Probably the first investment book I ever read was One Up On Wall Street by Peter Lynch. He was the guru of keeping it simple. He would tell people to go to the mall and see what stores are attracting the most people. In his mind, those stores are the stores you want to potentially own.
“Everyone has the brainpower to follow the stock market. If you made it through 5th grade math you can do it.”
Peter Lynch
Listening to Peter Lynch talk was easy and he didn’t bring the quantitative detail to the conversation. He made investing simple and he believed it too. He’s also the greatest mutual fund manager of all-time.
He and his team would crunch the numbers but he would always say his companies were ones you already knew. I feel that way too. I’ve written a few articles on trying to keep it simple when picking your companies.
“Know what you own and why you own it.”
Peter Lynch
In the spirit of keeping it simple, today the Peter Lynch quote above becomes the purpose of today’s article. In November 2019, I wrote an article about building wealth in individual stocks and laid out some basic principles, including these four:
- Don’t Pay Too Much
- Best in Breed (i.e. quality)
- Familiarity (strong brands)
- Receive Dividends
These aren’t rocket scientist or mathematician principles. They are actually pretty simple and something that Peter Lynch would appreciate. Keeping it simple is important. That means no hard math or fancy financial ratios. My Master Stock List is built to keep it simple and that’s supported by the four basic principles identified above.
Know WHAT You Own
The company logos above are the 13 stocks I currently own. Just a quick glance at the picture shows it passes the “sniff” test for quality and strong brands. They’ve all been around for decades and are industry leaders. My non-financial wife needs to know what every company in our portfolio does to generate revenue.
She needs to know what we own. When she’s 85 years old (26 years from now), our portfolio needs to be so simple that she understands every company. Can you imagine your grandma or great-grandma trying to figure out what Chinese company Alibaba Group does.
You will probably recognized every stock on the Master Stock List too. Like the title of this article says “It’s That Easy” but we seem to make things to complicated. For my style of investing, I’m not trying to find the next Apple or Microsoft and I’m certainly not investing in Tesla either.
I know what these stocks do for the most part. And I don’t need to memorize every drug that Pfizer or Johnson & Johnson have in their pipeline. I just know they are industry leaders and have great R&D departments. They’ve always got several things in the pipeline.
The 3 tobacco companies (Philip Morris, Altria, and British American) sell cigarettes and have developed some non-combustable products too. Any adult in American can look at these 13 logos (or their products) and know basically what they do.
That is the essence of “knowing what you own.” Honestly, it doesn’t need to be any harder than that.
Know WHY You Own It
These companies have been around for decades and their growth has slowed. That’s why buying them at the right price is important. I’m not looking for the perfect price (because I’m not sure what that is) but fair value or lower. That’s one reason why I own them.
Paying 30x earnings for these companies would be horrible. It would take years for you to eventually make money with that approach. Sure, I’d love to own PepsiCo but I’m not willing 30x earnings right now. Eventually, PepsiCo will be in my portfolio but not until it comes down in price.
These companies are best in breed, meaning they are high quality. This quality comes in many different forms. It could mean great cashflow or credit rating or low debt. It could mean consistent decade after decade earnings power. This is another reason I own these stocks.
Finally, they all pay dividends, some growing them for decades. I’m building a passive income stream so dividends are important. Combining a quality company with one that has been growing their dividend for decades and that stock makes it onto my Master Stock List. If the price is right then it will make it into my portfolio.
It’s really that easy.
Summary
I know WHAT I own and WHY I own them. I make mistakes but for the most part I’m pretty happy with what I own and will hold them for a long time.
During my crappy investment years (when I was stupid), I would buy companies where I couldn’t really explain to my wife how they made money. That’s a red flag.
Comparing some junk I bought earlier in my life with Johnson & Johnson or Coca-Cola is a joke. I used to make pure speculative bets as I tried to hit home runs. You can’t hit home runs with junk. I might have had better odds going to Las Vegas.
Buying stocks off my Master Stock List is simple: quality, dividends, and bought at a fair price.
Thanks for reading!
Mr. TLR