More Baby Steps For Individual Stock Picking: Investing In What You Know And Holding It

Last week, I wrote about Baby Steps For Individual Stock Picking, which gave starter tips on how one can invest in individual stocks. While I tend to primarily invest in low-cost index funds, I am interested in investing in a few individual companies whose business policies I greatly admire.

Why invest in individual stocks at all? First of all, I have no interest in active stock trading – to me, buy and hold (or buy and homework) is the real way to go. I plan on buying companies that have earned my business and holding those stocks for a long time.

That being said, how can I know this is a good investment? A big portion of this is, as discussed in the comments of the first Baby Steps thread, the desire to focus my investments on companies that match my personal values. For example, if I buy Exxon stock, I’m implicitly opposing alternative energy sources, something I’m uncomfortable with. On the other hand, if I buy CostCo stock, I’m implicitly supporting the concept of treating your employees well. If I buy a broad market fund, I own both companies, but if I just buy CostCo individually and don’t buy Exxon, I know that I’m supporting companies that share my personal philosophy with my investment dollars.

A sample portfolio My wife and I have discussed companies we support quite often and we’ve attempted to select a portfolio of four stocks that match our shared values.

Herman Miller (MLHR) makes absolutely amazing chairs, both incredibly comfortable (I love my Aeron) and great examples of ecodesign.

Hasbro (HAS) makes games of all varieties and gives extensively to children’s charities.

Cisco Systems (CSCO) is a technology giant with superb management philosophies that treats employees quite well.

Anheuser-Busch (BUD) is a brewery that does exceptional work in minimizing their environmental impact.

We would also strongly consider Costco and Berkshire Hathaway for our portfolio.

A portfolio consisting of equal amounts of these four stocks would be up over 5% for the year, while a portfolio with all six stocks bought in equal amounts at the start of the year would be up 7.36%. In each case, the investments align with our personal values, they line our pockets, and we can sit back and just let the investments ride until our feelings about the company change.

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20 thoughts on “More Baby Steps For Individual Stock Picking: Investing In What You Know And Holding It

  1. skioften says:

    Keep in mind though, that this basket of stocks is underperforming the market. The S&P500 is up just under 10% YTD, and the Dow is up 12% YTD.

    Personally, I am an avid Mac user and a former PC user who saw strong the Mac OS platform is. Thus, I’m long AAPL which is beating the market YTD.

  2. Too bad Anheuser-Busch makes such poor beer ;) I’m glad to hear that they do a good job of watching environmental things, though. I happen to live near Coor’s facilities in Golden, CO and the place looks pretty barren. Fortunately for me there are some good microbreweries that don’t insist on making their beer in such a nasty environment.

  3. Matt says:

    Anheuser-Busch does make poor beer…so I probably wouldn’t invest in them. But that’s me and I’m a beer snob. I also don’t like their monopolistic actions towards smaller microbreweries. But I’m poor and I like beer so I support them monetarily through beer purchases. :)

    I’ve been contemplating individual stock picking as well. But I’ve thinking of it more as a way to beat the market over a long period of time. Which I don’t think is a good rational. Instead, I’ll stick to low-cost index funds until I fully understand those and the different asset classes. Back to reading Investing in REITs: Real Estate Investment Trusts by Ralph Block.

  4. MillionDollarJourney.com says:

    Trent, you should consider learning about cash flow analysis and owners earnings. I will be posting about this in the near future.

    FT

  5. Bill says:

    And yet picking stocks individually results in a sub-optimal return (too low, given the risk)

    See this page for why:

    http://en.wikipedia.org/wiki/Modern_portfolio_theory

  6. Lauren says:

    Have you looked at social responsibility mutual funds? They seem like a good way to align investments with societal goals but still retain the diversity benefits of a mutual fund.

  7. Rob in Madrid says:

    I would sticks with stocks that you know and ones that offer a Dividend reinvestment plan (fee free is best) and Stock Purchase Plan (SPP) that way your not concerned if the stock goes sideways or drops as your dividends are being reinvested and you can purchase small blocks (say 3.2345 shares) for free or for a small fee.

    From a diversification point of view 10-15 stocks is all you need.

