glassdoor to read what employees say about the company culture and their views of management.  If people hate going to work for a company or the CEO has a poor reputation, I am much less prone to investing, even if the numbers look good.

 

Dividends

Now let’s consider financials, which is what most professional investors focus on.  I love companies that pay dividends, so that I can reinvest the cash into more shares.  I also make sure the company can afford to make the payment each quarter. There are some companies that unfortunately need to borrow money to make the dividend payment.  To me, this is robbing Peter to pay Paul.  I believe it is too risky of a strategy, and I’m not comfortable with it.

 

portfolioNo Debt

I look for companies that have zero debt or as close to zero as possible.  I personally do not like debt and therefore favor companies that can grow without the need to take on debt.  This may be a really stupid criteria to some people, but it has worked well for me.  

 

Downturn in the Market

The last thing that I want to see is a downturn in the market and for the company to go bankrupt or to see their shares drop significantly because they are running out of cash.  If you remember in 2008, Warren Buffett was lending companies tons of money when the banks couldn’t due to the cash crunch.  Remember the deal that he made with DuPont?  DuPont was in a cash crunch and agreed to borrow three billion dollars to finance a purchase of chemical makers Rohm and Haas.  Warren Buffett received preferred shares and a 8.5% annual payment.  This payment was suppose to go away when DuPont stock reached $53.72 for 20 days during a 30 day trading period.  In the seven years since, DuPont stock has not traded above this mark.  Remarkably, DuPont is still paying him a interest payment of $225 million each quarter, or $8 per second of the day.  Like they always say, “cash is king”.

 

portfolioAnother criteria that I look at is how the company survives during downturns in the market.  I like to see the balance sheet, income statement and cash flow statement.  Were they able to still be profitable during this time?  Did they take a dip in their sales and revenue and by how much?  While I understand that this past performance is not always indicative of future performance, it gives me an idea of what the market thought about them during volatility.  I don’t make a decision solely on this information, but it gives me more of a complete picture of the history of the company.

 

S&P 500

Finally, I like to see what the company has done as a benchmark against the stock market.  Again, I’m a broken record by saying past performance is not indicative of future performance.  This just gives me a benchmark to see how the company has performed relative to the broader market.  If the company has beaten the S&P 500 each year for the past five years by two percentage points, I dig further to understand why.

 

portfolioFor instance, there was a company that I was researching called Cal-Maine (stock ticker CALM) that owns 25% of the fresh egg market.  I was trying to understand why they were doing so well compared to the S&P 500.  In my research, I found that the Avian Flu had wiped out much of the hen population.  This caused a spike in egg prices and caused CALM stock price to shoot up.  As I continued to read, I found that the hen population was slowly rebuilding and that while it may be a great long-term stock to own, the stock price could stay down for the foreseeable future.

 

While those are the criteria that I look at, by no means do I encourage anyone to invest like I do.  I simply wanted to explain why I invest the 10% of my portfolio the way I do.  With that said, a couple of years ago after I had significantly funded my retirement portfolio, I decided to learn more about the stock market.  After reading tons and tons of books like The Intelligent Investor and Motley Fool Million Dollar Portfolio: How to Build and Grow a Panic-Proof Investment Portfolio, I decided that I wanted to be like Warren Buffett and buy a near monopoly with a huge moat that wouldn’t get disrupted by changing technology.  But then again who doesn’t 🙂

 

Rollins & Chipotle

portfolioIn my reading and researching more stocks than I’ll ever remember, I stumbled across two pest control companies that basically own the pest control market.  During my research, I could not find a disruption for pest control.  People are constantly looking to combat rodents, insects and especially mosquitos nowadays.  After scouring through the financials of Rollins (owners of Orkin) and Servicemaster Global Holdings (owners of Terminix), I felt comfortable with the direction of Rollins, specifically because they do not incur any debt.  While it’s only been a short while, I hope Rollins continues to outperform the competition for years to come.

 

portfolioWith that said, I did make a mistake when I bought Chipotle.  I thought the stock was oversold during the E. coli outbreak and thought that traffic would quickly bounce back based on previous E. coli outbreaks at Jack in the Box, McDonald’s and Taco Bell.  While all of them took a hit at one point, I bet today you don’t think of E. coli when I mention these companies.  At the time I bought, Chipotle shares were down more than 33% of their highs.  I thought this would be a good time to buy a quality company for a discounted price.  However, in the short-term, this has not been the case, as Chipotle shares have fallen another 20%. While I am glad I am not a short-term investor, I am unfortunately gun shy about buying anymore shares in Chipotle at this time.

 

Now, here is the full gambit of “fun stocks” that I own:

Stock Symbol Stock
AWK American Water Works
AWR American States Water
NNN National Retail Properties
CMG Chipotle
BRK.B Berkshire Hathaway
QQQ PowerShare QQQ (ETF)
XLE Energy Select Sector SPDR (ETF)

 

Yes, utility stocks like water and energy are “fun stocks” to me.  You might wonder how I am doing with these stocks.  I’m actually doing pretty well.  I am currently beating the market, as you can see below.  While history will say that overtime I should theoretically lose, below are my returns from this year and last year.  Keep in mind that I only allocate a small percentage of my portfolio to this endeavor.

