Own More Companies Than Exist

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Includes: BIBL, CHGX, CRF, DDM, DIA, DMRL, DOG, DUSA, DXD, EDOW, EEH, EPS, EQL, EQWS, ESGL, FEX, FWDD, GSEW, HUSV, IVV, IWL, IWM, JHML, JKD, OMFS, OTPIX, PMOM, PPLC, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RVRS, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPSM, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, USA, USMC, UWM, VFINX, VOO, VT, VTWO, VV, ZF
by: Investment Pancake
Summary

Understand what you own: stock, strategy, or someone's efforts to implement a strategy.

Build your own bespoke index, and be your own bespoke mutual fund.

A persistent sleet of $280 investments.

Why stop at owning every single company that exists on Earth when you can own so, so many more? It's easy to do: simply invest in mutual funds and ETFs.

According to Statista.com, there were 114,131 mutual funds worldwide in 2017 (total mutual funds worldwide) and 4,535 ETFs (total ETFs worldwide). That's nearly 15 times the number of individual stock holdings that exist worldwide based on the 8,116 companies that Vanguard's Total World Stock Index (VT) held as of December 31st, 2018. Where else besides Wall Street can you end up owning more than everything? It makes you want to rub your hands together nefariously, put on a monocle and a pinky ring and change your legal name to a single-digit number.

Don't you sometime like to ask yourself what you're actually buying when you invest in a mutual fund or an ETF? At one level, what you are buying is a strategy - like tracking the 500 largest companies in the USA, for example. At another level (especially if you're talking about an actively managed fund), you are buying the skill set of some investment managers at picking underlying investments or adhering to a predefined strategy. And at yet another level, what you are buying is a piece of the underlying companies that the fund itself owns. One thing is constant, though. However you choose to invest, the further you get from owning the underlying companies, the more layers of information you are adding. You're not just looking at the earnings for all the businesses you own through the fund - you're looking at how the investment strategy is working, how well the fund executes that strategy, what the fees are, the taxes, the turnover, etc.

Can I tell you my greatest failing as an investor? Obviously, there is a lack of motivation and ambition there, but what I am telling you is that my deficiencies as an investor are literally radical. I don't want to own stock. Stock is stupid. What I want to own are businesses, but I put up with owning stock, since it's the only mechanism by which I can buy pieces of a business. What an ugly-sounding word. - "stock." It's one step removed from the actual business itself, which is one step further than I'd like to take, because it means that I have to think about the market for stocks and not just think about the underlying business itself.

But as if that wasn't bad enough, now you are asking me to go three or more steps away from owning actual operating businesses? Are you really suggesting that I own mutual funds or an ETF... which amount to owning a fraction of the efforts of some dudes I don't know who will execute a strategy I don't completely understand to buy stock so I can indirectly own a fraction of a piece of an actual business that sells products and services? And pay management fees for the privilege? Excuse me while I adjust my monocle, stroke my white Persian cat, and hover my finger ominously over that red button on my desk console that opens a trap door under your chair.

"Wait!", you implore, before I shunt you down to the underground piranha tank, "passive index ETFs and mutual funds enable you to ignore information about the underlying companies, thanks to the power of diversification!"

As I pause contemplatively over the red button, I have to admit, I do have a bit of a lazy streak. Even if I settled for owning merely all of the existing companies on the planet, I can't say that I'd be motivated to study each and every single one of them. To be honest, if I settled for owning only a tiny fraction of all the companies that exist - maybe just the 500 or so that comprise the S&P 500, I wouldn't read much about any single one of them. Why would I? The point of passive, diversified investing is to not act on information - which eliminates the need to even look at the information in the first place. You've almost convinced me to own an index ETF like VT, or even the SPDR Dow Jones ETF (DIA), if for no other reason than to ignore company-specific news and analysis and limit my need for information. But as I languidly withdraw my finger away from the red button, I have simply one more question for you.

"If I can ignore company specifics by investing in an index ETF, why can't I do exactly the same thing if I own exactly the same underlying companies directly? In fact," as my finger returns to the red button, "by your reasoning, I would need to research and act upon even MORE information with an ETF or mutual fund since ETFs and mutual funds place more layers of information between me and the underlying companies."

