New Strategies and Surprising Optimism

Jeff’s Random Words

At the end of this week’s episode, we talked about a potential change I might be making to my investment strategy. I won’t rehash the whole thing here but the quick summary is that I’m leaning towards buying way less often, and making larger investments when I do. I spend an insane amount of time thinking about investment decisions that have almost no material impact on my investment portfolio.

For example, my largest individual stock accounts for less than 1% of my entire invested wealth. My entire stock portfolio is around 10% of my invested wealth. If I keep buying in 0.03% increments I am going to miss out on the impact of any potential significant gains.

Here’s a quick illustration. My best investment, from a total return perspective, is Nvidia (NVDA), which is up 151% (including dividends). Sounds great, right? It is, except for the fact that even with that increase, the stock represents 0.3% of my total investment portfolio. When I think about a 151% return on a stock that I made a 1% or 2% position, I can’t help but feel like I’ve left some money on the table.

Ok, but if I am being fair, I also need to take the other side. My worst (current) investment, in terms of total return, is Outset Medical (OM), which is down 79%. It was a 0.2% position based on cost basis and is now 0.03% of the portfolio. I can’t help but worry about what if I had made that a 1% or 2% position originally. Jason and I would be recording another financial therapy episode for me.

But when I balance the two sides of this decision in my mind, I think I am ready for a change, even if it is riskier. Until such a time that my individual stock portfolio becomes a more material part of my overall portfolio, I think a little more risk is okay. I’m still a ways from retirement and I do spend a lot of time learning about the companies I invest in. I’m also going to keep contributing to my retirement account at work (index funds) and so will my wife (index funds). So that also mitigates some risk, I think.

Here’s my current thinking. I like the idea of buying in thirds but with the added strategy of using starter positions. This would look like this:

For a new stock that I am interested in, but want to learn more about, I might buy a small amount. So maybe 0.1% of the cost basis of my total portfolio.

For a stock I have high conviction in, that I’ve already initiated a starter position in, my next move would be to add to it so it becomes a 0.33% of the cost basis of my portfolio.

Were I to add to that position again, it would be to get it to 0.67% of the cost basis of the portfolio. The next buy would bring it to 1%.

THIS IS ONLY A DRAFT IDEA. But it’s kinda where my head is at right now. I would love your thoughts on this. What am I missing? Email the show or DM me on social media.

Jeff

Jason’s Random Words

In looking back at some of my Random Words since we started this newsletter, I realized that I have been generally down on stocks. After all, it's been a strange, tough couple of years. Broad stock market indices are still well below all-time highs, which came way back in late 2021 and early 2022. 

Yet even with (most) stocks still down, a lot of stocks don't really feel cheap. The "Magnificent Seven" tech giants by and large still trade for very rich multiples, and plenty of blue chip dividend stocks are also still pricey. This continues to surprise me, considering that interest rates now make it possible to earn, what for many people and large-money investors like pension funds, is an adequate rate of return. And one that's also a lot less volatile, hence safer in the short term. 

At the same time, a lot of the stocks that have fallen a lot have become higher-risk investments. Companies like REITs and yieldcos that rely on either issuing debt, selling stock or – often – a combination of both to fund their growth ambitions, are going to face both higher capital costs for growth and also to refinance their existing debt. This will affect returns, and I'm still trying to come to terms with whether existing valuations factor in enough of those hard times coming. 

But man, I still believe in stocks as being the great economic equalizer. It's incredible to me that anyone with a little bit of disposable income and an internet connection can participate in capitalism at the highest levels. 

We can own trillion-dollar businesses. Invest in disruptive upstarts led by the next visionary captains of industry. Own stable, cash-flowing, dividend-paying companies and still sleep well at night. 

We get to invest in our best version of the future, right along with the founders of our favorite companies. Create wealth for our retirement. Put our kids through school or even seed their retirement 50 years before they'll need it. Fund a charity that changes the lives of people you'll never meet and who'll never know it was you who did it. Start a charity with your name on the building. 

And it's my optimism and belief in humanity broadly that, even when I am fully pessimistic of the economy, market valuations, geopolitical tensions, and Jeff's ability to become a good investor, keeps me invested. You, listening to our podcast and reading these words in part do make your own investing more successful so you can do one or more of the things above. You, the founder of my favorite companies, still pushing to build it into something amazing and, hopefully, very profitable. You, the index investor who dutifully maxes out your company match and increases your contributions with your raise every year. 

Capitalism is incredible. And we get to fund it. It's our capital at work, making the world better and creating wealth. If that's not enough to make you want to be an investor, I don't think anything will. It sure helps me stay motivated, even when the market is down and it's hard to see things getting better in the near term. 

Last thought: It's during exactly this sort of environment when disruption and innovation happen. A decade of cheap, easy capital is over. The companies that figure shit out are the ones that will win. It's harder now. That's probably a good thing, and I'm pretty convinced that some of the great companies of the next 20 years are trading for all-time low prices right now. And this capital environment will prove the crucible that forged the leaders who come through this and thrive.

Jason