When Peter Lynch decided to leave the professional investing world after posting annual gains in excess of 29% for Magellan Fund shareholders from 1977 to 1990, he noted the toll that keeping track of so many individual stocks was taking on his life:
My departure [from Fidelity Magellan] was sudden, but it wasn't something I dreamed up overnight. The task of keeping track of so many companies had begun to take its toll by mid-decade, as the Dow hit 2000 and I hit 43. As much as I enjoyed managing a portfolio the size of the GNP of Ecuador, I missed being home to watch the children grow up. They change fast. They almost had to introduce themselves to me every weekend. I was spending more time with Fannie Mae, Fredie Mac, and Sallie Mae than I spent with them.
When you start to confuse Freddie, Sallie, and Fannie with members of your family, and you remember 2,000 stock symbols but forget the children's birthdays, there's a good chance you've become too wrapped up in your work.
I have written before that I think it makes perfect sense to hold a widely diversified portfolio of 25-35 stocks that does not require a lot of monitoring. Although the standard presumption is that such a portfolio would require substantial time management, it does not have to necessarily be that way if you recognize that true buy-and-hold stocks tend to cluster together in certain industries.
Certain sectors more readily lend themselves to stability than others. The guy that owns a nice collection of utilities, conglomerates, consumer staples, and megacap healthcare stocks is not going to have to spend as much time monitoring his portfolio as his nextdoor neighbor with the big tech and big bank portfolio.
Once you identify the sectors that lend themselves to stability, the next step is to identify particular companies within those industries that have particularly excellent track records of success.
There is a reason why the novice and experienced investor alike can come to appreciate the value of adding Coca-Cola (KO) to your portfolio. It is obvious to everyone what an excellent company Coca-Cola is. Sure, you are not going to impress at the proverbial cocktail party when you mention that you have Coca-Cola in your portfolio, but if you give it enough time, you will get wealthy.
And the monitoring process for Coca-Cola does not have to be terribly complicated. You read the annual report and check up on volume shipments, make sure that the return on equity is still in that 25-30% sweet spot range, keep tabs on the company's debt and the total share count, and check to see how Coca-Cola's market share stacks up against PepsiCo (PEP) and Dr. Pepper (DPS). If Coke maintains the status quo (or improves) on those metrics I mentioned, you should get your 8-12% annual earnings growth and dividend growth for the long term.
The joy of blue-chip investing within the most stable sectors is that most of the energy devoted to making the investment is upfront. You have to come up with the initial capital, study the company in great detail before you make the initial investment, and then determine a rational price to acquire ownership. Short of the discovery of severe accounting fraud or some other extremely low probability event, I cannot think of any news development that would spur on a sale of Coca-Cola stock. If you are dealing with the best of breed companies in historically stable sectors, the stock monitoring process does not have to be a chore.
When you add 300 shares of Aqua America (WTR) to your portfolio, exactly how much time do you need to spend keeping tabs on it? You know you're going to get 6-10% long-term earnings growth, and you know you're going to receive dividend growth that slightly lags that figure. You know the company is going to carry a high debt load (par for the course with most utilities), and most of your monitoring is going to be focusing on the rate increases that the company is able to achieve in most local jurisdictions. Water utilities aren't exactly the kind of stock that make you wake up in the middle of the night and say, "Honey, don't let me forget, Aqua America's earnings report comes out tomorrow. Wake me up early so I don't miss it."
Of course, as is the case with all investing, any long-term strategy ought to match your temperament (if you adopt a strategy that does not match your natural temperament, you will set yourself up for ongoing emotional struggles between the strategy you set up today and your future impulses). Personally, I am an accumulator. I enjoy the prospect of buying Johnson & Johnson (JNJ) stock at the age of 21, stuffing it into a retirement account, and then looking back twenty years down the road so I can say, "Look what that grew into!"
Knowing that I enjoy watching things grow and being able to say "those $1,000 dividend checks started with a $4,000 investment twenty-five years ago", it logically follows that I should spend my time focusing on finding companies with business models built to stand the test of time (that's why David Fish's CCC List is so popular-if a company can raise dividends almost every year during the second half of the rapidly changing 20th century, it probably has a business model that is pretty darn durable).
Charlie Munger, the Vice Chairman of Berkshire Hathaway (BRK.B), was right when he said that for a lot of people, their stock holdings reflect their personality. I only own one large bank and one large tech company, and for the bulk of my investments, I am in very stable sectors like consumer staples, large healthcare companies, energy supermajors (although this comes with commodity pricing risk), conglomerates, and when price permits it, certain electric and water utilities. Since purchasing Becton Dickinson (BDX), I've only spent maybe four hours of my life monitoring the stock.
For long-term investors, different sectors (and companies within those sectors) come with different monitoring requirements. The stocks that you always see on television are usually the ones that require investors to react to every news headline. As of my last count, there have been thirty articles released on Seeking Alpha alone about Apple's (AAPL) earnings release today and what kind of trade to make about it. That's the life of tech investing. The earnings releases from General Mills (GIS) don't exactly stir up the passions this way. If you're someone like me that enjoys adding different stocks to your portfolio and letting them grow over time, you can monitor a diversified portfolio without a substantial time commitment if you ignore the sectors that dominate the news headlines and choose to focus on the stable sectors that I mention above.