The Personal Stock Portfolio: How to Build a Stock Portfolio That Works

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club

Do you have a tendency to sell stocks when the market is down only to buy them again when it recovers? If so, you’re probably a frustrated investor… and definitely not alone.

It’s hard to stay calm when a lifetime of savings is at stake. (After all, this is real money we’re talking about.) But one way to overcome emotional and counterproductive tendencies is to build a personal stock portfolio. Here’s what I mean…

Many years ago, in an earlier life as a stockbroker, I had a particular client who found it impossible to overcome his worst instincts. Whenever the market had a sudden downdraft, he’d run to cash, abandoning his investment discipline. Then when the clouds cleared and the market rose again, he’d resume the confidence to invest again.

As you might surmise, this had disastrous consequences as he was forever buying high and selling low. After trying unsuccessfully to calm his fears, I finally hit upon a solution that allowed him to ride through the tough patches in the market with relative equanimity: a personal stock portfolio.

“What kind of car do you drive?” I asked when he inquired about the market again.

“A Toyota (NYSE: TM),” he said.

“Ok, we’re going to buy a few shares of that,” I said. “What kind of computer do you own?”

“A Mac.”

All right, we’ll pick up some Apple (Nasdaq: AAPL).

“Who is your local utility?”

Dominion Resources (NYSE: D).”

“Check. We’ll buy some of that.”

“Who’s your favorite retailer?”

“I don’t have one,” he said. “But I can tell you my wife’s is T.J. Maxx (NYSE: TJX).

“We’re going to buy some of that, too.”

Before long, we put together a blue-chip portfolio made up not just of his automaker, local utility, computer company and clothing retailer, but the businesses that provided him with financial services, telecommunications, prescription drugs and hospital services. All in all, there were 25 stocks in the portfolio.

It didn’t take long before we got a chance to put this new strategy to the test. When the market started to keel a few months later, he was on the phone.

“Things aren’t looking so good,” he said in that familiar tone of fear and dread. “I’d feel a lot more comfortable sitting on the sidelines right now.”

“Hold on,” I said. “Are you still sending in that car payment every month?”

“Yeah.”

“Are you still paying your power bill?”

“Of course.”

“Is your wife still shopping at TJ Maxx?”

“Regrettably, yes.”

“Well if you’re still patronizing these businesses, chances are the other customers are, too. Why would you sell your shares now when they’re so cheap?”

He thought about this and said he’d have to call me back. But you know what? He didn’t. Not for several weeks.

When we did finally did talk again he admitted that he had gotten over his jitters by remembering that these were real businesses – ones he was patronizing – not just stock quotes or paper certificates. Putting together a personal portfolio turned out to be his salvation.

How about you? Are you sending a check to Duke Energy (NYSE: DUK) every month, carrying a Visa (NYSE: V) card or shopping on Amazon (Nasdaq: AMZN)? Take a look at how these stocks have performed through the recent financial crisis and weep. They could have been part of your personal portfolio.

This approach isn’t without its drawbacks, of course. No strategy is. For instance, you may bank with Citigroup (NYSE: C) or use a Blackberry (made by rapidly failing Research In Motion (Nasdaq: RIMM), in which case you would have had a few stumbles – minimized by using a trailing stop).

Still, if all else fails, a broadly diversified selection of great companies you actually patronize may give you the wherewithal to respond unemotionally to market volatility rather than cutting and running at the first hint of danger.

If emotions have plagued your own stock market approach, maybe it’s time to consider a personal portfolio.

Good Investing,

Alex

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Food for Thought

Peter Lynch often said he found some of his best-performing investments while visiting the mall with his family. Indeed, he noted that, “If you like the store, chances are you’ll love the stock.”

Even if you yourself don’t frequent a business, it helps to keep an eye out for businesses that are expanding in your area or seem to be doing great business.

Such was the case for Alex with Whole Foods Market (Nasdaq: WFM):

“Several months ago, Whole Foods opened a significantly larger outlet in the Charlottesville area. There are frequent traffic jams in front of the store, the parking lot is usually packed and you can hardly squeeze by all the customers inside the store. This is a retailer’s dream. And there is every indication that customers are just as fervent in other cities. That bodes well for the stock…”

We first alerted readers to Whole Foods in this space back on July 23. Wall Street had beaten down the stock after a poor earnings showing from Chipotle (NYSE: CMG). But Alex felt they were mistaken and he predicted an earnings surprise.

And Alex didn’t disappoint. The stock jumped more than 10% that Wednesday based on an earnings surprise and has gained a total of 12.9% since July 23.

Alex still feels there’s plenty of momentum left in the play. Here’s why:

“The company is obsessive about seeking out the finest natural and organic foods available and maintains the strictest quality standards in the industry. Its stores are clean, well lit and attractively laid out. And the regulars bear a strong resemblance to Apple customers in an important respect. They are almost fanatical in their loyalty.

“Some will grouse that groceries are more expensive at Whole Foods. And indeed they often are. But customers are happy to pay for the exceptional quality.

“In the most recent quarter, earnings jumped 31% on a 14% increase in revenue. Sales growth at existing stores is on the rise. And the company – after a tough recession – is opening new stores again.

“I expect Whole Foods to earn $2.50 a share this year and more than $3 in 2013. The company has posted positive earnings surprises in each of the last (five) quarters. Future beats should drive the stock to new highs.”
Now don’t go out and buy the stocks for every store or company you patronize, but as Peter Lynch advocated, it’s a great start for your research.

– Justin Dove with Alexander Green

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