oracle of louisville

The Twenty Stock Concept: A Deep Dive

Clients, you know that our communications are you-centric: we prefer to focus on the situations, challenges, and concerns facing you. But from time to time it makes sense to talk about the tools and techniques we use to meet those issues. Let us give you some background and then introduce a strategy that’s become an important tool in portfolio reviews: the Twenty Stock Concept.

There are many ways to invest for the long haul, and we strive to participate in the growth of the economy over time. Many people’s financial objectives require the growth of capital, whether to improve their financial position, build toward retirement, or preserve purchasing power.

We manage individual stocks for people (which, by the way, is one of the services that sets our shop apart). Because we prefer to invest in the ownership of carefully chosen companies rather than buy investment products made of hundreds of holdings, it’s become more and more important for us to develop a systematic and efficient way to monitor and adjust portfolios over time.

At any given time, our Buy List includes 30 to 35 equity opportunities, which we supplement with more diversified ballast holdings. Client accounts may then wind up with even more names in them, as sometimes positions are held even after they’ve rotated off the Buy List. Doing it this way creates a lot of moving parts…

… which is where the Twenty Stock Concept comes in! This strategy helps us pare things back to only those parts of our investment philosophy that we feel are most fundamental. This list of holdings becomes the template from which we work for new portfolios and for reviews of existing portfolios.

The foundation of the Twenty Stock Concept is great companies trading at fair prices. These are usually blue-chip companies that dominate their sectors. They are our first picks, and we expect to hold them for a long time. We usually have 10 to 12 of these blue chips on our list.

To round out the list, we select what we perceive to be the best opportunities from the rest of the Buy List. These will include cyclical companies that we hope and believe we are purchasing at favorable points in the cycle. The rest of the opportunities may include other bargains from anywhere else in the investment universe.

Because the Twenty Stock Concept is a starting place, a template, not all of our holdings are fundamental enough to make the cut.

What gets left out? Our main investment approach also includes a handful of speculative growth-seeking holdings. Some of these may be smaller, unproven companies that we see explosive potential in. Others are regional or sector plays in areas that may or may not pan out. We think there is a place for these holdings—otherwise we would not have them to begin with. But some clients may not need or want the turnover and volatility they bring.

As an in-house system, the Twenty Stock Concept serves two functions for us: it allows us to provide a focused offering for those who prefer to own a smaller number of names, and it gives us a consistent approach that we makes our services available to smaller accounts than we would otherwise have the capacity to manage.

No guarantees, of course. We base our work on our opinions; no matter how carefully we do our research, sometimes the future confounds us.

But it is intensely interesting, and often rewarding. Clients, if you would like to talk about this or anything else, please email or call.


Investing involves risk including loss of principal.

No strategy assures success or protects against loss.


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Minding the Bears

photo shows a rocky mountain trail

One recent morning, I was lucky enough to be hiking on a mountain trail with my sister. The air was crisp and clear, the smell of the pines was thick—a beautiful day.

We came across animal tracks, then more animal tracks, on the muddy parts of the trail.

We knew before we started that there were bears in the neighborhood. (In fact, one might say we were in the bears’ neighborhood!) The tracks seemed to have the shape of claws, with a size and depth that impressed me with a desire to avoid a meeting.

It seemed as good a time as any to turn around, so we did. My senses were on high alert as we began to descend. We reached the trailhead without incident.

Later, I looked up the facts about bear attacks. Only one out of 175 million people worldwide is the victim of a fatal bear attack each year, fewer than two in the whole United States.

The danger I perceived was far larger than the actual risk involved.

This reminds me of where we are in the investment markets. It seems to be the economic equivalent of a beautiful day: the market has had a sharp rebound from the pandemic lows of 2020. Yet some are concerned about the bear (a bear market meaning, of course, a big decline).

Just as there are plenty of bears in the wooded mountains, there are regular declines in the stock market. Some estimate that 10 to 15% declines are routine each year. But fear of the bear often seems to be greater than the actual damage a bear market might do to long-term investors.

