Imagine that you can own shares of only one company. It means that your portfolio is not diversified at all. Well, it is rather difficult to call it a portfolio. It is just your money parked in the shares of one business — hopefully, the good one.
Such an approach is not a great idea from the perspective of diversification. I would not put all my wealth into a single company.
Understanding a business well may not be enough. There are so many aspects of investing you do not have an impact on that such a bet would be a very risky one. Political decisions and changes in regulations are factors we cannot predict. It is something we can recognise as a risk, but we never really know what new idea is growing in the heads of politicians.
No diversification – analogy to buying a property
But from the perspective of diversification it sounds very risky, don’t you agree? The property is located in one local community, in a specific country — all the wealth risks being influenced by the politics or economy of a particular region.
Political decisions like the UK’s EU referendum or tax changes in the Buy To Let market will affect demand for properties as an investment.
Local market problems are another such risk. The issues on the local level like a closure of a factory by a big employer will have an impact on the property valuation. I suspect such a situation may influence property prices in Swindon. In February 2019 Honda confirmed that the company will close its Swindon car plant in 2021. The article from The Guardian gives more details about it.
That is one of the reasons why I still have not decided to buy a property in this town.
The Investment League – choosing only one company
But let’s come back to the main topic of this article.
Almost one year ago I presented an idea for a game to my colleagues. I decided to start investing virtual money in an Investment League. My colleagues are interested in finance, so it was the perfect opportunity to use everybody’s experiences and knowledge to educate ourselves together in stock market investing.
The rules of the Investment League
Every participant could choose only one company to invest in our portfolio. All £10 000 of virtual money had to be invested in the company selected by a participant. Selling was allowed anytime during the month, whereas buying was allowed only at the end of the month – using the closing price from the last trading session of the month. The idea behind this restriction was to limit the number of transactions as well as forcing participants to think more about their choices.
A person who achieves the best result in each quarter is awarded the right to add an extra company to the portfolio. Also, a similar prize is planned for the best result of the year.
My criteria for buying
Choosing one company means you need to put a lot of thought into the decision. You need to remember that you are competing with other participants in this game.
It should be a company which has excellent perspectives, and at the same time is cheap. It means that the sentiment of investors towards this company is rather negative.
My 1st transaction
The moment when the Investment League started, the Facebook company was meeting these criteria. After Cambridge Analytica scandal, Facebook went through the greatest crisis in its then 14-year history. But I knew that the perspectives for the company are still great in the long term. Here is my argumentation for buying shares of Facebook.
I bought shares in Facebook for $164.46 on 30th September 2018.
Avalanche on the markets in the 4th quarter of 2018 and change of sentiment in 2019
I did not buy Facebook at the bottom. Facebook shares were falling till December 2018. At the end of December, my position was down 18.6%. With that result, I was 4th among 10 participants. It shows negativity around investing in the stock market at that time.
Selling Facebook on good news
In 2019 the sentiment towards stock market investing changed. On the 30th January, Facebook posted great financial results which surprised analysts by exceeding their expectations. Next day, the price of Facebook grew by +13%. I decided to sell on good news. As good results were priced in, I expected that the price would stop rising.
I was 1st among 11 participants after Facebook’s rally in January 2019. A new colleague had joined our Investment League in the meantime.
I sold my Facebook shares for $166.69 on 31st January 2019. The Pound Dollar exchange rate was 1.31098. The gain after currency conversion and transaction costs was only 0.58%.
I felt that there was another tech company which was not getting the attention, it deserved.
One of my biggest positions in the real portfolio at that time was Alphabet (Google), and I decided to replace Facebook with Alphabet in the Investment League portfolio. I expected the market to react the same way as it had reacted to Facebook’s results. There was a good market response when the earnings came out but not on the scale we saw for Facebook.
In February 2019 the price of Alphabet shares increased only +0.06%. But during the same time, Facebook shares lost 3.14%. The change paid off.
Coming back to Facebook
Because of the small correction of Facebook stock price and the appreciation of Alphabet shares, I was able to buy back more Facebook shares than I initially owned.
