Our investment plan for 2021

If you’ve been following along with the podcast for the last few episodes, you’ll be well aware of the model portfolio that Albert and I launched way back at the start of the Telescope Investing journey in July 2020. The model portfolio was a collection of our best investment ideas at the time, designed to help a couple of friends get started on their own investing journeys.

We agreed in December that it would be useful to refresh the model portfolio annually. We have a long and successful investing track record personally, but it’s hard to build any public credibility without actually sharing an audit trail of our recommendations, allowing a reader to look back and see how the investment thesis actually played out.

The purpose of the model portfolio is really threefold:

1. To deliver long-term market-beating returns
2. To be a solid diversified portfolio in its own right
3. To outperform the market in its year of institution

At Telescope Investing, we’re firm advocates of the long term buy and hold approach. We try our best to make sense of the world, to make forecasts about the needs and demands of the world a year or ten years from now, and then to find the companies that we think are best positioned to serve that need.

We call these megatrends, and it’s really the focus of the Telescope Investing approach.

Structure of the 2021 model portfolio

The Coronavirus pandemic hugely shaped our investing strategy for 2020 (we review the results in this pod). As we look ahead to 2021, in the immediate term Covid is still a massive force to contend with, but we’re optimistic that the world will begin to reopen from the third quarter, as widespread vaccine rollouts bring down R numbers around the world.

We feel that the first half of this year is going to be dominated by continued fiscal stimulus, and in practical terms this means continued benefit for ‘work from home’ and ‘shop from home’ stocks.

We’re then anticipating a three phase economic recovery:

1. The first phase is simply a continuation of the social distancing and lockdowns we’ve become accustomed to over the past twelve months. As the rollout of vaccines gathers pace and brings down R numbers, we can expect non-essential retail to begin to reopen
2. The second phase is when the economy within a city or country reopens and life starts to get back to some semblance of pre-pandemic days. The trigger for the transition from the first phase to this second phase is likely to be herd immunity, and it could be quite a quick transition. Although vaccines will not be mandated in most countries, they may be a practical requirement if you want to go to the office, to school, or to attend social & entertainment events like bars and concerts. In the UK, it’s my best guess that we’ll enter this second phase sometime around June/July
3. The third phase is when the global economy opens up, and we see this being far more gradual as vaccination strategies vary greatly between countries. As countries achieve herd immunity, we’re likely to see travel bubbles expanding, and finally the travel industry may begin its recovery – realistically this is unlikely to be much before 2022

With these factors in mind, we’ve opted for a portfolio structure that focuses on the industries that are likely to prosper from extended lockdowns, but also with an eye to healthcare, as people are simply much more aware of their health as a result of the pandemic.

We feel that the right number of stocks in a portfolio is between 10 and 20, for this year we’ve allowed ourselves fifteen picks. We feel that we can monitor fifteen companies fairly closely, and it’s not so many stocks that it starts to resemble the performance of an index.

This table from our kick-off pod shows how we originally decided to allocate those fifteen choices across megatrends.

Stock picks for 2021

In mid-January, we used two podcast episodes (1 & 2) to pick the stocks that would go in each category.

An eagle-eyed reader will spot that this actually diverged from the original plan a little. We had narrowed our climate change choices down to a handful of solar energy companies, but were surprised when Tesla announced that they were launching their own solar inverter product. An inverter is only a small part of the overall technology solution for solar energy capture and storage, but we were concerned that this might hint at Tesla’s intention to fully vertically integrate into the solar space, in the same way that they have with cars, and that could prove troublesome for their competitors.

There’s space for many winners in this category, but in the end Albert and I were just a little uncomfortable picking a specific climate change stock for the model portfolio, so we reallocated those points into healthcare and flexible working.

Diversification

As well as allocating stocks across megatrends, we’ve built the model portfolio by picking big and small companies, and also risky and less risky companies. Size is a fairly objective measure, you just rank the companies by market capitalisation, risk is a little more subjective though – and while we’ve considered the volatility of the share price (the stock’s beta), the risk level is mostly driven by our subjective assessment of the company’s strategy, the track record of management, their culture of innovation, and risk of being displaced.

The following chart plots the fifteen companies by market cap & risk, and the colours denote the megatrend. It’s unsurprising that the smallest companies are the riskiest, but it does seem quite interesting that the companies in each megatrend appear to cluster to some extent.

Next steps

Albert and I have decided to allocate 30% of our real money portfolios to the model portfolio selections (giving a minimum 2% investment per stock). We actually have many of these stocks in our portfolios today, but we both have a couple of gaps to fill, so over the next few months we’ll gradually sell out of some legacy holdings, and generate capital to invest in the model portfolio picks.

We’re committed to tracking all fifteen of these companies throughout 2021, so while this article definitely is not stock advice (we are not regulated financial advisors, please DYODD!!), if a reader chooses to follow along with part of their own portfolio, then we’ll be using our weekly podcast and the occasional written article to share pertinent news as we spot it.

We’ll also try to make time to do a full review of the portfolio at least once a quarter. Investing is a marathon not a sprint, and we’re only seven days in, but it’s nice to note that the model portfolio is already beating the market by 10%.  😉

A live view of the 2021 model portfolio’s performance is available here.

CRWD DIS DOCU EDIT FVRR GH ISRG MELI MGNI NET SE SHOP SQ TDOC TSLA TWLO