Rolf’s investment philosophy (Part 3) - Building a Portfolio!
In this finale of the trilogy for Rolf’s investment philosophy/strategy, I will discuss strategy to build Rolf’s Equity Portfolio. To recall, Part 1 here discusses the need to build up the right character and Part 2 here identifies the importance of understanding the business and building up your human capital in the early stage of your life. In my opinion and of great relevance to me, the understanding Part 1 & 2, lays the foundation of successful investing.
Number of stocks
Ideally I prefer to have 20 stocks or more. Not just for numeral diversification, but for personal interest of knowing how different companies run their business across different industries. Too little stocks, I cannot learn much…too many, no time to monitor! I am not discounting the possibility of me owning lesser stocks one day. Yet, I reckon my stocks + watchlist stocks shall be between 20-30 stocks at a minimum.
Invest in stocks I know well
I prefer to invest in stocks that I know well or at least have done homework on. This is a theory made famous by Peter Lynch in his famous book “One up on Wall Street”. Lynch said:
- Invest in things you already know or have an edge in.
- Investment without research is like playing stud poker without looking at the cards.
Well, I will not elaborate too much further on Lynch’s ideology/examples. You can easily “google” or simply read his book. Instead, in the following, I will use more of own examples.
Prior to the onset of the oil plunge in Oct 2014, I owned large percentage of O&G stocks in my portfolio. Having work in the industry and have a better insight on the business model of various stocks, I made a few critical decisions then and fortunately it turns out to be right. For instance, I sold most of the stocks during the early stage of the steep oil plunge, either taking profits or mitigate losses. I also sensed trouble and had not added any O&G related holdings since more than a year back.
Despite being more careful having worked in the industry, I am not immune! I am still holding on to three O&G stocks today that had suffered colossal damages. Mind you…that is not to say that these stocks will not rebound. Imagine there is sudden unforeseen news that send Oil price soaring again.
As a rule of thumb, it is easier to understand the business of stock if you worked in the same industry. But never be complacent and think you know a lot and start skipping the detail reading of articles/reports of the company. Likewise, it can also be a business that you have “rub shoulders” with frequently. For e.g. after I was admitted to Raffles Medical due to an accident in 2013, I started investing in the company.
Read:Why is Raffles Medical Great? – A tale of personal experience!Why is Raffles Medical Great? – Facts & Figures
The aforementioned are just few examples of my own. Essentially, there can be many examples of companies that you may come across often and the business is easier to understand for you. For example, taxis (Comfort Delgro), trains (SMRT), shopping malls (Reits), banks (DBS, UOB, OCBC) telco (Singtel, Starhub, M1), properties, F&B etc
Diversified across industries
While I prefer to have a portfolio diversified across various industries, I will tend to allocate more “gunpowder” to industries I am more comfortable with over long term. Hence, I do not diversify for the sake of diversifying
Very briefly, I am long term bullish on consumer, healthcare, data/internet or even telco! For Reits and property, I am neutral now (waiting for a better entry point) but also long term bullish. Ok, you may wonder why I am still long term bullish on Singapore telco, since IDA announced the fourth operator.
Pertaining to cyclical stocks e.g. Oil and Gas, shipping, construction, I am not quite comfortable. I feel that banking stocks will face short term headwinds and moreover their businesses is “too difficult” for me to understand entirely.
Diversified across countries
In the long term, I am optimistic about the future of Singapore, ASEAN and China. Hence I prefer investment exposures inclined towards these countries.
Invest Asia 2016 Seminar – Key Takeaways from Kishore Mahbubani et al on ASEAN!China stock plunge - From Horse Mouth of Mainland Chinese ResidentsCapitaRetail China Trust to Continue Thriving in a Pessimistic China Economic Outlook?Why China Today is so Different - My Own Travel Experiences in the Last 10 Years!
Invest in stocks I traded before
I did own close to 30 stocks at one point last year. This is before I disposed most of my equity holdings to hold substantially more cash in the 3rd quarter last year. Since the start of this year when STI tumbled, I had been deploying part of my warchest.
My stock buy or watchlist this year will generally revolves more on those shares which I use to own/traded before which apparently also means stocks that I know well. Or at the very least, those stocks I had analyzed before and been in my watchlist for awhile.
Ideally, I like to buyback same stock at a lower price, which I had previously sold at a much higher price before. Ok, you cannot time the market. That is true! That said, it is still possible to ascertain if a stock is over or under-valued to facilitate some of our short term trading desire! Read the last section of this article.
Strategy in creating my portfolio
I attended one Motley Fool.sg seminar, where the topic of portfolio management is addressed. The management strategy is generally Pyramid investing! I think this plan makes a lot of sense to me and hence while using Fool’s strategy as basis, I also improvised to create my own strategy as follows.
Avoid or have less exposure in companies that are too “hard”. E.g. Oil and gas companies may appear too hard for many to understand. My “hard” pile consists of bank stocks!
First, classify all stocks in my portfolio into 4 categories. Categories are guidelines to me and not hard rules which I don’t lose sleep over it, if there are slight deviations. Bear this in mind.
- Speculative : stocks that looks interesting but have some risks, and you less sure of. E.g. the oil and gas stocks now, penny stocks or in general cyclical stocks.
- Growth : stocks that have consistently grow their EPS at least 5% p.a.
- Income : stocks that have consistently pay out dividends of at least 5% p.a.. E.g. Reits, Telco, certain consumer companies etc.
Below is an example to show how I organise my portfolio. It is for reference and they do not reflect my existing portfolio size.
Space out buy
According to Fool.sg, it is also better to space out your buys to reduce risk. E.g. you can wait for 6 months to 1 year before adding the same stock.
PS: I do not follow this rule strictly. You can also read following article on my strategy to deploy my cash during a market decline.
If the market remains bullish, I strive to consistently buy stock every month based on the excess cash I had from my monthly income. Not warchest! This excess cash to invest each month is after taking consideration of unforeseen circumstances etc.
Fool.sg recommended investor to keep 20% cash as warchest to take advantage of a downturn. In the current market outlook, I am more cautious and decided to keep more cash.
Read:Hazy Outlook Ahead – Cash as Hedge?My Major Stock Portfolio Selloffs in 2015 - I use more "Gut" than "Logic"!
Mixture of long term and short term investing
Long term investing calls for the elimination of frequent buy and sell (“trades”). This I agree and I have most stocks that fall into this category.
However it does not mean that this is the only way to achieve success via investment. I believe that sometimes, you can also have several stocks that you performed short term trading too! This can add some spice to your investing! But remember to be strict and keep the amount to the conservative non-risky range. Also remember to set and apply your cut loss benchmark for short term trading.
For short term trading, I prefer to trade BLUE chip stocks that are sort of depressed or volatile now due to the short term outlook!
Rolf’s final thoughts
Currently, my portfolio is far from perfect and is a “long long” way to go before it becomes “solid”. Being solid to me means robust and can weather the “big bear” and not crashed out/bankrupt. It also mean to be sustainable with significant dividend payout over time, and with little monitoring needed. Ultimately, this portfolio should be one that is tailored made to be most suitable for me. And it is going to be a portfolio that will continue to evolve over time, improving to be better and stronger.