There Is No Illusion In My Portfolio

There is no illusion with my portfolio … I’m not diversified. I know that, I’m ok with that, and it’s a work in-progress. It’s something I own and it’s more about my approach to building my portfolio.

I was looking at my small but growing taxable stock portfolio today and wondered what was missing. Answer – a lot of things are missing. So many things are overpriced in today’s market and it’s hard to find fairly valued stocks on my Watch List to purchase.

You’ll find many dividend investors that have 50, 75, or 100 dividend stocks in their portfolio. And they’ll buy them 3 shares at a time. That’s not the approach I’m taking. I don’t want to buy 3 shares of Pepsi for $145 and then 5 more shares when it get’s to $130.

I’ll wait for my price and then buy 50, 100, or 200 shares at my price. I do like buying 2 or more positions in a company because you never know when the exact right price is going to occur. So I’ll likely buy 50 or 75 shares of Pepsi at a lower price and then I’ll buy another 50 or 75 shares later. That’s just how I’ve been building my portfolio.

This portfolio started just over a year ago so it’s far from mature and far from what it will look like when I retire in 5 years. A quick look at the companies will show you that I’ve been buying out of favor stocks.

Most of my future “core” positions – like Pepsi, Colgate-Palmolive, Nestle, or Hershey – are just too expensive right now. So I’ve been following Warren Buffett’s advice of “The best chance to deploy capital is when things are going down.” So, I’m waiting for that moment but in the meantime I’m grabbing some opportunities when the market provides them to me.

Yes, I’ve only got 9 stock positions but those stocks where purchased at a fairly decent price and it will eventually be a 25-35 stock portfolio. It’s no illusion that I’m missing many pieces to my portfolio and I’m not currently diversified but that will change over the next few years. Eventually, a market correction will occur and the stocks I really want will be added.

Buy Them While They’re Down

When all stocks are going up, even the dumbest person in the world can look like a genius. But when you are focused on quality companies with a long-term buy and hold focus, it’s best not to buy them at 30, 40, or 50 P/E’s.

“The best thing that happens to us is when a great company gets into temporary trouble. … We want to buy them when they’re on the operating table.” 

Warren Buffett

During President Bill Clinton’s years, healthcare stocks took an absolute beating. That happened again in 2019 when Democratic Candidates Bernie Sanders and Elizabeth Warren started talking about destroying healthcare as we know it today. It crushed companies like CVS, so I bought it.

Headlines or one-time events can be great opportunities to purchases companies. My CVS example fits the bill perfectly. Tobacco stocks took a significant hit in 2019 when vaping was hitting the headlines. So I bought some Phillip Morris (and probably should have bought more of it) at a good price.

Today’s headline is oil and energy companies. The coronavirus from China has smashed energy companies. People think oil will go away. Politically, people are screaming about climate change and large investors are talking about divesting their oil holdings. So I’m currently heavy in oil (Exxon Mobil and Royal Dutch Shell) and will likely buy more if it continues to stay low.

Being Contrarian Can Be Scary

I’ll be the first to admit that buying oil, healthcare, or tobacco when nobody else wants those stocks is scary. Molson Coors (TAP) was a $110 per share company over 3 years ago but I got in at $51. Yes, it has experienced some troubles but they keep raising the dividend, cashflows are good, they’ve got some great brands, and they are rethinking their approach to business (they are a beverage company now and not a brewery).

But this is where you make money. I get paid 4.40% to wait while Molson Coors figures it out plus I got them at a great price. I’ve limited my downside by getting a good price for this iconic brand. They are not in financial distress but they do need to get the revenue and earnings engine cranking again. In the meantime, I’m reinvesting my dividends while they figure it out and I look for another company. And it’s very possible that they go lower because there are no guarantees when buying stocks.

It was frightening buying AT&T under $30 when the headlines said they would cut the dividend because of their debt load? But I purchased some and my total return is already nearing 30%. The same thing with CVS. Apparently, the talking heads in the media didn’t feel that CVS’s 10,000 locations, Aetna purchase, or excellent cashflow was enough to keep the company from falling into the abyss. My purchase now has given me some breathing room with a nearly 30% total return. Both AT&T and CVS are long-term holds for me and I’m glad I got them at a good price.

And that’s what investing is all about. Getting good companies at a good price. Of course, I’m really waiting to buy Johnson & Johnson, Pepsi, and Disney at better prices … those are a few of the companies that will be the core of my portfolio. But in the meantime, I’ve been looking for opportunities to buy when something goes on sale. It’s tough in today’s market but you just have to be patient and let the stocks come to you … don’t chase yield or performance.

Conclusion

I could buy 100 shares of Pepsi today at $145, a 2.6% dividend yield, and a 25 forward PE. I’d rather buy it for $119, a 3.2% dividend yield, and a 20 forward PE. My choices are to: (1) be patient and wait for my price (which may never come), (2) purchase a small amount now and then some later, or (3) buy something else.

In 2019, I’ve done all the above to build my current portfolio. In December 2019, I wrote Let The Game Come To You and that’s exactly how I’m building my portfolio today. I know what stocks I want to purchase and I know what I’m willing to pay for those companies. It never crossed my mind that Coca-Cola would drop 10% in February 2019 but I had cash ready to buy when it did.

My portfolio is not (yet) diversified but it doesn’t concern me at the moment. When I retire in 5 years, then having a diversified portfolio is something that will be on my mind. But by then, I’ll have 25-35 stocks representing many different sectors. My first stock position was AT&T for 300 shares. Soon after I bought CVS after it got beat down and then Coca-Cola became available. And that’s how you build your portfolio … one stock at a time when the price is right. If a major correction is “gifted” to me then I’ll buy several quality companies at once. Until then, I keep looking and waiting.

Thanks for reading!

Mr. TLR