Investing in public markets
Slight yearly outperformance can have a tremendous impact on total return over extended periods. Achieving this outperformance is not easy ... there are certain characteristics that make this outperformance more achievable: independent thinking, patience, and never compromising quality standards.
— Best Anchor Stocks, What An Investor Needs to Outperform Over the Long Term
Strategy
- Raise your savings rate, invest more every month, mostly into $VFV.
- Large positions (ideally 10% or more) in 6 businesses or less, no diversifying into worse names.
- Hold for years not months, trade less.
- Aim to buy 10x more shares than you sell.
Portfolio allocation
These are moving targets:- Diversification:
- ETFs - 40%
- Core, Large cap, Compounders - 30%
- Growth - 25%
- T-Bills - 5% or less
- Sectors:
- Technology - 35%
- Consumer (Healthcare) - 25%
- Financials (Real Estate) - 15%
- Resources (Energy, Materials) - 10%
- Manufacturing (Industrials) - 10%
- Utilities (Telecom) - 5%
- Geos:
- United States - 65%
- Canada - 35%
Checklist
- Growth potential: How big is the TAM? Can the market cap can 10x-100x? Are there signs of optionality, a widening moat, plenty of reinvestment opportunities?
- Business model: Does the business have a dead simple business model, growing margins, and an easy-to-understand competitive advantage?
- Valuation: From its current valuation, does this business have the magnitude and durability of earnings growth to outperform SPY over the next 3-5 years?
- Recurring Revenue: Does this business have loyal customers who make repeat purchases?
- Pricing power: Could this business easily increase their prices & not lose customers?
- Management: Is the business founder-led? Are there high levels of inside ownership?
- Market: Could this be an industry-leading business? Does the business have a reasonable valuation relative to its position in its industry?
Bad reasons to buy, invert
- Buying what’s hot. Just because a stock has gone up doesn't mean it will head higher. Ask: How much more growth is possible? Will people continue to pay higher multiples?
- Buying low. Just because bad news caused a stock’s price to plummet doesn't mean it will bounce back. Ask: Is the stock move an overreaction or are the problems deeper?
- Buying suddenly. Just because you have cash sitting around doesn't mean it will automatically earn more if invested. Ask: Am I taking quick action before thinking through the investment?
- Buying what you don’t understand. Just because you hear a hot tip based on a rumour doesn't mean it will be a good buy. Ask: Can I explain how this company makes money to someone in plain English?
Bad reasons to sell, invert
- Selling when the fundamental story remains unchanged. Just because external factors like media coverage are affecting market sentiment doesn't mean it will lead to long-term underperformance. Ask: Is the change in the story based on fundamentals that will hinder the long-term prospects of the company?
- Selling to buy a company with worse prospects. Just because there is a shiny, new idea doesn't mean it will be a better investment. Ask: Is this new investment better than all of my existing holdings?
- Selling when the stock is 'overpriced'. Just because a company looks overvalued doesn't mean it will lead to lower multiples in the future. Ask: Is this an outstanding company with significant potential to continue growing earnings?
- Selling to lock in paper profits. Just because a stock has surged by 25% in one quarter doesn't mean it will lead to a major correction. Ask: Can I time it perfectly by selling now and buying at a lower price?