Anyone else stockpicking here and interested in discussing things?
Note: if you’re a fundamental index only person, thanks for clicking into this, please move on.
Me, FIREd, started picking stocks in 20 … er, 19? … picking a stock or two for their dividend, then started educating myself in Feb 2020 - great timing! - and have been picking stocks (mostly) ever since.
Stockpicking portfolio now consists of about 90 securities, TWR is so far at 20+% CAGR annually, yield on cost is at 5.39% and NAV is around 1.5 million CHF.
Lessons learned:
should have picked a real broker like IB instead of Swissquote (transaction costs are terrible)
use screeners and the right powerful tools and stockpicking becomes more of a process than a lottery
stockpicking is simple but not easy: you need to … stick to your own process
For completeness:
still own plenty of index funds, both in retirement accounts as well as in liquid custody accounts.
For teasers my most recent picks in March 2022:
LGEN, MMM, VFC, GWO, LEG.
Additionally, through corporate actions (read: no transaction costs): OXSQ, MAIN.
I do stock picking as part of a satellite strategy which has the majority in VT/VWRL/VWO. However, my stock picking does not really follow a real strategy but more a historical review focusing on companies that are in the business since long time. However, my overall performance with the stocks does not outperform my ETF and hence I will keep the core investment in the ETF and adding some stocks which I like as satellites. What I really like is the options for stock dividends such as RIO for example which I hold since 10y and hence I have already doubled the amount of shares with stock dividends only.
Good lord how do you keep up with them? Or do you just buy and hold?
Over which time period?
How did you come up with these picks? Are you looking at fundamentals or technical analysis?
Personally I invest most of my money in Fundsmith and Smithson, as I prefer professionals to do the stockpicking for me, and more importantly the monitoring of the stocks. Their strategy strongly resonates with me and I would do the same if I had the time to do the research etc.
I have 35% of my portfolio in Smithson fund and the rest is invested in six or seven different businesses.
I used to have many more lines in my portfolio (up to 40 at some point) but I realized that I could not keep up with knowing all of them well. The strategy at the time was to buy a basket of statistically cheap securities and rebalancing regularly. It worked well for some time, until the market became very expensive and I could not find so many opportunities. That’s when I decided it was probably better for me to own a small number of quality businesses that I would let run for as long as possible.
I have so many questions:
How do you keep track of all of them?
How do you select them? Via quantitative measures entered in a screener? Or via qualitative analysis? Or maybe just a momentum strategy?
What is your holding period? less than 3 years (waiting for a re-rating of the company) or more (letting the compounding of earnings do its magic)?
If you select them via quantitative screeners, how do you know that the numbers you are selecting for will stay the same in the future (if for instance, you want the business to keep growing), or, on the contrary, will change (if for instance, you are buying cheap securities that you hope will re-rate)?
If on the contrary, you select more qualitative factors (harder to screen, especially in a world of intangible assets), how do you keep track of so many businesses at the same time?
Do you know enough about those businesses to keep a high conviction during downturns?
That’s it for now, I think I will have more questions once I know a bit more
Heheh. I just buy and hold, ideally forever. Though I would sell if the business was deteriorating or if the line of business is doomed (“whale oil industry”).
The top 20 positions cover 2/3rds of the dividend volume. The top 40 cover 90%.
Similar for purchase price.
Since inception, July 2019.
I know, not really that long. Plus, I only really held two stocks until I started educating myself in Feb 2020 and since then started adding the remaining companies.
First and foremost I tend to focus on dividend growth investing, although I also have a few “just” dividend stocks (with slow dividend growth).
Picking potential candidates is a mix of things: some screening on my own, some inspiration from e.g. YouTube Channels Zahltagstrategie and FASTgraphs, some even from Fintwit.
Actual picking takes place via looking at fundamentals. FASTgraphs tool is the tool I use for that.
My personal parameters are a soft limit of at least a 3% yield on cost, steady track record of raising their dividend, buying with a margin of safety (i.e. below or at worst at the appropriate multiple given the company’s growth), and of course a fundamentally healthy business.
