The One Stock Portfolio
After I first wrote this article in 2009 and published it in The Age on Saturday, the stockbroker I worked for at the time insisted that I include a disclaimer at the bottom of all my articles from then on saying “The opinions in this article are those of Marcus Padley and do not represent the views of Patersons Securities”. Chickens. Broking was a hostile environment for someone like me or Charlie Aitken, in broking they cut down the small poppies, let alone the big ones, so ego-charged are some of the desks.
So as I explain this investing approach, you should know that the licensed advice community would never endorse it for fear of being irresponsible, and as such, this is not a recommendation, it is an idea. It is the “One stock portfolio”, the opposite of diversification. It is about the odds being better for the investor if they know a lot about a little rather than a little about a lot of stocks. The last time I wrote about it, it stirred up a storm.
Let's start with diversification.
Captain Cook, the first of a long line of successful English captains to tour Australia, will tell you one certainty of life. Discover any group of human beings, no matter how remote, and they will have a God and a religion. It was not someone’s idea; it is a human need, to huddle under an omnipotent being and a connected creed. To have all our biggest questions in life, any question in life, answered not by logic, but by faith, in a guru and his teachings.
Net result, from religion to financial advice, our insecurity endows our symbols with vastly more trust and belief than they could ever realistically possess or deserve. It has been going on since the depths of time. Blind faith born of insecurity.
In the remote wilderness of portfolio construction, we have a lot of gurus but one religion. It’s called diversification.
We have all heard the cry. A spread of equities, bonds, property and cash. A spread of international and domestics investments. A spread of sectors including resources, financials and industrials. In fact, by the time you leave the average financial planner these days, you may think you’ve bought five managed funds, but in fact, you have a portfolio of 14 asset classes and 3,000 stocks domiciled in half a dozen countries.
But those 3,000 stocks won't save you in a bear market and will dilute your returns in a bull market. It is the chicken little approach and worse than that it fools you into thinking you are safe. It is a “Matrix” that prompts laziness and inattention, and on that basis, diversification is arguably riskier.
So let’s depart for a moment. Cut across all the consensus preaching and consider the blasphemy of “The one stock portfolio”.
Why wouldn’t you pick just one stock? If you want low risk, what’s riskier? Knowing a little bit about twenty stocks you’re not watching or everything about one stock you are. “Diversification is insurance against ignorance” for people who don’t know what they are doing. But if you are not ignorant? If you do know what you are doing?
If you were forced to sell all your stocks, liquidate your SMSF for instance, and buy just one stock, what would you do? I’ll tell you, a heck of a lot more work getting to know that stock than you are doing now.
Trading one stock is more intense; it focuses the mind. You pay attention and paying attention is good. You do a lot more work before you buy. You think harder about every trade. You plan. You set levels. You develop a strategy. You are more disciplined, more vigilant. With so much at stake, you are more risk-averse, not less; you have to be. You are sensitive to bad news. You are in touch. With one stock, trading is not necessarily more risky at all or more short-term. It is less risky because you have your head in the game.
And you will be more disciplined and sell more readily. You only have one to monitor after all. And you know when you get out, it is only until you get back in again. It’s not a divorce; it’s a holiday. And you’ll be back. Understanding that you will sell instead of prevaricating. You will control the outcome rather than leave it to luck. And you will do something that twenty stock investors rarely do; you will regularly cash out. You will find that cleansing, entering the eye of the storm. Clarity returns. The world is at your feet, and you then have the time and the cold emotion to put your total effort into something too few of us spend any time doing, looking for re-entry of the quality stock you have come to know and understand.
Now comes what seems like a big question but is actually a small question – which stock?
At any one point in time you should theoretically be looking for the best single investment in the whole wide world at that moment in time, but get hung up on that, and you will get paralysed. What you need is a stock that suits your risk profile, is volatile but not too volatile for you – and that depends on your risk profile – which is not a number, it is a feeling, of comfort. There are loads of stocks to suit every investor, not just one; you just need to pick one. It may not be the best stock, but good is good enough, and with focus, you will quickly learn if you have picked the wrong one, and move on to another.
When I was broking in 2013, I had a very good year trading Webjet (WEB) using my one stock portfolio approach to investing.
WEB was the only stock I traded; I was all over it. I was in and out, in and out. I got to know the company, but more importantly, I got to know the share price. I could feel it bottoming out, feel it topping out, although the underlying reason for the success was that I had identified a stock in an uptrend. A growth stock. A stock with momentum. A stock moving from off the institutional radar to on the institutional radar – fund managers had to buy it as it grew and as it joined their benchmark indices.
Trade a stock that’s going up in the medium and long-term and the odds are firmly on your side, you are trading “with the tide”.
I picked up on WEB because it started advertising on TV. At the time I had been running Marcus Today for fifteen years and was very aware that profitable, growing companies like Webjet and Marcus Today are run for years before they can afford a decent advertising budget, can afford to advertise on television, and while Marcus Today had yet to get there, WEB had. That told me that they were achieving a level of cash flow and profit, it also told me that their management wasn’t greedy (paying it all out as dividends) but saw the future growth and were prepared to invest in it heavily.
So I bought it, and sold it, and bought it, and sold it.
Since then, I have had my antennae up for companies that suddenly appear in mainstream media advertising. Some of them are new companies that have raised a lot of money and are throwing the dice on advertising, on creating a new brand. You can ignore those. Others like WEB that have been in existence for years and have reached that point in their life-cycle when they start to spend more significant dollars on marketing/advertising are more interesting. Helloworld (HLO) for instance is a company that popped up advertising on TV in the last year.
The message for traders is to find a stock, from anywhere. A growth stock that has a good chance of trending up in the long term. In fact, find five. If one good idea year is a good year, five good ideas a year is a fabulous year.
Focus on this small number of stocks. Five growth stocks – get to know everything about them, better that than holding twenty stocks you know a little bit about.
Picking these precious stocks to trade in the long term is the key because trading “with the tide” is so much easier than ducking in and out of stocks as they have a ‘moment’.
The other key is to expect to trade these same stocks again and again. The idea is to build experience. To get used to them, the volatility, their calendar, the management, how they release information, when they release information, what the drivers are, how the market affects them, how liquid they are, how quickly they move, who the big players are in each stock, when they are selling, when they are buying.
Focus a few stocks, one stock even, and your antenna are ‘up’ at all times, feeling the air for anything that will affect the share price. You are interested, you understand, you know. Eventually, you develop an edge, and your fortunes improve. As Geoff Wilson once told me “the one with the most information wins”. You can’t have an edge if you go from stock to stock.
They say the reason people get addicted to online gaming, first-person combat games, in particular, is because as you improve the feeling of dominating newbies is a drug.
You can find that in the stock market, but only if you have a focus.
One good stock. As Mae West says “Too much of a good thing can be wonderful”.
Footnote – if you want an easy investment life with diversification, you can still ‘focus’ – your “One stock” is “the market” (a listed investment company like AFIC for instance). Watch that. You can be either in or out. Completely diversified when in. Zero to five decisions a year. It’s a lot less stress.