How to Build a Good Portfolio
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I've been working to build a good portfolio for my entire adult life (I got my first brokerage account 3 months after my 18th birthday), and I regret that I still sometimes make stupid mistakes. However, I have learned a few things and stumbled onto a few good ideas over time. I'm going to share some successes with you now, because I don't like the idea of other people screwing up as much as I have. It's expensive.
Look for a Moat
I love businesses that can compete on something other than price. Price alone is a poor qualifier, and it leads to bad associations. That's what I love about Philip Morris International (NYSE: PM) and PepsiCo (NYSE: PEP). They have strong brands like Marlboro and that fizzy brown liquid that are popular with people all over the world. Both of these companies are simple, old-fashioned, and work almost in spite of themselves. There's nothing like a company that's all but unsinkable as part of the core of your portfolio. I wish I'd thought this way a few years ago, though.
Be a Calculated Contrarian
I used to get into REITs all the time. In fact, at one point my portfolio was 90% REITs of various kinds. But then they started dying left and right, and I took a walloping. At that point, investing in REITs became a seriously contrarian move and I made some tough calls. I sold a bunch of bad performers for a fraction of what I put in, and I really rethought my whole strategy. I bought American Capital Agency Corporation (NASDAQ: AGNC) because it had been adapting beautifully to the new interest rate and lending environment, and because it was actually started during the early part of the recession in 2007. But I'm not so keen about how many false starts I had back in the day on the way to making a more mature decision.
The point is, I used to buy contrarian stocks for no other reason than because they were unpopular. Now I know that a good company in an under-appreciated industry can be a great deal, but a bad company is just a bad company.
Actually Do the Research
I'm far too often guilty of forgetting to do enough research. One way I used to justify my laziness is that the day to day stuff doesn't matter too much. Well, tell that to BP (NYSE: BP) after that massive Gulf Coast oil spill last year. I took the opportunity to buy into the company parially because of the massive price drop, but I wish I'd bought more. And it's not even because I got lucky enough to experience a substantial gain and the subsequent reinstatement of the dividend. When I finally got off my butt and did the research I found out that BP is more than just a massive oil company -- they're making pretty good strides into alternative energy. I'd bet the day will come when BP's name is a misnomer as they shift their business model into cleaner and more sustainable energy sources.
Know Why a Company Can Succeed
A wise person once told me to never do something unless I've got a good reason for it. Well, I had a great reason to go with First Marblehead (NYSE: FMD) when I bought into it. I liked the loan portfolio it was sporting and the cash flow was strong back in 2006. But the real reason I liked First Marblehead's prospects (even though it's subsequently tumbled because of its mortgage portfolio) was because of its emphasis on student loans. You can't ever escape your student loans, short of faking your own death, and I like obligations that a person can't easily weasel out of. Whenever you invest in any company, make sure you've got a solid reason behind your decision to make that investment. And I really liked how First Marblehead became my first three-bagger.
I hope you've learned a valuable lesson or two from my past mistakes, as well as my handful of successes.
pongun has positions in BP and AGNC. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!