Learning to live with the ups and downs, one may benefit from long-term growth in value. But fear of a decline that proves to be temporary—and rarely truly catastrophic—may lead one to sell out long before money is actually needed, with future gains foregone.

Clients, thank you for inviting us to hike the trails of your life with you. If you would like to talk bears or mountains or markets, please email us or call.


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Sinking Fund, for the Win (Again!)

photo shows jars full for coins with labels for things like travel, education, house, etc.

Some time back, we wrote about the benefits of a “sinking fund” to make for a smoother life, financially speaking. This is a way to set aside money systematically for unpredictable-but-likely expenses, long-range spending plans, and lumpy annual expenses. (When businesses or other entities use sinking funds, it’s usually to lower the level of debt over time.)

My home is (was?) in good shape, but I knew maintenance and repairs were bound to be needed. Furniture and appliances do not last forever, either. My vehicles are in good shape, but someday I will need to pay for a new one.

To meet these needs and more, I arranged an automatic deposit into my brokerage account each month, calculated to—hopefully!—handle whatever might come up.

So far, eight monthly deposits have been made. And wouldn’t you know it, an unexpected home expense has hit.

It might have been the air conditioner or a washer or a dryer. Termites could have popped up or the insurance deductible for storm damage. But the money in my sinking fund can be spent on what is needed, when it is needed.

I don’t know precisely how much it is going to take to fix the problem, but the important thing is that it won’t stress me: the sinking fund has more than enough to cover the issue. Next year when I think about replacing some windows, and many years from now when the roof needs replacing, I’m sure I will feel the same way.

The examples mentioned here aren’t exactly emergencies, but they are sudden. They are part of the fabric of modern life. If you own a home or a car, if you have one of those fragile human bodies, if you live somewhere weather happens… this fund may help you avoid tapping into your emergency fund or resorting to expensive credit to cover something that always could-have-been coming.

So one of the best things about the sinking fund is that I spend less time worrying about the sudden expenses the fund is intended to cover. It took just a bit of thought to set up, then it flies on autopilot. I review it from time to time, and I can always adjust the monthly deposit.

Clients, if you are ready to talk about reducing the stress of unexpected expenses in your life, call or email us.


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This text is available at https://www.228Main.com/.

Working What We’ve Got

One investment supersedes all others: an investment in yourself. It adjusts for inflation. It helps you have a more interesting life. When we invest in ourselves, we are seeking to improve our value to others. The more valuable we make ourselves, the more an employer or customer will pay us.

The collection of attributes that create this value are called human capital. Many aspects of human capital are free. Years ago, I became acquainted with a senior officer of a large publicly traded company whose most obvious superpower is kindness. After they moved on to a leading role elsewhere, people familiar with them always remembered that trademark feature—and how they had helped them in the past, how they made them feel.

Kindness is free. So are dependability, punctuality, enthusiasm, diligence, and all the other traits we seek when we deal with others. (Others desire those same traits in us.)

Some aspects of human capital require time and money, sometimes lots of both. Think of the education and training required of surgeons, for example. Educational paths and career planning are beyond the scope of this essay, but the value and wisdom of all of your choices ultimately comes down to whether you figure out how to add value to the rest of society.

We have heard the idea of “follow your passion” debated back and forth. Understand the difference between doing what you are passionate about and being passionate about what you do. One of them has a wider range of opportunity than the other.

The source of our wealth is our earning power, which arises from our human capital. It all starts here.

Clients, if you would like to talk about this or anything else, please email or call.


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The “Stuff” of Wealth

photo shows clothing hanging and a table full of glassware and kitchen goods for sale at a yard sale

Spring cleaning has given way to garage sale season in many communities. What a thrill for the senses! Whole rooms, stages of life, and past eras get arranged outside for our neighbors to consider.

I myself lean more minimalist, in general. Less stuff means less to manage. But having moved a few times in a few years, I’m thinking more about our relationship to the stuff our lives—and what it might highlight about our wealth more generally.

