Jason's Barbell

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Jason’s Random Words

By the time you read this, we will have already had our First Fridays monthly livestream. We were joined by the wonderful Lou Whiteman, our colleague, friend, and also the brain behind the  Fits and Starts newsletter. If you were not able to watch live, be sure to check it out in either your podcast app, or the video version on YouTube. 

With that shameless promotion out of the way, I wanted to talk a bit about my barbell approach to stock investing. The seed for this was planted when Jeff and Lou were making fun of Jason’s workout habits prior to the livestream going, well, live. Anyways, onto the reason you’re here.

I’ve talked about this before, but wanted to share it in a written format for a few reasons. The first is selfish: It's helping me fully clarify my thoughts. Second, I hope it may help some of you in your own investing journeys. Especially around forming attainable goals. 

But first, some background on my investing evolution. When I began buying stocks, I had the zeal of the newly converted. I was absolutely convinced that I could beat the market, and I made that my goal. 

This is a terrible goal. 

Hear me out. The reason I say it's a terrible goal is because it lacks clarity of true purpose, and it doesn't really deliver on what we, as investors, are trying to do: create and/or retain a certain amount of wealth, by a certain point in life. 

History lesson: Let's say you were in your mid-50s in 2000, and you decided you were going to take the next decade and supercharge your retirement portfolio and buy individual stocks. And you were going to do it by taking a large 401K rollover, and investing it all in stocks. 

From the beginning of 2000 through the end of 2009, the S&P 500 fell 10% in total returns. So even beating the market over that period would have potentially still been a wealth-destroying venture. 

Now, let's say you started that same journey in 2009. By the end of 2019, the S&P was up 351%! If you'd rolled over a half-million dollar 401K and just hit the market average, you'd have $2.5 million. 

Yes, I know. That's one of the worst decades in stock market history, followed by one of the best. 

But that's the point. Beating the market doesn't pay the bills. It doesn't put your kids through college. It doesn't fund that big purchase you've always aspired to (but will probably end up regretting), like a boat or RV. 

Beating the market is a terrible goal because it puts undue pressure on you to accomplish something arbitrary, and doesn't really represent a tangible financial target. Having those real-world financial needs in mind is where you can build actual goals. Now, you should still aspire to beat the market if you're buying individual stocks, because as we wrote recently, it is how you measure yourself objectively, and hold yourself accountable to avoid self-harm. 

That's a long prelude to set up why I have taken a barbell approach to investing in stocks. 

What is a barbell method?

In my case, it's balancing out my stock portfolio with two different strategies I simultaneously employ to build and preserve wealth. Two weights on each end of the barbell. 

On one end is the part that's behind the bulk of my returns over the past decade and a half. Owning growth-focused companies like MercadoLibre and Trex and Intuitive Surgical and Axos Financial for over a decade has more than made up for also buying Clean Energy Fuels and others. In more recent years, I've found wonderful winners like CrowdStrike and Kinsale Capital and The Trade Desk to offset losers like Tellurian and Nikola. 

The other end of the barbell features companies in more capital-intensive industries where the secular and economic tailwinds create wonderful potential, but the return profile and mix looks very different. Businesses like Brookfield Infrastructure where the growth rates would make Silicon Valley venture investors fall asleep, but the total returns when you factor in dividends and dividend growth, start turning into really attractive numbers. Dare we say market-beating results? 

Okay. I won't say it. 

What makes so many of these companies appealing? The dividends are an attractive, reliable hedge against a protracted market downturn or an extended period of below-average market returns. They're also a great way to preserve wealth, particularly if you're reinvesting the dividends. 

Think of it as trading a higher ceiling for a higher floor. 

As my portfolio has grown, and I've edged closer to the time when I'll start needing to turn my companies back into money, that's become a more important goal than beating the market. 

At this stage, my barbell isn't balanced. About 65% of my equity value is still in growth-focused investments, with 35% in dividend stocks plus a little Berkshire Hathaway. Interestingly, it's much closer to 50/50 on a cost basis (the dollars I actually spend to buy the shares). About 53% of my invested dollars are on the growthy side of my portfolio, versus just under half in dividend stocks. The lesson there is that I've certainly profited from the outperformance of growth stocks over my investing career so far, based on the higher returns. But if the market doesn't cooperate with continued growth and higher multiples, I need to own stocks that can take up the slack. 

Back to the main point

This strategy isn't around trying to do better than the market. It's about creating my family's financial goals, which are creating (first) and (then) preserving wealth. We've put in the time to have some real-world numbers in mind. And as we move ever-closer to those goals, adopting a strategy to avoid some of the downside, even at the potential cost of upside, is more important than beating the market. 

Or to put it another way, if we get another 2009-2019 run, I don't need to beat the market. But if the next decade looks more like the one that started with a dot com crash and then ended with the Global Financial Crisis, I'll want to do a lot better. And I'm trying to build a portfolio that can do exactly that, even if most decades look more like the most recent one than the first.

Jeff’s Random Words

I’m a bad investor. Jason is SO much better than I am.

-Jeff

(Jeff isn’t actually a bad investor. Well, maybe. But he didn’t write that. Jason did because Jeff hasn’t written Random Words in a while. Jeff will be back next week!)