Building a portfolio
An opportunistic investment process
This post is about the use of watchlists. I expect almost all readers will know about watchlists. For those who don’t, I have added a short explainer below at the end of this post.
To set the scene, let me quote from an interview with Aswath Damodaran on The Millennial Investing Podcast. He teaches corporate finance and valuation at the Stern School of Business at New York University.
A sixteen year wait
Damodaran: “So to me sometimes companies make my list because I like to own them but I don’t like the price they’re at, but I know that if I wait long enough the market will be right.
I had to wait 16 years to buy Google you know because it kept being overpriced in my… at least based on my assessment of value.
Now I could have been wrong every one of those 16 years but I have to stay true to my investment philosophy which is I value companies rightly or wrongly, and I’ve got to make decisions based on my estimate of value because if I don’t then what’s the point?”
See: Aswath Damodaran: Stick To Your Philosophy Or Just Buy The Index | The Acquirer’s Multiple® (acquirersmultiple.com)
Also see: Musings on Markets (aswathdamodaran.blogspot.com)
The idea expressed is to have a list of companies you’d like to buy and if you wait long enough they will at some point become bargains value wise or something along those lines.
Different ways to skin a cat
Every investor has their own process. I’m not being critical of Damodaran. It’s just that I do things differently. I do not maintain a watchlist of stocks that I would be interested in buying if they came into my price range. I’ll explain.
Long term investors are not in constant need of new investments. A well-constructed portfolio needs few changes from year to year. At the moment our family’s portfolio contains fourteen stocks. Of those, only five are new in the last three years.
This is actually more turnover than usual. The culprit is Covid. In 2020 I sold stocks in companies that I thought would be hurt by Covid for a very long time (aircraft engines, bus manufacturer). I redeployed into two beaten-down stocks (medical devices, real estate broker) that I felt would suffer in the short term but be fine long term. I also redeployed into some beaten down tech stocks (semiconductor fabrication tools, e-commerce and payment technology).
I hadn’t been “watching” any of the stocks I bought for any length of time before buying. I saw the need to sell some stocks and redeploy the money. The process was to find, as Warren Buffett would put it, some pitches in my happy zone. I set to work to find suitable investments.
The investment process I follow might be described as opportunistic. In a sense, I suppose, I am constantly on the lookout for investment ideas. But I am not building up a bull pen of game-ready companies. I read the business news and economic news. I read about companies in different sectors in a general way to educate myself about those sectors.
If an interesting prospective investment (great company at bargain price) comes along, I will study it to see if it would fit in our portfolio. I spend no time studying great companies that are not bargains. There’s one Canadian tech stock with a successful business that has been a market darling for a numbers of years. I haven’t spent a moment looking carefully at it because it has always been way overpriced.
The way I set about finding companies to invest in is described in the Motherlode sections set out below. The search process for finding great companies to invest in is a completely different topic than watching and waiting with a watchlist.
My use of a watchlist
Our discount broker has a watchlist service. I use it to assist me in our portfolio management, i.e. of stocks we already own. It has a newsfeed related to each stock in our portfolio. I read that once a week. I also make use of research accessed through the watchlist, the chart feature and access to financial statements. I wish it had access to transcripts of company calls with analysts, but it doesn’t. I have to access those through other sources.
But, this is not the use of a watchlist in the sense described by Professor Damodaran.
Investors have an extraordinary array of internet based tools available to help with investing. Some of these tools are useful. Others are technological wonders that are looking for a purpose in life. Watchlists are ubiquitous. Just because they offer all sorts of fancy features doesn’t mean you have to spend time playing with them.
Watchlists stand to one side of the larger topic of ‘how to find companies to invest in’. The sections of the Motherlode below deal with that topic.
You need to make a distinction between watchlists of stocks you don’t already own and watchlists or portfolio tools for your existing portfolio. This post has focused on the former. I have only touched on portfolio management in passing.
Watchlists – an explainer
Our best Canadian business newspaper, The Globe & Mail, has a watchlist service that allows you to set up a list of companies and the service will give you access to various kinds of information about the stocks on the watchlist. This includes market data, charts, company profile, statistics, dividends, earnings, estimates, insiders, news and price history. There is also a stock screening feature to allow you to find stocks meeting whatever you specify in the way of price to book value, price/earnings ratios and so on.
Our discount broker, which is an arm of Canada’s largest bank RBC, has a watchlist service with more or less all those same features, but with more sophisticated research access and other features.
I don’t use the Globe & Mail service even for the stocks in our portfolio because I get all I need from our discount broker. I use the watchlist service of our discount broker as a portfolio management tool.
Here are a couple of earlier posts you might check out:
The problem with stock screening
Analysts’ reports and the estimate revision game
To read more about the search for wonderful investments, take a look at the Motherlode Sections:
40.02 Positive media stories generally indicate the end of superior performance
40.03 Analysts’ reports and other sources
40.06 The earnings estimate game
40.07 Herding and the short term
40.08 Reading deeper in sell side analysts’ reports
40.09 An aside about facts vs opinions
40.10 Analysts’ reports continued
40.11 Conclusions re sell side analysts’ reports
40.13 Company website, quarterly and annual reports
40.14 Meetings with company officials
40.16 Scuttlebutt and other sources
You can reach me by email at email@example.com
I’m also on Twitter @rodneylksmith
Check out the Tags Index on the right side of the Home page that goes from ‘accounting goodwill’ to ‘wisdom of crowds’. This will give readers access to a host of useful topics.
You can also use the word search feature on the right-hand side of this page to find references in both blog posts and also in the Motherlode.
There is also a Table of Contents for the whole Motherlode when you click on the Motherlode tab.
Want to dig deeper into the principles behind successful investing?
Click here for the Motherlode – introduction.
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