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  • Writer's pictureTyson Jonas

Building A Great Stock Portfolio

In many ways investing has never been simpler. For the average Australian to buy or sell a share it is just a mouse click away. In fact, 30 years ago, for the retail investor tools that professional investors use was a world away. Now, almost every brokerage platform will offer in depth charting, stock screeners and access to broker research.

I’m not going to talk about the various techniques used to value a stock (there are numerous and even the best methods have their flaws). If you do want to know more about stock valuation metrics and techniques, feel free to message me and I’ll happily give you my thoughts on various models. I am however going to talk about the intangibles of a building a great portfolio.

What really matters in building a great stock portfolio

1.      Start by work out what your investment goals are. Are you seeking reliable income, growing income, capital growth or a mixture of the previous?

2.      Work out what sort of risk you are willing to take to achieve your goals. A great rule of thumb is that if your portfolio has a reasonable probability of a sum large enough to stop you from sleeping soundly at night, you are taking too much risk

3.      Stocks are just a slice of ownership in a business. Never forget this.

4.      Buy stocks in businesses that you can understand. If you can’t understand the business, don’t buy shares in it. There are always other opportunities around the corner.

5.      The price of the stocks you buy matter. Often growth stocks will be expensive, but the higher the price you pay the more impressive tomorrow’s earnings need to be to justify the price and make the position profitable for you

6.      The size of the companies you invest in matter. Often super small companies are not regularly traded and it can be hard to buy/sell the share. That being said, it is much easier for a $100m company to double in value than it is for a $1 Billion company to double in value.

7.      Once again price matters. I’m saying this again because it is worth paying attention too. Even great companies will have pullbacks in their share price from time to time. If the stock looks too expensive there is nothing wrong with preserving your capital and not buying it

8.      Buy with a margin of safety. Simply put, this means buying at a sufficient discount to what your analysis tells you the stock is worth. This helps to protect your capital, provides a buffer against your investment risk and helps you to sleep soundly at night.

9.      Take the time to work out the strengths and weaknesses of the company. The stronger your knowledge of this the more aware you are of catalysts that could change the price

10.  If the dividend yield looks too good to be true it probably is.

11.  If the dividend yield looks too good to be true ask is this stock a “value trap?” Look into what caused the previous dividend to be so high relative to the current price, did the business sell assets and pay a special dividend or are future earnings expected to be significantly less than in the past?

12.  Hold a diversified portfolio. This will help protect your investments from short term fluctuations in a single company. Personally, I like to hold between 12-20 stocks depending on what opportunities are available at the time. If you want to hold 30 plus stocks, it might be much more efficient for you to invest in an index fund or an ETF

13.  Owning the Big 4 Banks, Telstra, BHP and RIO isn’t diversified. Diversification involves investing across a range of sectors and streams of income.

14.  Don’t feel pressured to be “all in” the market. If good opportunities are not available, there is nothing wrong with holding cash. Opportunities will arise in time.

15.  Ignore non-pertinent information. Over trading your portfolio on a very small shift in investor sentiment or on a news article is a great way to lose money, trigger tax events and cut winning positions early. The solid exception to this is when the news will fundamentally alter the future prospects of the company. Unless it does so, the news is most likely not meaningful at all.

16.  Management matters. If management has a track record of not doing what they say they will, it is a great indication that they will continue to disappoint in the future. Typically, great stocks to own have managers in place that are very proficient at what they do. The old adage of under promise and over deliver applies to great management.

17.  Don’t be afraid to invest contrary to popular opinion. Contrarian investing can be a great way to make money in the stock market but it does require the ability to have strong conviction in an unpopular idea and ignore others.

18.  Look at the footnotes of financial statements. This is where the real gold of a financial report can be hidden.

I hope this helps to give you a strong basis for building a rock solid portfolio not only for today but long into the future as well. 

Until next time, Tyson


The information contained in this article has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs. #portfoliomanagement #stocks

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