stock market

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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Re(balancing) Act

photo shows a golden scale out of balance

We’ve got something that may sound like a riddle at first, but this situation captures an idea that we apply here in the shop. 

Suppose you took some of your money and split it equally between two stocks, both trading at $20 per share.  

Let’s say that after a year or two, one of the stocks rose to $30 while the other fell to $10. 

Another year or two later, they leveled out again, and both stocks were back at $20. But your investment has not been a wash. How? 

It might appear that your holdings are right back where you started. There is, however, a simple portfolio management strategy that can help us take advantage of back-and-forth movements.  

Imagine if you had rebalanced your holdings in the two stocks when one went to $30 and the other went to $10. If you had sold off a third of your $30 stock and put the cash toward the $10 stock, you would wind up having twice as much of the cheap stock as you did of the expensive stock—and bringing both positions back to the dollar amount they were when you originally bought in. 

But now when the high-flying stock gives up its gains, you already took some out, so now the price decrease affects a smaller portion of your portfolio than if you’d held onto all the shares. Similarly, when the depressed stock recovers, you get to enjoy the ride up with more shares than you took on the ride down. 

Using rebalancing, this situation would leave you sitting on a net profit of one-third of your original investment—even though both stocks are back at the same price they were when you first bought them! 

Rebalancing works because it applies the simplest investing axiom: “buy low, sell high.” When you rebalance your portfolio, you are selling a little bit of the higher-priced stuff in order to buy a bit more of the lower-priced stuff.  

Trying to “time the market” is a fool’s errand; rebalancing takes the guesswork out and turns it into a matter of arithmetic. 

As always, there are no guarantees: in the above scenario, if the cheap stock kept going down from $10 to $5 and the expensive stock went from $30 to $60, you would look awfully silly (… although not as silly if you had sold out of the one entirely!). 

Stocks do not go up forever or down forever: We generally expect a lot of back and forth. By taking on the risk of missing out if there ever is an extended period without back and forth, we have a chance to use the back and forth to our advantage. 

Clients, when you have any questions about what this means for you, please call or write. 


Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. 

Investing includes risks, including fluctuating prices and loss of principal. 


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2021 Market Forecast

photo shows hands around a glowing blue crystal ball

It is that time of year! Prognosticators and pundits issue their forecasts for the year ahead. Wouldn’t it be nice to know what the future holds? Some forecasts are hedged and don’t really say much. Our prediction is quite specific.

For those who have visited our offices, you know that we actually do have a crystal ball. It forecasts the direction of the stock market for the coming year. It does not say how far the market will go, but it always predicts the direction.

If you knew which way the stock market was going to go, could you make money investing?

Here’s the catch: our crystal ball has only been 74% accurate. So perhaps the question should be, “If you knew which way the stock market was going to go 74% of the time, could you make money investing?”

Without further ado, here is what our crystal ball says about the direction of the stock market for the year beginning January 1: it will go up.

Long-time observers will not be surprised. The crystal ball always says the market is going up. It has never predicted a down year. And checking back over the past hundred years, according to Standard & Poor’s, it has been right 74% of the time.

We don’t know how well its track record will hold up, but we believe this presents a favorable backdrop to buy bargains, avoid stampedes in the markets, and seek to own the orchard for the fruit crop. In other words, to keep on keeping on, following our principles and plans and strategies. And remember the long haul sets its sights beyond the coming year.

It is tempting here to include a discussion of the economy, the strengths and weaknesses we perceive. We’ll leave that to people with more time on their hands. If your plans are evolving and deserve some attention in the new year, please email us or call.

Cheers to 2021, friends.


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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.

Investing involves risks including possible loss of principal. All performance referenced is historical and is no guarantee of future results.

Any economic forecasts set forth may not develop as predicted and are subject to change.

The 3% Solution

photo shows a red basket full of red apples in the grass

Finding potential bargains is one of the hidden joys of stock market disruptions. (And seeking bargains is a core principle for us!) Sometimes, economic setbacks affect the value of enterprises that are actually quite durable, companies that will probably survive and ultimately prosper.