 

This Year’s Returns

portfolio

 

Last Year’s Returns

portfolio

 

Do you invest on your own?  Do you pick out your own “fun” stocks?  How are you doing compared to the S&P 500?  Share your thoughts below.

Mustard Seed Money

Welcome to the website. A mustard seed is a very small seed but astonishingly grows very large over time. My hope is that through your financial journey that your small investment in time, money and faith will grow beyond anything that you could ever imagine.

38 Comments

  1. Given I work on the private information side as a corporate banker, my portfolios are monitored and so I stay away from owning other than mutual funds. Maybe when I reach FI I will start picking some individual stocks with a sliver of my portfolio too. I like your approach and the level of detail you get into (including glassdoor). With my job I get pretty into the weeds with companies so I’d like to think I’d do alright picking a few winners, knowing where to research and what to look for. Thanks for the interesting post!
    The Green Swan recently posted…DIY iPhone Screen ReplacementMy Profile

  2. I have a portion of my portfolio set aside too as “fun money”. Right now I’ve been playing some options on leveraged ETF’s and shorting volatility.

  3. Chipotle is gross. That said, what do you think about the idea that when a stock tanks, you should just buy more? Chipotle is likely not going anywhere and you could even out your initial loss with better returns on the second purchase over the long term?

    • Buying more of Chipotle while it’s on “sale” is something I have definitely thought to do but haven’t felt comfortable yet.

      I definitely agree with you that they aren’t going anywhere anytime soon. Most of the e. Coli scares (McDonalds, Jack in the Box, Taco Bell) have had short term impacts on the company and stock.

      Plus you are right when you say that I could lower my basis in the stock by buying more to increase my returns.

      I’m a little gun shy on buying anymore with the stock market so high. If the stock market tanks further would that also bring down Chipotle? I’m not sure but definitely gives me some things to think about.

      Have you purchased any stock that has gone down and bought some more to increase your returns?

  4. Great job selling Chipotle! It’s hard to recognize when to sell. I’m having a hard time recognizing when to sell, I feel that I have a good idea on when to buy though. One step at a time.

    Those are great criteria used to invest. Especially the one about no debt. Back when the tech boom happened, there were so many PC manufacturing companies that were erupting. However, Dell was a dominant player who survived because they had very little to no debt compared to other companies who were financed a lot with debt. It can ruin a company that makes even a great product!
    Finance Solver recently posted…Increasing Credit Score Means More MoneyMy Profile

    • Thanks for stopping by.

      When I started to do research on utility companies I couldn’t find any technology that could currently disrupt water.

      Based on that I thought it was lower risk than some of the other utility plays. IE solar has the potential to disrupt traditional electric.

      I personally don’t have a landline and don’t have any friends with a landline so I wasn’t sure what the long term market for landlines were.

      Additionally in my research I saw that cellular has the potential to be disrupted by Google Fi and Republic Wireless. So I decided to stay away. I have a friend that bought a bunch of AT&T and has done really well with the purchase but I’m comfortable with AWR and AWK.

    • I think a lot of the traditional retailers are going to get crushed by Amazon. Interestingly enough TJ Maxx and Ross are actually excelling in this market. It will be interesting to see if Amazon can make a dent in the discount retail clothing.

      Additionally from what I’ve read, big malls are moving away from the traditional department stores as their anchors and moving towards restaurants and experience driven businesses to take over for retail properties.

  5. Really nice post MSM – I love how you’re trying to find the monopolies of the stock market – even as something as basic as eggs can work. I like the pest control idea too.

    But I love your water investing, with more people and the same amount of water for everyone – it just makes that water more valuable. Great investment strategy!

    Tristan
    Dividends Down Under recently posted…The big questions about the future of automationMy Profile

    • As a shareholder I feel compelled to go if I am going out to lunch. I might be in the minority but think Chipotle has some room to grow.

      I hope in the future that they decide to open up earlier and serve breakfast burritos.

      Additionally they have two other concept stores that they are testing out. One is a fast casual pizza restaurant as well as a fast casual Asian themed restaurant.

      Hopefully they can turn it around. I definitely do 🙂

  6. I do my own investing with my own set of “fun” picks because that is just what it is, a little bit of fun! I appreciate your explanation of your research methods because all too often you hear people picking stocks just because it is a name they recognize or even worse, a hot tip from their buddy! Great post!

  7. I also have a fun part to my portfolio. The only stock that sits in that category is IZEA, which I do plan on holding on to “forever.” I see them as an acquisition target and are uniquely positioned to benefit as dollars shift to influencer marketing.
    DC @ Young Adult Money recently posted…5 Ways to Negotiate BetterMy Profile

    • I think for most people investing in the S&P 500 is the best way to get started. After you feel more comfortable it’s fun to branch out and test different ideas. Thanks for stopping by 🙂

  8. Great points! Though it’s hard to find companies with zero or near zero debt, I simply compare a company’s debt to its peers and credit rating within its industry. Companies in certain industries tend to have higher debt such as utilities. It seems only the banks have zero debt but that’s because how they operate 🙂

    BTW, have you or anyone looked into writing covered calls? I have always been reluctant to go into option trading but covered calls look tempting and have a potential for another source of income. Any thoughts?