More recently I’ve added reading through their financial statements and investor calls transcripts.
No technical analysis. I think it’s mostly voodoo, at least from the perspective of long term investing.
I looked at Fundsmith’s and Smithson’s fact sheet, and I mostly liked what they state (except their fees and their need to buy and sell based on fund flows). I even share some positions and candidate positions with Fundsmith.
Agreed it’s better to run with the funds if you don’t have the time to do the research yourself. I have the time and genuinely enjoy it.
Personal preference of course, but I like the additional diversification you get from more than just six or seven businesses. Owning more of course also limits the upside, but I can live with that.
I guess you’re somewhat diversified through the fund you hold.
Once I’ve selected a company, I’m fairly convinced they’ll do well for at least a couple of years. Thus, I don’t need to look at them daily or weekly.
I check their fundamentals regularly, probably about once a month, though there’ve been stretches where I didn’t look at things over a quarter. I actually check probably more so from the perspective of looking for further buying opportunities when the price is right.
I do this via having my portfolio in the FASTgraphs tool, which allows me to very quickly see at a glance where things are at.
See my reply to Burningstone.
Yeah, ideally forever. I don’t think I would buy a company with the intent of holding it less than three years.
You don’t know.
However, you can look at the company’s history and see whether they’ve been able to steadily grow their earnings, how they did through recessions (e.g. whether they had to cut their dividend, etc), and get a feel for their resilience during downturns and their abillity to grow earnings through upturns.
To some degree you can even look at analyst forecasts (for earnings, not for price). They are forecasts only, but they give you some indication of where the company is headed, at least for one, maybe two years ahead, whether for example the forecasts over time grow or shrink for a given year, etc.
I don’t.
They’re called intangible assets because they’re intangible.
Ok, less snarky: businesses with lots of intangible assets tend to be harder to understand for me, and I stay away from businesses I don’t understand well.
I’ll answer with my investment sums during my first year of pursuing stockpicking:
So if I understand correctly, you try to buy companies for the very long term, and you would like them to grow their profits at a satisfactory rate while distributing part of it as dividend.
If that’s the case, then focusing on business quality is fundamental. In the long term, most of your returns will come from profit growth (assuming there is no fundamental change in the capital structure of the business - equity raise, etc).
If you want to improve your batting average, you might want to look at more qualitative aspects, like:
What is the competitive advantage of the business and how strong is it. You don’t want competition to come and eat your lunch. If you are not able to keep competition at bay, it is unlikely that the business will be able to achieve a high return on capital. Without a high return on capital, you need a huge amount of capital to grow profits, and shareholders will be very unwilling to inject more equity
What is the runway for profits reinvestments: having strong return on capital is one thing; being able to reinvest them in interesting opportunities is another. You need both to have a long-term winner. For instance, you were talking of MMM. it has a very good return on capital, but it looks like a very mature company that will not reinvest most of its profits. Rather it will return most of it to shareholders as dividends. So a strong profit growth in the future is not likely and I would not expect to get the same kind of long-tern returns with MMM that what you achieved so far.
How good is management, in particular at capital allocation. Over the long-term, the return on capital and profit growth will depend on how management allocates capital. It is very important to have able people in the management seat.
Thanks a lot for taking the time to provide your great insights on this!
You’ve obviously thought about this before …
I would add one nuance.
This at first seems slightly off topic from stockpicking, but actually plays into why I do my own stockpicking instead of letting a professional money manager do it for me.
I need part of the dividends as cash flow for our family’s ongoing expenses. I really prefer to finance that cash flow through reliable dividends and keeping the companies providing that cash flow, regardless of equity prices, compared to having to continually sell part of the portfolio, especially when valuations are attractive.
Managing my own portfolio allows me to do just that: adjust returns to what I personally need, balancing with other factors, e.g. growth, whatever.
This is the volatility risk: becoming a forced seller out of financial reasons even of quality companies at the worst time, just because Mr. Market has a fit.