  8. Callum says:

    @Trent, a word of warning regarding posting your stock choices. I was a member of the Edinburgh University Trading & Investment Club (www.eutic.org) back in the day and we couldn’t publish our stock portfolio online as it could be construed as financial advice, which is highly regulated in the UK.

    If you haven’t already, I’d recommend having a chat with a friendly lawyer to ask their opinion. You might find that posting individual stocks could be seen as a “recommendation” and open up a whole can of liability worms.

  9. Trent says:

    The footer of every page on this site contains a pretty clear disclaimer that I’m not a financial advisor and that this site is for entertainment purposes only. According to my lawyer, this is an appropriate disclaimer.

  10. Anna says:

    While I applaud your commitment to relying on your values to help in chosing stocks, I always wonder when people pick on Exxon. Besides the fact that my Exxon stock has seen a return of about 70% in the last five years – I have no dobut that Exxon’s financial commitment to changing the world for the better would be enough for anyone’s support if they would just look into it a little. I studied all of the factors before I bought my stock … and my portfolio and my net worth are happy I did.

    For example, there is the Africa Health Initiative and their commitment to help wipe out malaria, the $10 million they gave to Stanford (That fly-by-night-university) to fund the Global Climate and Energy project, and thier focus on Math and Science education in the US.

    I try to remember that they are not an alternate fuels company … they are an oil and energy company. And I manage to sleep just fine with that knowledge.

  11. Well, I have to admit I had a bit of a chuckle when I read that article and saw that the related posts generated linked to your review of Jim Cramer’s Real Money! He spends a fair amount of time in that booking talking about how you’re not buying a piece of a company when you buy a share of a stock, and that you should never, ever buy stocks because of your personal feelings towards the company.

    I have to admit that I am somewhat guilty of this as well (I would never own a share of Wal-Mart), but you seemed to be a fan of Crarmer’s book and I’m just curious why you took this approach.

  12. Rick Dahl says:

    picking stocks based on personal feelings or a political stance is the wrong way to do it. If you are satisfied with 5% return, just stick your money in an online bank account and earn 5.20% APY. If you want to play in the stock market, you should base your stock picks on the economic prospects of the company and not shoot for a 5-6% return. Go to bonds or savings accounts for that.

  13. Ted Valentine says:

    I’d love to invest in BRKA too. Especially at $110,400 per share.

  14. Dan says:

    So, I’m getting:
    1. It is morally wrong to own an oil and gas stock (Exxon) in a oil and gas company who chooses to focus on oil and gas.
    2. It is morally ok to own stock (Bud) in a brewer who produces a product that contributes to a multitude of societal ills from alcoholism to cirrohis to drunk driving to wife beating, and does so along with a variety of questionable advertising which often seems aimed at teens.
    3. It is morally ok to own a stock (Berkshire) who controls portions of Chinese companies who may or may not be aiding genocide in Africa…

    It’s best to ignore all of this stuff and pick stocks on their merit and not your politics.

  15. js says:

    Regarding Exxon: Exxon did fund studies questioning global warming, and now even Exxon says global warming is a serious threat.

    http://blog.healthpolitics.org/public/item/156717

    Personally I don’t have problems with people investing in Exxon, I just have problems with people getting delusional and pretending Exxon is out to do good.

    When I found out my 401k was investing in Halliburton though that was the last straw. That’s more evil than I can stomach.

  16. Debbie says:

    This is why I have a problem with socially responsible mutual funds. My idea of socially responsible just doesn’t match up. For example, I found one that holds Microsoft, which I find to be an amoral company trying to make money through monopolization rather than by making good products (although by now some of the products are finally actually good).

    I’m also not sure how buying a stock supports a company if you are just buying it from other stock holders and not the company itself. I guess more people being interested in a stock raises the demand which raises the price which helps people selling the stock including the people who work at the company who are paid partly in stocks. That seems a bit minimal to me.

    One could also argue that it’s better to own stock in scummy companies because as an owner you have a say and you can make stronger requests. Socially responsible companies are often using their power in this way–cutting off companies that no longer meet their standards and talking other companies into making changes after which they buy their stock.

    Most of my stock investments are in mutual funds, but I do have a bit of “fun money” in individual stocks. And I do only pick companies I like because it just feels better to root for a good company than a scummy company. That said, of all the companies I like, I hardly by any of their stocks because I don’t like how they are performing.