We noted a few months ago that bargains had emerged among those providers of basics—like food, clothing, and shelter—and that we were likely to still need these things in the future.

Now we are noticing another benefit to some of these prospects.

Dividend yields in the 3% range in name brand companies, although not guaranteed, offer the opportunity for actual recurring investment income. You know another one of our core principles is owning the orchard for the fruit crop. Well, a share of ownership in a profitable enterprise, when some of those profits are distributed as dividends to the owners, can be like owning an orchard.

While the value of the orchard (or the ownership share) will fluctuate, the crop (or the dividend) may be a sufficient reason to simply own it.

Why are we mentioning this now? Income-producing investments may be a way to offset the twin Federal Reserve policies of near-zero interest rates combined with the intent to raise the cost of living by 2% per year. (Officials speak of wanting to “hit a 2% inflation target,” but that is just another way to say “increase in the cost of living.”) When savings is earning less than the inflation rate, purchasing power erodes day by day.

Let’s keep our eyes open.

Clients, if you would like to talk about options for your cash or any other portfolio issue, please email us or call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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

Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.


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The Best Way to Get to Know a Recession

photo shows a foggy bend in a road

Tolstoy’s great novel Anna Karenina begins, “All happy families are alike; each unhappy family is unhappy in its own way.”

This seems like stretching a point. In my life, I’ve had the good fortune to know many happy families, all quite different. But the quote does capture the uniquely lonely feeling that can come with misery.

The market, we believe, operates in much the same way. Bull markets can cover up a lot of performance differences, and although no two bull markets are quite alike, most investors are generally going to be happy regardless.

But each and every recession hurts in a unique way. We just have to wait.

The market behaved very differently in the tech wreck of 2000–2002 than it did in the Great Recession seven years later. And what we see now is different than either of those!

In a conventional recession, heavily cyclical companies like manufacturers get hammered hard. But cyclical companies generally understand the boom-and-bust cycle and plan for it with their savings.

Consumer goods companies on the other hand might take it for granted that people will keep buying food and clothing and other necessities, so they generally do not keep as much cash on hand. The short, sharp shock we experienced earlier in the year took out a lot of retailers that might have weathered a longer, shallower recession.

Homebuilders are normally one of the biggest casualties in a recession, but they are doing booming business now. So are the companies that make the materials they work with. Many big tech stocks, normally volatile and erratic performers, have been scorching the markets.

This is a stark contrast to the 2007 recession, when the housing market cratered and took out a lot of homebuilders, or the 2000 recession, when growth tech stocks got demolished.

In all likelihood, those previous recessions helped set the stage for these sectors’ current outperformance. Going into this downturn “everyone knew” that homebuilders were going to get wrecked because it happened last time.

Perhaps in five or 10 years there will be big opportunities for investing in restaurants or cruise lines as the next recession prompts investors to flee the businesses that got hit hardest in this one. No guarantees.

Every downturn is different, and we have no way of knowing what the future will hold. All we can do is stick to our principles: avoid the stampede and seek out bargains. Sectors that get trashed in one recession may be found in the bargain bin before a different recession. This is why we study and keep our eyes open.

Clients, if you have any questions, please call or email us.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

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

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Parts of the Picture

photo shows small white and orange dog running through grass

There’s plenty about 2020 that is disorienting. Some parts of the picture seem to be going okay: spending is on the rise again, and some industries are seeing fresh growth and new opportunities this year.

Other indicators are worrying. Retail bankruptcies are piling up, and many small businesses are just hanging on.

What’s the deal? It’s head-spinning to hold all the pieces together… but they are all part of one economic picture, right?

We recently heard an analogy from Josh Brown of Ritholtz Wealth Management. Brown told Planet Money to picture a person walking a dog, “walking upright at a moderate pace, nothing terribly exciting.”