Maybe you’ve read about or seen the Netflix show from Marie Kondo: she’s a Japanese “tidying expert.” In her method, people have to confront their relationship with things they keep.

Does each item spark something in you? Does each item have a home?

The spark is typically joy or energy, but it could be a basic appreciation. (I wouldn’t say my toilet brush “sparks joy,” but hey, I’m glad enough I own one for when I need it!)

There are no formulas about what fraction of your wealth you devote to the stuff of your life, from furnishings and clothes to gadgets and books and fine art and gardening tools and… whatever it might be. You might, however, think about whether there’s a fit between what you have and the life you’re living. Does anything feel like it doesn’t fit? Do you get the sense something’s missing?

Our stuff is not the most important part of our financial planning, but it can certainly be part of it. As you look around at the things of your life, we hope that you see them as a reflection of and tool toward your goals—as part of a happier, healthier, and more sustainable financial future.

Think of it from the other direction: if you’ve got stuff around that’s not really part of your life, you’re paying for it to live rent-free with you! (How’s that for crystalizing the financial cost of keeping stuff around?)

Clients, no judgments from us: when you’re ready to talk about how we can help realign your money with your life, write or call.


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What a Nice Problem to Have!

photo shows a pile of small American cash bills

Money isn’t just money. This is one the unspoken understandings that drives our work at 228 Main.

(Green paper folding money is actually pretty gross, when you think about it. We exchange germ-ridden linen for goods and services? It’s weird.)

For many people we know, money represents work. It’s sweat and time and livelihood.

For some, money means travel, through time and chapters of our lives.

It’s supporting children and parents and ourselves and our communities.

It moves around among us and makes new things.

However, money can be a top stressor for many Americans. We’d like to offer a little reframe: money can be a wonderful problem to have.

In recent months, fresh flows of cash have been springing up in many households as the pandemic kept us less mobile and less active. Others have discovered more flexibility after paying down debt across the last year. And those stimulus checks arrived whether we needed them or not!

We’ve been hearing from some of you about those big financial questions of life, too, as some are wondering about whether a financial legacy takes the form of an inheritance for later or gifts splashed around to children or loved ones now.

Generational wealth is a powerful tool and privilege. It also highlights the tensions we feel around money: what is the utility of money, in our lives? What can it get us and others? What can it do for us and other?

How do you best use your money? There isn’t one answer—and we certainly aren’t here to tell you your answer—but oh my, what a nice problem to have!

Clients, may your wealth bring you only the best of dilemmas. We’ll be here to try to help you along your way.


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Why Don’t We Just Pull Back?

photo shows a foggy bend in a road

Clients sometimes ask why we don’t just pull back when the market starts going down.

It is a fair question. We are thinking about a number of things in formulating investment strategy and tactics:

  1. The average decline in the course of a calendar year in the major market averages is about 13% (per Standard & Poor’s 500 Index, S&P Dow Jones Indices). Basically, the market is always going down—and up.
  2. A wag once noted that the market has predicted nine of the last five recessions. In other words, it may decline 10 or 20% without signifying anything about the health of the economy.
  3. The times when it seems to make the most sense to sell out often turn out to be good times to be invested.

In short, the ups and downs are part of investing. We each face a choice between stability of values and long term investment returns. There is no way to get both of these things on all of our money, although we may have some of each.

It is important to know where our money will come from, the funds we need in our pocket. For investors, it is also important to know that our long-term portfolios will go up and down.

We mentioned above that the average stock market decline in the course of a year is 13%. Let’s be clear about what that means: a $13,000 drop on a $100,000 portfolio; $65,000 on $500,000; $130,000 on $1 million.

Here’s some solace: by the time you notice we’ve been skewered, we are closer to recovery than when the decline began. One year out of four, on average, the market (measured by the S&P 500) declines. Think about it—three years out of four, on average, it has gone up.

We don’t pull back because we do not want to miss the rebound. Our experience has been that we can live with the ups and downs. It isn’t always easy, but our experience has been that it works out over time.

Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing, including stocks, involves risk including loss of principal. No strategy assures success or protects against loss.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.


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