Owning Individual Securities: Should You? And How Many?
Did you know that over half of the U.S. households have some type of investment in the financial markets? Globally, I can’t confirm the exact percentage, but I would guess it is less than 50%. Opinions vary on whether to dive into the market. Many steer clear altogether, suspecting a lack of integrity in the stock market. This skepticism is reflected in films. Hollywood, ever the influencer, perpetuates this doubt with movie lines like:
“A lot of people feel the system is broken. The whole idea of the stock market is if you’re smart, and maybe with a little luck, you can make your fortune. Certainly not anymore. There’s no hope for the little guy. Maybe now there is.” -DumbMoney (2023)
“I don't care if you're Warren Buffett or Jimmy Buffett; nobody knows if the stock is going to go up, down, sideways, or in f$&% circles…” -The Wolf of Wall Street (2013)
“What do you think the stock market is (beat) a great mystery beyond the realm of human understanding? Didn't you see the signs? (beat) I saw the signs” -Ocean's Twelve (2004)
“That’s all the market is, one giant casino.” -Rogue Trader (1999)
“…buy low, sell high. Fear? That's the other guy's problem….One moment you're up half a mil in soybeans and the next, boom, your kids don't go to college and they've repossessed your Bentley. Are you with me?” -Trading Places (1983)
So, if you're among those who see the stock market as a murky mystery, this post might not be for you.
Let’s dive right into it. With a more generalized belief about the market, you may have heard financial advisors suggest setting up an automated system. The idea: consistently save a percentage of your income, purchase a broad market ETF or mutual fund and forget about it for the next 20-30 years. Automate. For the most part, that’s not the worst advice and you could potentially customize it to fit your specific goals. However, if you read our previous post, you know this is not our approach —it’s certainly not how we at BMG set ourselves apart.
By no means are we against the full passive approach if that’s what the client is seeking. We much rather [using proper risk management] proactively look for investment opportunities that align with your financial goals. Whether it's identifying undervalued stocks, engaging in strategic asset allocation, or incorporating alternative investments. Our take is about actively seeking ways to grow your wealth tailored to your unique circumstances and objectives. Most of us are on a path towards financial freedom. This is a goal tougher to reach if your assets are not performing optimally. If you’re unfamiliar with our services, stay a while, look around or better yet, call us.
If you haven't guessed yet. The answer is yes. You should definitely own individual securities. How many? The answer to that is, it depends entirely on the individual. Buffett’s multi-billion dollar portfolio is highly concentrated in 1 single company. Can you guess which one? -answer below. So rather than delve on the percentages or number of individual stocks you should own let’s briefly discuss how to go about selecting one:
Use a stock screener to weed out companies that may look good at first glance
Stick with public companies you fully understand how they make money
Look out for the best companies with that positive parameters (i.e. continued revenue and earnings growth, steady profit margin, positive operation cash flow over net income)
Review management’s track record. ( Is there evidence of hurt money? meaning what % do the insider own? How long has the CEO been working with the board?)
Research companies that other asset managers are categorizing as ‘Quality’.
Try to examine it’s current stock price. Is it trading at a premium or a discount. Do your best to avoid overpaying for a company you want to own (set pricing alerts!)
Set a margin for safety and read any existing analyst reports available in said companies. You have to continuously learn about this companies and how it operates
We’ll leave you with the above graph as a representation of how the stock market has behaved for the last year or so. If you are still wondering which company dominates the portfolio of Warren Buffett, it’s Apple. One of the 7 companies that have carried the S&P 500 index to a YTD return of over 18.75%. This graph provides you with quick insight and reinforces our case on the benefits of owning individual securities. It also highlights the impact the wrong selection can have on your portfolio returns. We hope this visual representation encourages thoughtful consideration in your investment decisions.
By no means are we suggesting to simple allocate funds into 1 or all 7 of these tech companies. We believe there are opportunities outside the “magnificent seven”. There is value to be found in Infrastructure companies, aerospace suppliers and construction related companies.
REMEMBER: Make informed decisions, stay vigilant, and let your investment journey be a reflection of your unique financial aspirations. At whichever stage you find yourself in: debt mgmt., goal clarity, budgeting & saving or investment allocation strategy, BMG can your resource.
RIP Charlie
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