And then there’s the dog. He says, “Then let your eyes pan down a little bit. Look at the dog. … It’s chasing birds. It’s digging up clumps of mud. It’s running at trees. It’s peeing all over the place.”

The picture feels split, but Brown explains that the dog is the stock market; the person is the economy. They are parts of the same picture. The dog can be bouncing all over, but it doesn’t mean the person is too.

The market is reflecting the twists and turns, the frenzy of opportunities and announcements and shifts in focus. The economy as a whole, however, is on a promising course. While the country has not weathered this specific set of challenges before, it has come through others. Times like these bring pain and innovation.

The economic picture is a complex one, but it doesn’t have to be totally overwhelming. The savings and cash we need, long-term goals, and a little planning: that’s how we stay the course. The dog can bark all it wants.

Clients, when you want to talk about this or anything else, write or call.


The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

IT WORKS UNTIL IT DOESN’T

the photo shows a wooden desk with a keyboard, notepad, pen, and balled up pieces of paper

We’re contrarians. We are not satisfied with conventional thinking that portfolio management requires plugging in the right numbers and then following the formula.

It’s not that simple—and it can actually lead investors astray.

Here’s the deal. Modern portfolio theory—one version of the conventional wisdom—uses rigorous statistical models that attempt to quantify volatility and risk in their many forms. The idea is that if you can measure and predict volatility then you can construct a portfolio that has only as much volatility as you desire.

We believe there are a lot of problems with this approach. These models all rely on the assumption that the market will continue to behave rationally. So when the market experiences irrational exuberance, statistical models quickly lose their meaning and begin producing nonsense.

For example, one measure of a stock’s volatility is called its “beta.” The more correlated a stock’s movement is to the broader market, the higher the beta. A high beta stock tends to be a big winner or big loser based on what the market is doing, while a low beta stock generally moves less than the market. A stock can even have a negative beta, where it tends to move the opposite way from the rest of the market!

Under normal circumstances, volatile stocks tend to have a high beta. But when a hot stock gets caught up in a speculative bubble, it can take on a life of its own. A stock on a hot streak that goes up even on days when the market is down will show a lower beta than stocks that follow the market but may still be volatile.

In cases like this, investment managers that are chasing “low beta” may end up with some very volatile holdings in a portfolio that claims to prioritize stability and low market correlation. And investors that are looking to avoid the roller coaster of the stock market may find themselves on an even bigger ride without realizing it.

We believe statistical analysis can be useful, but it cannot compete with timeless investment principles. Trying to quantify volatility exposure can lead to ugly surprises when the underlying models break down.

We think there’s another way. Instead of trying to mathematically capture and avoid it, we believe in living with volatility. If you are investing for the long haul and you know where your cash flow is coming from, you do not need to fret about day-to-day price action.

Clients, if you have questions about this or anything else, please give us a call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.

STOCK SPLITS AND SWEETS

photo shows a variety of individually-wrapped taffy pieces

Arithmetic is important in our line of work, but its lessons can be found all over.

My older brother gave me one such lesson when I was very young. There was a particular joy in convincing any of my siblings to share candy or treats with me. One day, my brother offered to split a piece of taffy.

“Mark,” he said, “how would you like a fourth of this piece?”

“Yes!” I said.

“If you think that sounds good, what about a tenth of this piece?”

I didn’t know much then, but ten was definitely bigger than four, so this development was promising. I nodded.

“Great! But how about a twentieth of it?”

I could barely contain my excitement. What a deal!

By the end of this process, we settled on a figure. My brother tore me off the tiniest corner of the taffy, and I learned a valuable lesson about math.

At the risk of oversimplifying, we thought of this story again with this news of some major companies executing stock splits.

A stock split is what it sounds like: a company increases the number of shares issued to holders by splitting each existing share into some fraction. Apple recently split four-for-one; Tesla just split five-for-one. (Unlike the taffy lesson, they don’t keep the other pieces! Shareholders went from owning one share to owning four or five, respectively.)