    • I’ve heard some really amazing things about covered calls but unfortunately don’t have any experience with them.

      My brother in law’s uncle swears by covered calls. He lives in San Diego and I have said for years that I want to study how he writes covered calls but unfortunately the timing has never seemed right.

      Seems like I probably need to figure out a time and learn.

      Thanks for the reminder.

      Let me know if you get into covered calls I’d love to hear your experience.

  9. Same here, I’ve been hearing a lot about covered calls lately and how they can add to the dividend income. Just started doing some reading/research to make sure I am not missing out on something good.

    Okay, I will report back in a bit 🙂

  10. I like to swing for the fences in my itty bitty fun portfolio (I’m talking hundreds of dollars) to keep things interesting. Usually do mid-term trading with beaten down high-growth names like ETSY. Sold most, but still have a small position. I like the glass-door strategy. I’ll have to start using that. Should be a good indicator of management.

  11. After having burned myself on “fun” stocks before (was using leveraged products), our fun money now goes into crowdfunding loans to help (start) businesses and/or expand operations. Love reading the pitches and stories.
    We still do individual stocks, but primarily for dividend purposes (not really the “fun” portion of the portfolio).
    By the way, well done! The returns are quite good so far this year, hope you can keep that momentum going!
    Team CF recently posted…How Much Do You Need To Become Financially Independent in the Netherlands (Part 3)My Profile

    • Thanks for stopping by Team CF. I can’t say that I know too much about crowdfunding loans. I know there are a couple out there which one do you prefer to use? Have you found the returns to be better than stocks and bonds? One thing that I worry about with loans is how they will work out during a bear market but then again we know how stocks perform as well.

  12. This is my first visit to your blog. I used to invest in individual stocks and the returns were good. It took way too much time and was stressful.

    So, I shifted fully into index tracking ETFs. The two stocks that I now own are TD and BNS – canadian banks that pay good dividends.

    Looking at your portfolio, you can’t go wrong with water. XLE is a good value play and I think it will do well with the oil rebounding and the OPEC limiting crude output.

    • Thanks for stopping by. Indexing funds are such an easy way to track by asset class. I love it. But it’s also fun to get my hands dirty about once a year and find a fun stock to pick.

      XLE I tracked for about 18 months before I had the guts to actually pull the trigger. I was fortunate on the timing. My water stocks have been my favorite buy so far. It also helps that they’ve done well with investors piling into the utilities sector.

  13. Investing shouldn’t be necessarily boring, it’s good to have some fun stocks to follow. Your selection criteria is very reasonable, if you stick to it, this 10% should grow bigger.
    From my side I’m trying to build up a dividend paying portfolio of 30 stocks, later on adding 1 or 2 index ETF plus a very small percent of bonds in the wealth accumulating phase. One thing I have surely learned: never try to catch a falling knife. Your Chipotle purchase looks something like that. I have also made some similar mistakes in the past…

    • Oh man I unfortunately learned a tough lesson with Chipotle. That falling knife is still making me bleed. Hopefully one of these days it will bounce back and I won’t feel as bad about the purchase.

  14. Thanks for sharing this post. Your idea to look at Glassdoor to determine how the employees feel about a company is an excellent one!

    Some very nice information you have shared here regarding your investment philosophies.

    To answer your questions:
    1. I recently determined that only 18% of my stock and bond investments are individual stocks which I picked. There’s nothing fun about them. I usually opt for boring names and they’ve done well for me. The other 82% is indexes. I own no individual bonds.

    2. I’ve only started tracking against the S&P 500 as of this September and October. I compare everything (US stocks + International stocks + bond index funds) against the S&P index. In September, I outperformed it by about 1/3 of a percent. I’m also slightly outperforming so far in October. I track it daily.
    Trip recently posted…Analyzing the Real Performance of an Investment: Rate of Change, Dividends, and InflationMy Profile

  15. Interesting approach to balance your risk while still scratching the ‘play the market’ itch! I learned a long time ago that investing in individual stocks was not for me. See http://penniesanddollars.com/stock-picking-horror-story/ for the whole story! I didn’t completely learn my lesson then, so I tried a similar approach to yours a few years later. I did better that time, but I quickly started obsessing over every shift in the market and my stocks to the point that it was consuming me and my time. I again realized individual stocks are not for me! But as long as you can keep your hobby from turning into an obsession, it sounds like this is really working out for you!
    Daniel Palmer recently posted…Crazy (Or Not So Crazy) Things I Do to Save MoneyMy Profile

    • Thanks for sharing Daniel. I’ve been fortunate that I haven’t been obsessing. I actually couldn’t even tell you what the market did today so that should tell you how little I’ve been paying attention. With that said when I initially started out I was constantly checking but have now only give a cursory glance. I figure if I bought great companies that in due time everything will work out. Plus it’s such a small percentage of my portfolio that it’s ok 🙂

      Thanks for sharing your link I will definitely check it out.

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