I understand that a (extreme case) non-dividend pure growth approach would eventually statistically end up with the same (or even much better) trajectory for NAV, but the psychological resilience of dealing with downturns is not the league I am able to play in.
Completely agree.
I think some of the quality aspects are visible from looking at fundamentals, too.
Excellent point.
As a proxy for the return on capital I look at the earnings yield (“how much would the company earn me if I owned the entire business”) and use 6.5% as a (soft) minimum before I buy into a company.
A good S&P credit rating also helps for raising capital at low rates. I actually prefer my companies to raise capital that way instead of diluting shares. In fact, I prefer them to buy back shares instead of issuing new ones.
Agreed, though I personally feel there needs to be a balance between re-investing capital and returning it to the shareholder. If management is awesome at allocating capital, I might buy more of their shares with the dividends they paid out to me. If not I’ll choose a different company. It’s my decision instead of theirs.
MMM strikes that balance for me: their payout ratio was 58.5% at the end of 2021. They’re also still growing (earnings) at the same clip as for the past 20 years (close to 8%). If that dips to 5% or 6% in the next couple of years (as forecast by about 20 analysts who have an excellent track record of forecasting MMM’s earnings) I can live with that.
I’m giving up better growth for more reliable cash flow.
But your point of MMM being a mature company still holds, of course.
To be honest, part of my motivation to buy into MMM is their potential for P/E expansion (which is a little bit of speculation). They currently trade at slightly below 15, while they on average (20 years) trade at about 20. They’ve only traded below a PE of 15 during the Financial Crisis, between maybe about mid 2011 to end of 2012, and maybe for about a month or two during the Covid flash crash. And now’ish.
Point taken on MMM regarding runway, though.
Oy, yes. Couldn’t agree more.
My contribution would be: all management data driven would be backward looking (i.e. in the fundamentals), while everything forward looking is as rosy as the management’s prospect of getting a better compensation package.
Consider me tarnished by having personally observed management compensation, including mine, as just completely unhinged from fundamentals.
On a side note: with the ongoing move to agile project management (e.g. SCRUM), MMMs might continue to grow. One of my clients used to joke about agile being invented by the companies who sell stick-its. We have quite a lot of people in IT, so I hope you understand the joke
I only have a few single stocks (bought the companies when prices were attractive, or just gambling with a small amount), so I’m not sure how much I can add to the discussion. From what I read, and also the part I quoted, it seems you are focusing on companies with strong dividends. Picking the stocks is sort of a hobby (checking fundamentals and technicals etc.)
From a pure “maximum return on investment” perspective, dividend stocks are not a better choice. E.g. dividend aristocrats which crashed hard during March 2020 have not seen the same growth compared to S&P 500. But I think you know that.
I think it’s important to be clear on what your purpose is with the stock-picking. From what I read, it’s about dividends and fun (I mean the searching, comparing numbers etc.) If that’s your goal, I think it is perfectly fine. Also learning more about fundamental analysis can be cool. I would also like to do that, but it’s more profitable for me to concentrate on my own business. That will give me way more return than 99.9% of public available stocks.
Define scientifically-proven. I’m sure there are people who are successful in picking stocks, but it’s a small minority. Also, you have to prove it for several years or even decades (not just in a bull-market flooded with money from central banks).
One question you can ask yourself: do I think I’m smarter than people who do stock-picking for a living (e.g. active fund managers, other successful people like Warren Buffett)? Buffett made a bet some years ago over 1 million USD against the top hedge funds (would have to check the reference though). He bet that passive ETF investing will gain more than active investing. I think he won by miles.
Not sure about good and easy resources. You would have to start with fundamental analysis, which is already too much for a lot of people. It takes time and will to learn the basics. @Julianek might be able to give you a better idea about how much time you need to invest for learning the basics. And even after you learned the basics, it doesn’t mean you are going to outperform the market. As I said before: there are people who are doing fundamental analysis and stock-picking for a living at large banks and hedge funds.