I did not feel comfortable with not including the biggest position from my real portfolio in the Investment League portfolio. That is why I came back to Facebook at the end of February. According to my analyses, the company was more undervalued than Alphabet, and I saw a bigger potential for growth in this company.
Continuation of Facebook’s rally
Judging the change from the perspective of a few months, it was a right decision. Between 28th February 2019 and 19th August 2019, Facebook shares appreciated 15.49% while Alphabet shares gained only 6.66%.
I won the Q2 2019! What to buy now?
I achieved the best result in Q2 2019 of Investment League. In this quarter, Facebook shares increased by 18.8% while the overall market was not giving many reasons for enjoyment for investors.
I nominated two companies as my choices to the portfolio. I sent the information to other participants in the email on 28th June 2019. The reason for sending names of 2 companies was that I did not have access to my work email and I was not sure if someone did not choose my preferred choice before me.
My 1st choice was CD Projekt SA – Polish game developer known for Witcher game series. The reason for buying was a very probable growth of the stock price caused by the Cyberpunk 2077 launch in April next year. The game was one of the most followed on the E3 2019 with very positive feedback. Expensive US $ to Polish Zloty makes the profits in Polish currency higher for the company. It is a very speculative buy – the company can go up 50-100% or go down 50% depending on the reception of fans of the new game.
I followed the company very closely during the last seven years, and I know it is a very volatile investment.
There are things, however, which give me confidence in buying shares of CD Projekt:
- reading opinions of fans on the promotional materials about the new game,
- expectations that it will be the best game of 2020.
If the hype of fans translates into the number of sold copies of the game, the valuation of the company can easily grow higher and even beat the analysts’ expectations.
You can read here about my last transaction on the shares of CD Projekt company.
My 2nd choice was the Alphabet (GOOGL).
The reasons for buying:
- moderate valuation of around ~27 PE with growth 15-20% annually,
- $115 billion net cash on its balance sheet,
- Waymo self-driving unit dominating self-driving research,
- Google Cloud gaining more of the cloud computing market,
- domination on the mobile phone apps and advertising market (together with Facebook),
- consideration of this company as a safe choice.
CD Projekt added to Investment League portfolio.
I added CD Projekt to Investment League portfolio on the 28th June 2019. The buying price was 215.30 Zloty. So far the shares gained 8.78% (or 7.7% including the growth of the British £ in that time).
Start of another experiment
I’ve done a lot of thinking to choose three best companies from my real portfolio. That is why I decided to run an experiment. I will run these virtual portfolios – of 1 best company and three best companies. I want to see if little diversification but with a focus on choosing the best will beat the results of my real portfolio, which includes currently 18 companies.
Little diversification is something which you can see among successful investors. In Warren Buffett’s Berkshire Hathaway stock portfolio, the largest three holdings account for ~47% of the entire portfolio. As of 6 September 2019: Apple (AAPL) 23.74%, Bank of America (BAC) 12.92%, Coca Cola (KO) 9.79%.
The results below are in British £ (20th August 2019). The calculation does not include transaction fees.
So what is the best company to invest in?
I believe what matters is business, management and price you pay for it.
The common features of all three companies:
- excellent management which showed many times that what they care about are the products and their customers,
- the companies are not cheap with Price to Earnings ratio > 20,
- incredible growth rate,
- strong balance sheet – they are cash-rich companies,
- a strong brand (even if CD Projekt is not recognised globally yet, they have an opinion among gamers as a company which never disappoints and puts a lot of effort in delivering the product which will be of a high standard),
- risky business:
- Facebook and Alphabet – the risk of regulations,
- CD Projekt – reliance on one product – new game release.
Of course, that is my definition of a great company. Such an approach makes me sleep well at night while having invested money in these companies. Every investor should find an investing style which fits him or her.
Please note I am not a regulated financial advisor, and so any help will be non-advisory. If you are unsure of the suitability of any investment, you should seek professional financial advice.