In response to a request from two friends just starting out their investing journey, in late July, Albert and I put together two model portfolios, one large-cap and one small-cap, to consolidate our thinking on where new money could be usefully invested for the long-term.
You can find the original portfolios detailed here.
It’s now three months since we published the original post, so we thought that would be a timely opportunity to review how we’ve performed vs the market (click to expand the image).
For simplicity, we’ve merged both the small-cap and large-cap portfolios into a single list of 25 stocks. The model portfolio assumes that $1,000 was invested in each of the positions. If the $25k had been invested in the S&P500 it would have grown to $26,459 over the last quarter (+5.83%), if it was invested in the model portfolio it would have grown to $30,813 (+23.25%).
Just as a thought experiment, we compared this to our real-money portfolios over the same period. I’m showing growth of +17.05%, and Albert has achieved +17.49%, so those are both very respectable, but clearly, we’d have done better by following our own advice!
These are all long-term holdings, and we’ll continue to track this original portfolio honestly over the coming years, but if we were choosing a model portfolio from scratch today, it would be a little different. For starters, 25 stocks are way too many for an investment portfolio – it’s just too hard to keep a sufficiently close eye on that many companies, and by over-diversifying (even though this is a fairly concentrated portfolio in terms of the sectors covered) you’re more likely to track the market than beat the market, which defeats the point of a self-managed portfolio. A far more sensible number of individual stocks is 10-15.
At Telescope Investing, we primarily make our investment decisions based on the quality of the company. We typically look for factors such as:
- Tailwinds – does the company have market forces working in its favour, e.g. while many small businesses have struggled as a result of Covid-19, many businesses have prospered
- Leadership – does the company have a leadership team with a proven track record, and ideally is it still led by the founders? How much of the company do insiders still own, and what do employees think of their leaders?
- Large total addressable market – how big is the market opportunity, and how much of the market does the company have today? This tells us a lot about the growth potential
- Low costs of production – can the company scale efficiently?
- High barriers to entry – does the company have IP or technology that make it difficult for others to compete, or are there high capital costs for a new entrant?
- Brand – does the company have a strong recognisable brand, are they seen as an innovator in their industry?
- Network effects – does each additional user make the product more valuable, creating a self-reinforcing dynamic that drives growth over the long-term?
- Customers – are customers increasing their spend over time, and is the company not over-exposed to any one particular customer?
- Optionality – does the company have multiple ways to grow and branch out their business?
- Financials – does the company have enough cash and free cash flow, and is their debt manageable?
However, it’s still important to keep a close eye on the valuation. When we’re investing in high-quality high-growth companies we should expect to pay a premium, but we still want to ensure that we’re getting reasonable value for money on our investment. At today’s valuations, we would probably cast a slightly harder eye on a couple of the companies that have grown significantly since July – in particular Tesla and Zoom.
I still like Zoom today, and it’s a 2% part of my real-money portfolio, but at a $150B market cap, I probably wouldn’t take a great deal more than that exposure right now. It may prove to be a dated method given the imminent anti-trust moves by the US government, but I tend to think about companies in terms of their ‘Google multiple’ – how many of these companies can you get for one Google. At today’s numbers, you could buy just over seven Zooms for a Google (actually, for an Alphabet, but it almost amounts to the same thing) – so that does feel a touch outlandish when you stand back and think about what the two companies actually do!
I really like DocuSign at today’s valuation. They’re stronger than ever, and at a market cap of just $41B they have a long growth runway ahead of them. I wouldn’t be concerned about overweighting this in my model portfolio (it’s 4% of my real-money portfolio and I’m planning to increase), and they do intuitively feel like decent value at a 26th of a Google.
I also really like Shopify, despite that I’m currently sitting on a 40x gain in my real-money portfolio. As a long-term investor, you’ll make the large majority of your returns from just one or two companies over your investing lifetime, and Albert and I both feel very lucky to have struck gold with more than our fair share over the last two decades. You need to let your winners run to achieve these sort of gains, and I think Shopify remains a core part of any solid growth portfolio. The company still feels like a bargain at an eighth of a Google – albeit perhaps the better comparator for SHOP given their business model is Amazon; today you’ll get 12 Shopifys for an Amazon, and one day I can honestly see that being one for one.
We’ll likely put together a new model portfolio early next year, once the end of the Coronaconomy is in-sight. This mega-trend has dominated our investment decisions for the last nine months, and we’ve enjoyed outsized growth as a result, but it’s a trend that personally we’re looking forward to putting behind us. While we don’t advocate trading in-and-out of stocks, we will undoubtedly need to substantially reorganise and re-balance our real-money portfolios, plus the model portfolio, once a return to normality is finally on the horizon.
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