  17. Dan says:

    @js – “Exxon did fund studies questioning global warming”

    You are _supposed_ to study theories, it’s called science. If you just believed ideas based on faith it would be called religion.

    “I just have problems with people getting delusional and pretending Exxon is out to do good.”

    Define “doing good”, I thought providing a critical commodity and quality derivitives while providing good paying jobs and delivering the shareholders a nice profit was “doing good”.

    I guess I don’t understand the “energy company = bad” and “farmer = good” mentality…
    I use both of their products on a daily basis…
    Both of their products are priced via an open market…
    Both of them can/do have environmental impacts…
    Both of them employ people who need jobs…
    Both of them are looking to profit from their operations…

  18. Ted Valentine says:

    Ahhh, the socially responsible capitalist debate. Oxymoronic, yes?

    I think its best to practice your social responsibility values on a local level in your community. You’ll accomplish a lot more.

  19. I have to echo Jon’s comments about the irony of your “buy and hold companies that I like” philosophy when you claim to have read Mad Money.

    A key point — IMO, *the* key point — that Cramer hammers over and over in the book is that you are competing only against big institutional investors — mutual funds and hedge funds. These guys are so competitive that they buy and sell constantly, looking to get an edge.

    They try to buy low, sell high, and because the funds all think the same way, it becomes a self-fulfilling prophecy. A stock will rise 20% in a couple of months for no particularly good reason. Then it will hit its peak and then drift back down to where it was before. This movement has nothing to do with the stock’s fundamentals, it just has to do with the stupidity of the big funds CREATING movement in the stock when, by all rights, it really shouldn’t be moving so much.

    Funds are always on the move from one stock, or one sector, to the next, even if it’s unreasonable to do so. A lot of the ups and downs of a stock’s price are due to nothing other than big funds pulling out their money and putting it elsewhere. It has nothing to do with fundamentals. The funds move in in staggered lockstep from stock to stock, and from sector to sector. If you can keep ahead of them then you will make money. If you buy and hold for the long term, your stock will go up, and then it will go down, over and over again. Yes, the long term trend will be up, but the rate will be 10% or less. If that’s all you want then why not just buy an index fund, which will smooth out all of those nerve-wracking bumps and provide the same or better results?

    Also I have to agree with the others who question the utility of “socially conscious investing” in the stock market. For the most part, when you buy a stock, that money doesn’t go to the company itself — it goes to some other investor. Yes, there are exceptions (when the company is issuing new stock or buying back stock) but they’re relatively small.

    Lastly, I have to say that I concluded a while ago that ANY organization (corporation, team, government) will necessarily become to some degree “bad” as it grows. There will always be bad people, and there will always be bad decisions. The more people become a part of an organization, the more likely it is that “bad” things will be done “by the organization” (which is just a collective of individuals). You have to take the bad with the good, or else you’ll end up disbanding any organization of more than 5 or so people.

  20. Kevin Pickell says:

    Some have commented that BUD makes bad beer. Well that is no reason not to invest. They have over 50% of the domestic beer market and the best distribution system in the world(compared to all other brewers). They generate tons of free cash flow which they use to buy back shares and pay dividends. Management has proven to be shareholder friendly and consistently allocates capital in a way that creates additional shareholder value. These guys have a solid track record of increasing the wealth of their shareholders over long periods of time. Warren Buffett’s Berkshire Hathaway is one of their largest shareholders. BUD is one of my biggest holdings. I suspect I’ll own this one for years to come. Go to your local supermarket and check out the beer section. Anheuser brands include Budweiser, Bud Lite, Natural Lite, Michelob, Busch, Bud Select, Rolling Rock, and many others.

    My other holdings include… Markel, Leucadia National, Berkshire Hathaway, Sears Holdings, McDonalds.

    If you really want to be impressed…look at a long term stock chart on Leucadia National(LUK).

    P.S…if someone goes out and kills someone while drunken driving, please don’t blame Anheuser Busch. We are ultimately responsible for our own bad decisions and judgement. Usually there is something rotten from within when people act so irresponsibly. Remember….Jesus turned water into wine. That doesn’t make him immoral. Many people around the world can sit at home and drink a few beers with football on TV or have a cold brew with dinner at a nice restaurant without killing someone or beating their wife.

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