DIY individual stock fund

Discussion of the Stock portion of the Permanent Portfolio

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Pet Hog
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DIY individual stock fund

Post by Pet Hog » Mon Sep 23, 2019 2:45 pm

I've been mulling for a while getting out of holding total-market ETFs as my stock holdings in my PP and setting up my own fund of perhaps 30 to 50 individual company stocks. For a few reasons: to cut out the middleman (avoid counter-party risk and fees, albeit tiny), to experiment with an equal-weighted portfolio (rather than market cap-weighted), and to have a bit of a thrill with managing such a thing (while maintaining the PP philosophy). There's been some discussion here before about DIYing a stock fund, and I'm curious if anyone here has set up their own and/or has any ideas on which strategy to use to select the holdings. I'd like to be as unemotional/mechanical as possible, and minimize trading/fees.

Here are some potential strategies [and my thoughts on the wisdom of adopting them]:

(1) Pick the Top 30-50 stocks by market cap [overweight tech, low dividends, less room to grow, but exciting and newsworthy companies]
(2) Randomly select from SP500 (or Wilshire 5000), like every 10th (or 100th) one or by random number generator [unemotional, diversity of sectors and market caps]
(3) Mimic a famous index or fund, like DJIA or Wellesley? [let someone else pick the stocks, established, diversified]
(4) Select equally among the large/small-cap growth/value quadrants, say 10 each? [choose unemotionally from established funds/indices, but high risk of picking lemons?]

I think all four strategies have their merits, but I'm drawn to the latter three. The biggest problem I can foresee is what to do when the whole PP needs a rebalance out of stocks -- it would require a lot of selling. So perhaps this approach could be adapted as just a fraction of the PP stock tranche and also hold, say 30-50% VTI, for rebalancing purposes.

What do you fine people think?
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Re: DIY individual stock fund

Post by Pet Hog » Mon Sep 23, 2019 3:03 pm

Here, for example, is the list of every 16th company in the SP500:

1 Home Depot (market cap: $245 billion)
2 Citigroup
3 Broadcom
4 Lowe's
5 Intuit
6 Boston Scientific
7 Marsh and McLennan
8 Phillips 66
9 Activision Blizzard
10 Public Storage
11 Lam Research
12 SunTrust Banks
13 McKesson
14 T-Mobile
15 Monster Beverage
16 M&T Bank
17 Hewlett Packard
18 CMS Energy
19 Copart
20 Best Buy
21 Dover
22 Ulta Beauty
23 Universal Health Services
24 Hormel Foods
25 Devon Energy
26 United Rentals
27 PulteGroup
28 Juniper Networks
29 FLIR Systems
30 Alliance Data Systems
31 Discovery (market cap: $13 billion)

I think I could go for that. Seems diverse enough. Thoughts?

EDIT: Backtesting data below from portfoliovisualizer.com. Wow, wasn't expecting such a super performance. Of course, I wouldn't have picked these stocks five years ago, so take the results with a grain of salt.

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Last edited by Pet Hog on Tue Sep 24, 2019 2:08 pm, edited 1 time in total.
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Kbg
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Re: DIY individual stock fund

Post by Kbg » Mon Sep 23, 2019 3:22 pm

I actively trade a 10 stock system and it’s a lot of work. A 50 stock portfolio will be a ton of work subject to human error which you should not underestimate the negative effects of. Unless you are going to try to outperform an index I wouldn’t do it.

If you are going to do this I’d look at a brokerage that does fractional shares and makes trading/maintenance easy like FolioFN or M1, but realize both sell flow. Given the market is oriented toward professional investors now share prices tend to be in the several hundreds now vs tens. Of course if your account is large not a big deal.

Or buy a fidelity zero fee fund if .03% is too much for you. Fairwarrned, you can easily pay that with a couple of fat finger trades you have to reverse.
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Re: DIY individual stock fund

Post by Pet Hog » Mon Sep 23, 2019 3:38 pm

Thanks for the feedback, Kbg. I'm not considering "active" management. Just buy and hold, check it annually, reinvest dividends if necessary, or buy a new holding. I wouldn't turn over the whole portfolio annually. Of course, I would like to beat an index, say the SP500, by holding, say, those 31 stocks (as a mini-SP500 proxy) at equal weight. But I wouldn't get concerned if they got too far from equal weight, just like I don't with the four components of the PP.

What kind of active management do you do with your 10-stock system? And how do you select them?
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Re: DIY individual stock fund

Post by Kbg » Mon Sep 23, 2019 4:01 pm

If you are maintaining equal weight then that implies rebalancing after a certain period of time. If you are selecting from an index then your source pool will change through components being added and dropped. You easily could have a stock that doubles and another that halves and all somewhere in between. Bottom line...there is maintenance you have to do and it costs money and you really need to think through how you will do it. For example, what will be your policy of when to bring something back into equal weight if it has a large move?

