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From Blueprint to Reality: Navigating the Steps to Construct Your Ideal Moat Stock Portfolio

Before we get started here, let’s be clear that there is a difference between someone that wants to invest in companies for the long-term (investor) and folks that want to trade quickly for profits (trader). In this post, I’m providing my guidance for long-term investors.

To me, investing requires a long-term view and patience. My holding period for each stock is hopefully a very long time to forever. As for how much to invest in each stock, I aim to invest equal amounts in each stock. Very simply, I take the total that I’m willing to invest in stocks and divide by the number of holdings that I’m aiming for. 

Ok, so you’re ready and confident that you can build and maintain your own stock portfolio. Let’s cover how to do it. First, let’s understand market structure and how it plays into building your portfolio. 

Market Cap

Stocks are categorized many ways. One way is by market capitalization (market cap) or size as measured by value. Market cap is calculated by multiplying the total number of shares of stock outstanding times the current price. Don’t worry this is an easy data point to find on any stock research site.

Think of it this way, the larger the market cap the bigger the company is in your mind. You want to own companies that range from small to mid to large market caps. I prefer to own about 70% of my portfolio in large market cap stocks and the rest in the mid and small. The smaller the company the more risky the investment. Fast growing, mid-size companies with moats offer good risk to reward. Think about it. A company that grows through the small cap phase has probably done something right. Here is a breakdown of categorizing market cap.

  • Mega cap – Over $200 billion
  • Large Cap – $10 – $200 billion
  • Mid Cap – Between $2 – $10 Billion
  • Small cap – Between $300 million and $2 billion

Investing in anything under $300 million in market cap is going to be pretty risky and should only get a small investment (if any). This would be money you’re willing to lose all of if the company tanks.

Don’t forget about owning foreign stocks. I tend to only look at large, foreign stocks from solid countries that the US has good relations with (Germany, Switzerland, etc…). Personally, I look to have at least 25% of my portfolio in foreign stocks.

Sectors and Industries

Sector identification is a broad way of categorizing companies while industries further categorize companies into more niches. For example, Apple is in the technology sector and the consumer electronics industry. Another example is Nestle which is in the Consumer Defensive (aka consumer staples) sector and in the packaged food industry. At the time of writing there are 11 sectors that companies are categorized into. Then, you can imagine the many industries that are within each sector. Here are the 11 sectors:

  1. Technology – this is everything from software to semiconductors to hardware makers
  2. Communications – this is everything from cell phone services to internet search companies
  3. Consumer Cyclicals (aka Consumer Discretionary) – this is everything from fast food companies to online retailers
  4. Consumer Staples (aka Consumer Defensive) – this is everything from packaged food makers to household product companies
  5. Health Care – this is everything from drug companies to device markers
  6. Basic Materials – this is everything from miners to chemicals companies
  7. Industrials – this is everything from truck makers to farming equipment to trucking companies
  8. Energy – this is everything from oil companies to gas companies to new energy companies
  9. Utilities – this is everything from power companies to water treatment companies
  10. Financial – this is everything from banks to credit card companies to insurance companies
  11. Real Estate – this is going to be companies that own lots of real estate whether it be companies that own houses to rent, buildings to rent or technology space to rent.

Building a portfolio

There are two important concepts I keep in mind when building out a portfolio – diversification and barbell. Both are easy concepts but important.

Diversification

Diversification can mean a number of things when if comes to investing. For me, diversification means spreading your bets across market caps, sectors and countries.  By spreading your bets across different businesses you will own companies that do better at times when others lag and vice versa. The point of diversification is to reduce the risk or volatility of owning a narrow amount of companies.

There has been plenty of research that points to achieving true diversification by owning anywhere from 17 to 40 stocks from varying sectors and industries. I own no more than 36 stocks of varying sectors and countries. Very simply, some industries do better than others in different conditions. For example, when the economy is slowing down sectors like technology and consumer discretionary falter while consumer staples and some health care hold up well. 

The above idea leads to the other term – barbell.

Barbell Approach

An easy way to structure a portfolio for diversification is to have some sort of ratios or balancing of sectors, market caps and countries. For example, since tech and consumer staples have a low correlation to one another it’s good to have similar percentages allocated to each sector. Keep in mind I personally do not invest in utilities or many materials companies. Here are a few of the barbells and ratios I aim for.

  • I try to barbell the percent of my portfolio in tech with an equal amount in consumer staple stocks (especially consumer staple stocks that pay solid dividends).
  • I try to barbell the percent of my portfolio in consumer discretionary with total percent allocated to health care, energy and real estate. For example, if I have 25% in consumer discretionary with the total allocated to health care + energy + real estate also adding up to 25%.
  • Across the previous two, I aim to have at least 25% of my total stock portfolio in foreign companies.

Keep in mind, your ratios and barbells may differ over time. When you are younger, and willing to take more risk, your ratios may be different. Regardless, the two barbells and one ratio are good ones to have at any stage of life. 

When to buy and sell

Once you know how much of a stock you want to invest in, most of the time, you will want to build your position over time. The exception is when a good stock gets its price hammered by a broad market decline or an overreaction to news related to the company or industry. When the price decline is due to a company specific or industry related event, ask yourself:

  • Is the company broken or is the stock just suffering?
  • Does the reason I like the company still exist?
  • If I have a position already, should I invest more?
  • If I do not have a position, should I open one now?

I like to build positions slowly unless I get a good opportunity to invest in solid stocks at a big discount due to a broad market decline that takes all stocks down – the good with the bad. This is when you might want to just fill a position versus easing in over time. To be clear, when I say ease in, I’m not referring to any particular time frame. The younger you are, or the longer the time frame you have, the faster your ease in might be. Buying in once a month over 6-12 months is reasonable. Often times the overall direction of the market and economy will tell you. Here are some examples:

  • If the overall market is at all-time highs and the economy is slowing down you will want to take your time easing in – no hurry here.
  • If the overall market tanked and is down 20% or more, open positions in solid companies and buy even if the market declines more. You will not catch the bottom of all stocks but you will sprinkle in at varying low prices which is a win.

For an example of buying a full or almost full position, at the time of writing, let’s look at Costco. Costco whose share price has seldom declined more than 12% from its recent high over the last decade is now trading at a 31% discount to its 10-year high price. The question is why is the price down now? The answer is because the market as a whole is declining due to economic uncertainty. Strangely, Costco does well in rough economic environments because it’s a place more people shop to get value for their money. So, this would be a place to load up on a great stock with a wide moat as it’s trading at a discount to it’s own history. 

Selling a position you will want to go through the same questions above. Is the company broken? Does the reason you bought the company still exist? Is the reason for the moat gone?

Unlike buying in slowly, you will want to dump stocks fully if you conclude there is an issue with the company. The idea here is to buy in slowly (most of the time) and sell quickly. Remember you can always buy it back later if you made a mistake selling a good stock.

This website and associated newsletter along with its content/links are not financial advice. Nothing in this newsletter is an investment recommendation. All content is created for entertainment, educational, or informational purposes only. My strong buy, accumulate, hold, reduce or sell opinions are exactly that – opinions. Be sure to do your own research for your own particular circumstances or higher a professional advisor.

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