I think it comes down to: how much time are you willing to invest for learning and how much grit/perseverance do you have?
I actually wrote a whole essay on the topic. You’ll find in it:
a long list of public investors who did beat the market by a wide margin for such a long time that luck cannot explain everything
a few examples where one could see at the time that the markets were not completely efficient
What are the factors that make markets efficient, and what can cause a breakdown in those factors
and most importantly, even if market are inefficient, why most investors are better-off sticking to a low-fees index fund strategy
Exactly. Among the few successful investors (with a long track record) I am aware of, I don’t know any that does not spend a huge amount of time researching the topic and analyzing businesses.
From my humble point of view, you are light years ahead from us mere mortals in this forum when it comes to fundamental analysis. From your point of view, most probably you think you are light years behind professional investors. Your threads about picking undervalued companies and then deciding to invest with Fundsmith showed me that it might be more beneficial for me to stick with my business, instead of going down the rabbit hole about fundamental analysis. Understanding the basics of fundamentals is important, but I’m not sure I’ll be able to get to a decent level to outperform others.
If you speak German and are willing to pay a few hundred euros, I can recommend Nils Gajowyi’s tutorial. You’ll find it on his homepage. I follow his approach.
If you don’t want to spend any money on a tutorial, I’d start with Chuck Carnivale’s FASTgraphs YouTube channel though it’s mostly based on the FASTgraphs tool they sell.
One tip: Try adapting the layout/font to be a bit more mobile friendly. (After all, probably 80-90% of web content is consumed via mobile)
It’s quite tedious to read/scroll it this large.
He bet that passive would beat funds of funds, where basically you have huge fees, as you need to pay the fund, and as they invest in funds (not directly in stocks) they also pay those fees.
That said, it’s true that roughly 3/4 of active funds/ETFs underperform the market.
There are some big advantages as small investor, the biggest being agility: most of us can buy/sell your net worth, on a single stock and it won’t move a cent on liquid securities
My only company in my stock picking portfolio offering stock dividends is IMB (Imperial Brands). I like stock dividends as they are corporate actions. If you choose the stock dividend instead of a payout, you basically purchase more shares without any transaction costs. And you get to choose: if the company becomes overvalued, you can switch to cash payout (and buy other undervalued companies instead).
I wish more companies would offer stock dividends.
RIO looks interesting … stellar credit rating for one thing, great looking dividend yield as of now.
I’ve looked at RIO a couple of times, but both their EPS as well as their operating cash flow (OCF) is too volatile for my stomach. I guess you currently get compensated with a nice almost 10% dividend for that.
The other thing I don’t like (as someone who increasingly relies on steady passive income) is their unsteady dividend track record. I prefer companies who have raised their dividend for a decade, the longer the better (no hard rule, but a guiding principle).
Currently, RIO looks undervalued, but given their negative growth over the next couple of years, I don’t expect their stock price to move much - even if they return to their historically normal multiple of about 9 x OCF, their price would stay mostly flat two years out.
Of course, Mr. Market will ignore this. In fact, you should consider my back-of-the-napkin analysis as a counter-indicator: Mr. Market will now send stock price for RIO into overvaluation territory, at least for a while.
If I had to pick a high yield company today, I would probably take EPD. EPD (yielding 7%) has steadily increased their dividend for over 20 years, is undervalued and grows at a steady nice positive rate.
I wish I hadn’t ignored them in 2020 when they were really cheap and yielded probably more than 15% - the entire oil story at the time was a little different than it is today…
To be succesful in stock picking I believe you need to be an expert in business picking. Which means you need to know the industry very, very well, to know the companies in the industry, the competion, the capital alocation, the strategy of the company, execution, management and also standard valuation technics and non standard. Also a good vision of the future market for that insustry helps a lot. Also fundamentals help a lot. I almost never look at technicals. But it is a lot of work. And this means you can only do this for max 10 companies, and you should be confortable with the risk. If you plan to invest in 100 companies, i think you would gain the avarage, so better stick with the index.
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