For my personal system, it is a momentum based system that a couple of investing buddies and I spent a couple of years developing and our sauce is secret. :-)
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Re: DIY individual stock fund

Post by Pet Hog » Mon Sep 23, 2019 4:09 pm

Here's every 100th component of the Wilshire 5000, picked alphabetically! (Who knew? There are only 3540 holdings in the '5000.)

1 Applied Genetic Technologies (62 million)
2 American Woodmark (1.4 billion)
3 Allegheny Technologies (2.5 billion)
4 Brandywine Realty Trust (2.6 billion)
5 BioSig Technologies (186 million)
6 Coeur Mining (1.2 billion)
7 Town Sports International Holdings (45 million)
8 Cortexyme (724 million)
9 Daktronics (333 million)
10 GrafTech International (3.8 billion)
11 Enstar Group (4.1 billion)
12 FBL Financial Group (3.0 billion)
13 FTS International (303 million)
14 Gap (6.5 billion)
15 Hilton Worldwide Holdings (27 billion)
16 Industrial Services of America (9.5 million)
17 Integer Holdings (2.6 billion)
18 Kosmos Energy (2.7 billion)
19 Lindsay (1.0 billion)
20 The Medicines (3.9 billion)
21 MRC Global (1.1 billion)
22 Northfield Bancorp (784 million)
23 New York Mortgage Trust (1.4 billion)
24 Paycom Software (13 billion)
25 Plexus (1.8 billion)
26 Qualys (3.1 billion)
27 RigNet (155 million)
28 Shoe Carnival (472 million)
29 Smith Micro Software, Inc. (192 million)
30 Constellation Brands (39 billion)
31 Team (557 million)
32 Twist Bioscience (911 million)
33 Visteon (2.1 billion)
34 Werner Enterprises, Inc. (2.4 billion)
35 Xerox Holdings (6.6 billion)

Of these, I've heard of maybe three: Gap, Hilton, and Xerox. Too many small-caps for my liking (what else could I expect?). Constellation Brands has the biggest market cap. They sell Mexican beers, like Corona and Modelo, and liquor. I don't think I'd be comfortable holding this portfolio long-term.

EDIT: Adding data from portfoliovisualizer.com. Some tickers not included because they are too recent additions (one or two years of data only). Apart from a terrible 2016, not bad for random stocks selected alphabetically.

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Last edited by Pet Hog on Tue Sep 24, 2019 2:34 pm, edited 1 time in total.
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Re: DIY individual stock fund

Post by Pet Hog » Mon Sep 23, 2019 4:44 pm

Every 100th component of the Wilshire 5000, by market cap.

1 Cigna (61 billion)
2 TE Connectivity (31 billion)
3 Synopsys (20 billion)
4 Broadridge Financial Solutions (14 billion)
5 Viacom (11 billion)
6 Gaming & Leisure Properties (8.0 billion)
7 XPO Logistics (6.6 billion)
8 Hanesbrands (5.2 billion)
9 Affiliated Managers Group (4.3 billion)
10 Apple Hospitality REIT (3.7 billion)
11 Regal Beloit Corp. (3.0 billion)
12 John Wiley & Sons (2.6 billion)
13 NeoGenomics (2.3 billion)
14 MEDNAX (1.9 billion)
15 Papa John's International (1.7 billion)
16 Rush Enterprises (1.4 billion)
17 Designer Brands (1.2 billion)
18 CSW Industrials (1.0 billion)
19 Cardlytics (878 million)
20 SMART Global Holdings (741 million)
21 Front Yard Residential (630 million)
22 Western Asset Mortgage Capital (537 million)
23 Community Health Systems (441 million)
24 Exantas Capital (371 million)
25 Covenant Transportation Group (312 million)
26 ACM Research (258 million)
27 Chemung Financial (215 million)
28 Uranium Energy (177 million)
29 ION Geophysical (136 million)
30 Lakeland Industries (96 million)
31 Dover Motorsports (72 million)
32 Proteostasis Therapeutics (50 million)
33 Innodata (32 million)
34 Regulus Therapeutics (17 million)
35 Invivo Therapeutics Holdings (5 million)

Again, too many small-cap stocks. I wouldn't want to long-term hold any of the bottom half of this list. I am happier with the "randomized 31" of the SP500 above, so maybe a decent strategy would be to hold something like that (50%) and an ETF of small-cap stocks (25%), plus VTI (25%) for PP rebalancing. Now it's looking too complicated, with too many components and too many rules! I don't think it would be a bad strategy, but I don't like the complexity -- I'm looking for a fun and stress-free alternative to VTI.