Notice that this is the diametrically opposite argument that you and the entire asset management industry have been making for years (rather successfully, I might add). You nervously adjust your tie and squirm in your seat, stammering for a good answer. But hey, carnivorous fish gotta eat, too.

Several years ago, I decided to put the entire global finance industry out of business. I opened my very own mutual fund. Privately owned, obviously (after all, I live on a private island that doesn't show up Google Maps). I could have simply bought all the companies that track an index, like the Dow Jones or the S&P 500, but the selection criteria for those indexes seem absurd to me. Balance my company holdings based on which has the highest stock price? Dumb. Balance my holdings based on which has the largest market cap - so that I'm literally buying high and selling low? What, you are nuts? Anyone could come up with selection criteria that are ten times smarter than that of the S&P 500 of Dow Jones Industrial Average. More to the point, anyone could come up with index criteria that are smarter for them personally, based on their own situation, priority and beliefs. Why on Earth would you ignore your personal priorities and ideas just to follow an index created by a journalist and a statistician back in 1896?

I know my personal situation better than anyone else on this planet, and I know what I believe in. I like companies with high credit ratings, solid dividend histories and solid historical earnings growth. I like it when the business has high operating and profit margins, but also competitive advantages to protect those margins over time. I want my index to be diversified across industries and, obviously, across companies. I want my index to have almost no turnover - certainly less than some of the bespoke dividend growth indexes floating around out there, and ideally less than the Dow Jones Industrial Average or the S&P 500. Plus, I have other criteria that aren't readily translated into anything that a computer algorithm could figure out. Coke is tasty. Explain that to your laptop. I can't articulate everything I like about a business or about a product, but since it is my own personal index that I'm creating, I don't have to articulate everything - not even to myself.

After refining my ideas about what I imagined an ideal stock index for me personally would look like, I used stock screeners to find constituent companies that matched my financial criteria. I looked at holdings for indexes that tracked things like dividend growth histories. Once I had the list down to 100 or so, I started to read annual reports and company presentations to try and give myself a gut feel for how the company worked. And if the price was right, I'd buy the stock. The index evolved over time, and I mostly just added holdings until I'd gotten my holdings into a range somewhere between 70 and 80 individual stocks. Then, I stopped. My personal index remains largely untouched since then.

When you step into a room, how do you identify the international supervillain? After putting the global asset management industry out of business, I've been keeping a very low profile. Hat. Sunglasses. Beard. I slip into and out of the mercados in Lisbon virtually unseen, and rarely come up to the surface of the global capital markets. It's a good thing that I am the sponsor of my own personal ETF, because I'd fire anyone else for not doing enough. In about 5-10 years I'll check back to see how it's worked and to make sure that the constituent companies have a long-term earnings record that continues to satisfy the original investment criteria that I devised. And I'll fix whatever doesn't work with my index, and ignore what does.

There's the question of dividends. I reinvest most of those, and the criteria that I use to reinvest dividends are in a state of constant flux. That's active management, plain and simple, but I have one rule to keep myself from running wild and tripping all over my own shoelaces like an idiot. I treat investing exactly like spending: once the money is spent, it's gone. Sometimes I will take items back to the store and ask for a refund, but it's rare and humiliating when I do. Believe it or not, guess where I sometimes reinvest dividends? ETFs! Especially if I only have a few hundred dollars to invest, I prefer to keep my brokerage fees at a minimum and will buy commission-free passive index ETFs - just like I did this past Friday. The impact of this unending drizzle of small investments could be on the order of an extra $11 a year in dividend income - but that's enough to buy one more plate a sushi and a glass of white wine for lunch at the mercado up the street. Plus, the dividend income compounds. You'd be surprised how quickly these little $280 investments start to pile up. And then I disappear back into the shadows with my monocle and pinky ring.

How is my portfolio allocated, how quickly has the portfolio income grown and how has the portfolio performed compared to VT since last year? What about the portfolio's dividend growth, and growth in the overall earnings per share? See for yourself - not that it is remotely relevant to you. If you are an evil mastermind bent on toppling the global financial order, you'll grab a monocle and pinky ring and devise your own index based on your own situation, priorities and beliefs.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long every company and fund shown on the attached spreadsheet. But that doesn't matter to you because there is nothing that amounts to investment advice in this article. I am not an investment advisor. Nothing in this article can be relied upon by any person for any reason besides, arguably, entertainment value.