Why split stocks? In years gone by, the idea was that soaring prices made some companies out of reach for smaller investors. A stock split on an expensive company made a single share more affordable, and in theory more investors could get a piece of the action.

Today, many trading platforms allow investors to purchase “fractional shares,” which are also just what they sound like: even if you can’t afford a whole piece, plenty of platforms will still sell you a corner of it.

So why a stock split? Even if it’s not doing much to make the company more accessible to more investors, the move still communicates that idea. It’s a strong marketing campaign for valuable companies.

What does it mean for us? Not much. Remember, we want a piece of the action: any way you slice it, the ingredients and quality of the piece haven’t changed.

A stock split changes the mechanics of how the company is traded. It does not change the mechanics of the company—its outlook, its output, its fundamentals.

Math will always be important in our work, but in this case, we’re not going to let the numbers complicate the situation. Whether we’re splitting the taffy in two pieces or twenty, we know what we’re getting.

Clients, if you want to talk about this or anything else, please write or call.


Stock investing includes risks, including fluctuating prices and loss of principal.

YOU DON’T GET WHAT YOU GIVE

photo shows two rocks balanced on a flat rock on top of a triangular rock with water in the background

We’re not pessimists, by any stretch, so we’ll apologize now for the “gotcha” headline. But do you always get what you give? No, you don’t.

When you invest a dollar, it rarely works out such that you make only a dollar or lose only a dollar. Returns aren’t symmetrical: it’s not one dollar in, one dollar out. It could be one dollar in… and many dollars out. Or pennies. No guarantees.

Our core investing philosophy guides us toward those investments that are likely to stay robust and provide healthy returns for the long haul. However, there is room in some accounts to consider more speculative investments from time to time.

Take Silicon Valley, for example, which is full of disruptive visionaries trying to turn the auto industry upside down. Maybe they are geniuses, and maybe not so much: they could go broke in the blink of an eye. But if an upstart company can capture 3% of the new vehicle market over the next few years, the payoff may be considerable. That could be an opportunity.

As another example, some time ago we invested in a flyer—a fairly risky company at the time—because we figured we might make five times our money if it worked out, and we would only lose one time our money if it didn’t. There were no guarantees either way, but the potential reward dwarfed the potential cost.

There are examples that ought to be cautionary tales, times when the potential reward is so tiny compared to the potential cost. Consider the choice of racing across the train tracks as the arms start coming down. Potential reward? You could save five minutes. Potential cost? The whole rest of your life.

Not worth it.

We can’t know the future, and we are always dealing with uncertainty. But we can think about the possibilities and work to understand the potential outcomes. This applies to investing and life: it’s why we took that flyer, and it’s why we do the practically free things that might help us live longer, healthier, happier lives.

Do you always get what you give? No, but it’s easier to find our opportunities when we understand the consequences.

Clients, when you’d like to talk about this or anything else, please write or call.

Peril or Opportunity?

© Can Stock Photo Inc. / flocu

Everybody talks about “the market” but each company in the market has its own story. We need to revisit this to understand the errors we perceive in a currently popular theory.

Some say that actions by the Federal Reserve and other central banks have artificially pumped up asset prices across the board, so there is no safe place to invest. When we look at the pieces of the market, however, a different story emerges.

Some sectors are far below their peak prices from many years ago. Many oil and natural resource companies are trading at only one-third to two-thirds of past high points. The financial sector has actually lost money over the decade ending July 31st.1

Within these and other sectors, we see opportunities. So we reject the idea that everything is too high to own.

At the same time, we know that there are distortions and potential bubbles in some parts of the investment universe. Even though we know the Federal Reserve will eventually get it right (because the markets force it to), we’ve described why we do not like current policy. We have also talked about the potential bubble we see in the bond market, and what might burst it.

Bottom line, the investment universe has rarely been this interesting. It contains both opportunity and peril, the potential for growth and stagnation. As always, we are studying hard to understand the pieces we should own. Please call or email if you would like to discuss your situation.

1As defined by Standard & Poor’s and calculated by State Street Global Advisors


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