Hmm. I have a better idea for a sequence...


EDIT: Adding data from portfoliovisualizer.com. Again, I had to delete a few of the more recent acquisitions. Well, this one sucks!

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Last edited by Pet Hog on Tue Sep 24, 2019 2:54 pm, edited 1 time in total.
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Re: DIY individual stock fund

Post by Pet Hog » Mon Sep 23, 2019 5:58 pm

Fibonacci! To spread out the small-caps. From the Wilshire 5000, by market cap:

1 Microsoft (1.1 trillion)
2 Apple (983 billion)
3 Amazon (887 billion)
5 Alphabet GOOGL (853 billion)
8 Johnson & Johnson (347 billion)
13 AT&T (277 billion)
21 Coca-Cola (230 billion)
34 Oracle (176 billion)
55 AbbVie (107 billion)
89 Becton, Dickinson & Co. (68 billion)
144 Progressive (44 billion)
233 Cintas (27 billion)
377 Twilio (15 billion)
610 Under Armour (8.0 billion)
987 LHC Group (3.7 billion)
1597 BioTelemetry (1.4 billion)
2584 PDL Community Bancorp (262 million)

Not too bad, but the top-5 are too concentrated in tech. I do like the way the market caps decrease quite linearly.

EDIT: Adding data from portfoliovisualizer.com. Had to delete a few companies because not enough time in the market. Not a fair comparison because of FAANG dominance.

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Maybe n2 might be better: 1, 4, 9, 16, 25, 36, 49, 64, 81, 100, ... 3249, 3364, 3481. That's 59 companies. Top 32 would be:

1 Microsoft (1.1 trillion)
4 Alphabet GOOG (853 billion)
9 Walmart (333 billion)
16 Verizon Communications (249 billion)
25 Boeing (213 billion)
36 Adobe (135 billion)
49 Broadcom (113 billion)
64 Charter Communications (93 billion)
81 Chubb (72 billion)
100 Cigna (61 billion)
121 Marsh & McLennan (51 billion)
144 Baxter International (45 billion)
169 Keurig Dr Pepper (38 billion)
196 Regeneron Pharmaceuticals (33 billion)
225 Hilton Worldwide Holdings (27 billion)
256 Xilinx (24 billion)
289 Kellogg (22 billion)
324 Hewlett-Packard Enterprise (19 billion)
361 Markel (16 billion)
400 Broadridge Financial Solutions (14 billion)
441 Continental Resources (13 billion)
484 Alleghany (11 billion)
529 Packaging Corporation of America (10 billion)
576 Avantor (9 billion)
625 Hyatt Hotels (8 billion)
676 Starwood Property Trust (7 billion)
729 Pentair (6 billion)
784 Grand Canyon Education (5 billion)
841 Performance Food Group (5 billion)
900 Affiliated Managers Group (4 billion)
961 Helen of Troy (4 billion)
1024 Bank of Hawaii (3 billion)

That's not too bad a list. Doesn't trail off fast enough for me, so maybe n to some other power would be preferable. n2.4 is 3508 for n = 30 -- looks promising.

EDIT: Adding data from portfoliovisualizer. Again, I had to remove a few companies for lack of time in the market. This one turned out great, but several caveats, like I wouldn't have chosen this set back then and it's only the first 32 stocks out of 59, so small-caps aren't included.

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I hope these lists aren't too boring, but developing this approach out loud is useful for me. It's not really VP-worthy, either, because these stocks would be used as my PP holdings. One more post and that's it for me!
Last edited by Pet Hog on Tue Sep 24, 2019 3:20 pm, edited 1 time in total.
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Re: DIY individual stock fund

Post by Kriegsspiel » Mon Sep 23, 2019 6:15 pm

What's with the randomness?

