The last several years have been wonderful to invest in stocks. But we often get the question, “What do you look for in stocks? Or How do you choose what to invest in?”
What we are going to do is break down a little bit of how we look at investing into specific companies or sectors. My goal will be to keep this high-level and very simplistic and its explanation.
Let me first state that I follow a lot of Warren Buffets philosophies on investing. You should block out the noise, find great companies at good prices, buy into cash flowing businesses, and keep your hands open for opportunity. We do not have to swing at every pitch, only the ones we like.
Here’s a breakdown of how we might invest an aggressive client’s portfolio:
An ETF is an Exchange traded fund that gives specific exposure to a sector or area of the stock market through various holdings. When it comes to diversity, we use the ETFs to give us the exposure in sectors that we do not have a particular edge in. But then we overlay that with those 15 or more stocks that we have the strongest conviction in after doing our research.
There may be times in which we sell ETFs in exchange for another ETF that either is cheaper expense ratio, better allocated in its holdings, or targets a specific sector in which we believe is undervalued.
This value-oriented approach has been around for decades. At its core, it’s about identifying businesses worth owning. If a company lacks a catalyst, moat, turnaround story, or competitive edge, it’s typically not something we pursue.
Here is how this might play out, energy has been under-favored for some time—until the recent oil spike—and is now outperforming. Even so, many oil and gas companies remain underweighted compared to historical levels, which may present opportunity moving forward. We have a few individual positions. We are convicted to own in this sector. But we may overlay that with an ETF that has more exposure to energy, oil, gas or infrastructure within that industry.
The way in which we choose these individual stock positions helps us position for better risk management as many of these companies are either out of favor from a stock price or we have taken out a lot of risk from the company because they have increased cash flow, low debt and a durable business.
Markets will always move in cycles, and uncertainty is part of the process. But those same periods often create the best opportunities for long-term investors.
By combining diversification with selective, high-conviction investments, we’re not trying to predict every move—we’re positioning for what’s ahead.
- Peyton
P.S. - Here are a few things I am reading/watching/listening to: