As someone who is heavily invested in tech stocks that are taking some heavy beating right now, here's what I have done in the last few months to minimize risk in my portfolio.
Thread below 👇
Thread below 👇
1: Investing In Wide-Moat Stocks
The best way to avoid risk in your stock portfolio is to avoid investing in flash-in-the-pan stocks. These stocks promise high growth but the growth is not guaranteed. Why?
The best way to avoid risk in your stock portfolio is to avoid investing in flash-in-the-pan stocks. These stocks promise high growth but the growth is not guaranteed. Why?
Because the competition will look at the company’s high-growth and will jump into the fray to make some money as well. This increased competition will drive down the growth prospects of your stock over time.
Enter: Wide-Moat stocks.
Enter: Wide-Moat stocks.
Since these stocks have a durable competitive advantage against their competitors, they can withstand any onslaught and grow at a healthy click. They can compound for the long-term and investing in them is my first step to minimizing risk in my portfolio.
2: Anchor Stocks
I first came across this term thanks to Kris (@FromValue). These stocks are mega-cap companies (above $100B market cap) and they may not grow as fast due to this reason. They are stable companies that grow at a healthy rate and have a fortress-like balance sheet.
I first came across this term thanks to Kris (@FromValue). These stocks are mega-cap companies (above $100B market cap) and they may not grow as fast due to this reason. They are stable companies that grow at a healthy rate and have a fortress-like balance sheet.
But they provide stability to your portfolio. During bear markets, you need them to make sure your portfolio stays anchored.
Anchor stocks in my portfolio are: $AMZN, $AAPL, $FB, $MA
Anchor stocks in my portfolio are: $AMZN, $AAPL, $FB, $MA
3: Avoid Leverage
I have never bought a stock on margin – which is a form of debt that your brokerage lends you to buy stock – and never will.
Because one can’t predict how the stock performs in the short term, it’s best to avoid any form of leverage when buying stocks.
I have never bought a stock on margin – which is a form of debt that your brokerage lends you to buy stock – and never will.
Because one can’t predict how the stock performs in the short term, it’s best to avoid any form of leverage when buying stocks.
4: Think Long Term
In the short term, the stock market works like a casino. The stocks are influenced by traders who react to earnings, stock news, macro trends, CEO tweets etc.
They trade in and out basis the short term information and that’s what moves the price up or down.
In the short term, the stock market works like a casino. The stocks are influenced by traders who react to earnings, stock news, macro trends, CEO tweets etc.
They trade in and out basis the short term information and that’s what moves the price up or down.
In the long run, the stocks are influenced by company-specific fundamental factors like:
Revenue growth
Profit growth
Growth in margins
Growth in free cash flow
Return on invested capital etc.
If you react to short-term price gyrations, you are bound to lose money.
Revenue growth
Profit growth
Growth in margins
Growth in free cash flow
Return on invested capital etc.
If you react to short-term price gyrations, you are bound to lose money.
5: Do Your Own Deep Dives
I've stopped relying on others' deep dives to make stock buys. I used to do it in the beginning but a small dip here and there would shake my conviction and I would run to their Substacks/Twitter handles to see if they are saying anything about the dip.
I've stopped relying on others' deep dives to make stock buys. I used to do it in the beginning but a small dip here and there would shake my conviction and I would run to their Substacks/Twitter handles to see if they are saying anything about the dip.
My current approach is to do my own DD. I go through the annual reports and earnings calls to build my conviction. I refer to the deep dives of other stalwarts only to see if I have missed out on anything.
Once I have built my conviction, I have a lot more confidence in my stocks. I can now understand the price movements and I am more composed when stock prices go south.
6: Diversify
Saving the most obvious, but most important for the last. Diversification helps you soften any blows to your stock portfolio.
Consider this: If your portfolio has 20 stocks (equal-weighted) and even if one of them goes bankrupt, you will suffer only a 5% loss.
Saving the most obvious, but most important for the last. Diversification helps you soften any blows to your stock portfolio.
Consider this: If your portfolio has 20 stocks (equal-weighted) and even if one of them goes bankrupt, you will suffer only a 5% loss.
But if you had just 5 stocks, you would suffer a loss of 20%.
Diversification, however, varies from person to person. For some, it means 20 stocks and for some, it may mean 40 stocks.
I personally own 20 stocks as of now and I think it’s a healthy diversification.
Diversification, however, varies from person to person. For some, it means 20 stocks and for some, it may mean 40 stocks.
I personally own 20 stocks as of now and I think it’s a healthy diversification.
Many thanks to the experts below for helping me grow as an investor:
@10kdiver
@BrianFeroldi
@Brian_Stoffel_
Podcast:
@DavidGFool’s Rule Breaker Investing Podcast
Books:
The Most Important Thing by Howard Marks
The Little Book That Builds Wealth by Pat Dorsey
@10kdiver
@BrianFeroldi
@Brian_Stoffel_
Podcast:
@DavidGFool’s Rule Breaker Investing Podcast
Books:
The Most Important Thing by Howard Marks
The Little Book That Builds Wealth by Pat Dorsey
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