It looks like very few companies account for most of the SP500's return. Last year Apple, Amazon, Microsoft and Netflix accounted for half of the SP500's return. I read an article recently (can't remember where) that said the same thing about this year's returns. I'd rather own the index instead of randomly picking companies.
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Re: DIY individual stock fund

Post by ochotona » Mon Sep 23, 2019 6:17 pm

Just buy RSP! Done!
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Re: DIY individual stock fund

Post by Pet Hog » Mon Sep 23, 2019 6:42 pm

Every n2.4-th stock (ignoring fractions) in the Wilshire 5000, listed by market cap:

1 1 Microsoft (1.1 trillion)
2 5 Alphabet GOOGL (853 billion)
3 13 AT&T (277 billion)
4 27 Cisco Systems (210 billion)
5 47 Union Pacific (117 billion)
6 73 General Electric (82 billion)
7 106 Charles Schwab (56 billion)
8 147 Bank of New York Mellon (44 billion)
9 195 Advanced Micro Devices (33 billion)
10 251 Square (25 billion)
11 315 Altice USA (19 billion)
12 389 Huntington Bancshares (15 billion)
13 471 Wynn Resorts (12 billion)
14 563 Omega Healthcare Investors (9 billion)
15 664 Axalta Coating Systems (7 billion)
16 776 Cousins Properties (5.4 billion)
17 897 Spire (4.4 billion)
18 1029 FibroGen (3.5 billion)
19 1172 Power Integrations (2.7 billion)
20 1325 Stepan (2.2 billion)
21 1490 Newmark Group (1.7 billion)
22 1666 Medifast (1.3 billion)
23 1854 Kelly Services (954 million)
24 2053 Peoples Bancorp (676 million)
25 2264 Waterstone Financial (475 million)
26 2488 Zynex (324 million)
27 2724 First Bank (207 million)
28 2972 Potbelly (108 million)
29 3234 VIVUS (44 million)
30 3508 XpresSpa Group (5 million)

It's an interesting way of selecting stocks. Think how many stocks you'd like to have (in this case, n = 30) and pick your exponent so that n to that power (in this case, 302.4) just fits into 3540, the number of stocks listed in the Wilshire 5000. This particular list doesn't excite me (too many financials?), but I guess if the point is to pick random stocks with a diversity of market caps, then it works.

Do you think this list, or any of the others posted above, would be good proxies for the total US stock market? I'd be going for an equal-weight index, so XpressSpa would contribute just as much as Microsoft. A scary thought, or not?

EDIT: Adding data from portfoliovisualizer.com. This one turned out great, too.

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Last edited by Pet Hog on Tue Sep 24, 2019 3:31 pm, edited 1 time in total.
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Re: DIY individual stock fund

Post by Pet Hog » Mon Sep 23, 2019 7:47 pm

Kbg wrote:
Mon Sep 23, 2019 4:01 pm
You easily could have a stock that doubles and another that halves and all somewhere in between. Bottom line...there is maintenance you have to do and it costs money and you really need to think through how you will do it. For example, what will be your policy of when to bring something back into equal weight if it has a large move?
I'm not sure it's a problem, stocks doubling and halving. If I held VTI, as I do currently, those same stocks would double and halve and I would do nothing. With an equal-weight portfolio, I would perhaps rebalance every couple of years. It's not so important to keep it equal-weight, just start out that way and keep an eye on it. In fact, I would be delighted if stocks doubled and halved, as long as it was in somewhat equal number -- like, if five of them double for every five that halve, I'd do well. Hell, I hope some triple and some go to zero!
Kriegsspiel wrote:
Mon Sep 23, 2019 6:15 pm
What's with the randomness?

It looks like very few companies account for most of the SP500's return. Last year Apple, Amazon, Microsoft and Netflix accounted for half of the SP500's return. I read an article recently (can't remember where) that said the same thing about this year's returns. I'd rather own the index instead of randomly picking companies.
The randomness is to avoid emotional stock-picking. I'd like to pick a handful of companies to mimic the market. But hold them equal-weight. The reason why the FAANGs dominate the market returns is that the indices are all market-cap-weighted. As you say, I could own the index or own just those five companies and I'd do similarly. I'm looking for a way to diversify myself away from the risk associated with another tech crash. And cut out the middleman. And have a bit of fun managing my own index. While asking myself: How much can the FAANG stocks really grow from here when they already have trillion-dollar market caps?
ochotona wrote:
Mon Sep 23, 2019 6:17 pm
Just buy RSP! Done!
You're probably right! Since it's inception, RSP has spanked SPY (10.07% CAGR v 9.18%, with dividends reinvested, since June 2003), but it's been the other way around for the past five years (8.80% RSP, 10.55% SPY, since Jan 2014). Perhaps because of recent FAANG dominance and outperformance? (Numbers from portfoliovisualizer.com.) I'm surprised that the RSP expense ratio is just 0.20% -- not shabby.

Thanks for all the comments. It's just something I'm mulling. Years ago I read on the Motley Fool that when your portfolio becomes enormous (I wish it were so) you should become your own index. And I think it was Machine Ghost on these forums who first got me interested in equal-weighting a portfolio. And then there's Tyler's Golden Butterfly, which adds small-cap value to the PP -- that's also a tilt toward equal-weighting, if you think about it.
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