In this article, I would like to share with you some lessons that I have learned about my portfolio as a byproduct of my recent divorce.
First off, divorce truly is an emotional, physical and financial earthquake. It shakes who you are as a person, and it provides forced reflection of your place in life and the decisions you have made. It forces you to be comfortable totally on your own and in your own skin, which in my opinion is one of the hardest things a person can do in life. Divorce also forces you to potentially make some hard decisions with your finances and to look deeper into the reasons why you are holding your equities.
Before I get too far in, I would like to preface that my wife and I were lucky enough to have a prenuptial agreement in place, which I rightfully expected to limit my exposure to splitting my separate assets. Also, we do not have children together (I cannot even imagine the process when little ones are involved).
So imagine my surprise to wake up on a sunny but chilly February morning to a flurry of six e-mails from my attorneys requesting that I produce a template of hypothetically how I would split my individual equity portfolio with my wife and they needed my response by no later than 5pm that same day.
After some panicked phone calls, a Daytime Emmy worthy I'm sick voicemail to my boss and a Xanax or 6, I got to work. My goal was to determine out of the 37 individual equities in my main equity portfolio, which of these are my true core holdings to carry with me going forward if my portfolio was somehow cut in half. My aim was to imagine that I was starting from scratch and that I had 37 equities to rank from 1 to 37 and place them into tiers. In essence, I was playing a game of dodge ball, and I was lucky enough to have all of the draft picks.
To be clear, I have a longer-term time horizon. I am 37 years old currently so time is still hopefully on my side, and even in the rosiest of total return scenarios, I will be working a 9 to 5 at a bare minimum into my late 40s, so I have ranked my equities as if I were going into a coma for five years to assess my willingness and stomach to hold these equities for the long term, untouched.
Below is a list of my 37 equity holdings that I will be placing into tiers:
I built my equity portfolio over the course of 25 years (yes, I started investing at age 12... seriously!), and I regularly monitor and tinker my portfolio, so I do not believe I am invested in any truly horrible companies, although GE and IBM will receive some blowback in the comments sections I am sure. I do hold a few companies with some problems and a few turnaround specials, so I was curious to see how I objectively ranked them.
I also was worried about over-diversification as I have always been hesitant to over-concentrate my portfolio into any specific sector, so my rankings will not take diversification into account, but instead will focus on what companies I truly feel will provide the right mix of total return growth, safety and sustainability over a long-term horizon.
Without further ado, my tiers are as follows (yes, these are in order):
Tier 1: Over my dead body!
- Corning (GLW)
- Nutrien, Inc (NTR)
- Apple, Inc (AAPL)
- Alibaba Group (BABA)
- Tencent Holdings, Ltd. (OTCPK:TCEHY)
- Dominion Energy, Inc. (D)
- The Walt Disney Co. (DIS)
- Alphabet, Inc. (GOOGL)
- Johnson & Johnson (JNJ)
My tier 1 stocks comprise companies that I may never sell and would be very comfortable holding for 5+ years untouched and unseen, each of these companies have strong fundamentals, growth opportunities and are part of long-term mega trends. These nine stocks alone would make a fantastic, albeit tech concentrated standalone portfolio for any long-term investor. These nine equities will not leave my portfolio barring a court order and multiple failed appeals.
Yes, a few of these stocks will be quite volatile; however, I am very comfortable that this tier five years out will be well ahead of where they are now. Frankly, I was shocked how easy it was to determine my all star team along with surprising myself a bit with my own risk tolerance.
Tier 2: Awe hell naw!!
- Microsoft Corp (MSFT)
- Facebook, Inc. (FB)
- AT&T inc. (T)
- Unilever PLC (UL)
- ABB Ltd. (ABB)
- Philip Morris International Inc. (PM)
- Lowe's Companies, Inc. (LOW)
- United Technologies Corp. (UTX)
- Wells Fargo & Company (WFC)
- Kinder Morgan, Inc. (KMI)
I will have a VERY, very hard time ever selling my tier 2 stocks. These stocks provide a healthy amount of growth along with some solid and growing dividends. This tier will also make a fine stand-alone portfolio that I will have no issues holding whilst slipping into a relaxing coma for five years.
Tier 2 presented more of a challenge as a few of these companies bounced back and forth between tier 3 a few times.
If I was forced to split my portfolio roughly in half, tier 1 and tier 2 would be my choices to go forward with to rebuild out of the wreckage and forward into the future.
Tier 3: Don't make me do it...
- Cheniere Energy, Inc. (LNG)
- The Coca-Cola Company (KO)
- Diageo PLC (DEO)
- International Business Machines (IBM)
- The Southern Company (SO)
- General Mills, Inc. (GIS)
- Tractor Supply Company (TSCO)
- Celgene Corp. (CELG)
- Verizon Communications (VZ)
Tier 3 is where I had some serious issues as I would truly have a hard time selling any of these; however, if it absolutely HAD to be done, I could pull the trigger... but man it would hurt. These in my opinion are solid companies with attractive total return potential; however, some are a bit richly valued, Diageo and Coca-Cola for example, or are executing turnarounds, IBM and General Mills specifically. I do plan to hold Celgene until the merger with Bristol-Myers Squibb (BMY) and then will be selling the 50% position in Bristol-Myers Squibb received upon completion.
The difference between tier 2 and tier 3 in my mind is very small; however, if there was a gun to my head, these would be on the sell block.
Tier 4: Fine... Just go!
- Union Pacific Corp. (UNP)
- Starbucks Corp. (SBUX)
- Citigroup Inc. (C)
- General Electric (GE)
- Qualcomm Inc. (QCOM)
- Marathon Oil Corp (MRO)
- Barrick Gold Corp. (GOLD)
- Gilead Sciences, Inc. (GILD)
- Bayer Aktiengesellschaft (OTCPK:BAYRY)
Tier 4 was not really that hard for me. A few may be surprised by a couple of these, and I will touch on each of them.
Union Pacific has been a huge winner for me, up 65%, since my purchase, and in my mind, we are reaching or have reached the top of the rail cycle. It's time to cash out. Cyclical stocks like rails tend to go through massive up-trends and then under-perform for long periods, and I am content to book my gains on this company.
Starbucks is in my opinion very richly valued. I am up 50% with my position, and frankly I do not like its coffee. I loved Starbucks stock at $50, but up here I am content to sell as I see a long-term consolidation for the stock to reach more reasonable valuations.
Citigroup to me was a tough call, and if left up to me, I would continue to hold as I believe financials will do very well over the medium term, and it has straightened its act up a bit. However, I vastly favor Wells Fargo in this area over Citigroup.
General Electric: I am still somehow a believer. I am down roughly 40% in this position and was very early in my purchase; however, the turnaround plan is solid and the assets are there, so if left up to me, I would continue to hold this position.
Qualcomm is in a tough spot as the licensing business looks to be forever changed going forward; however, 5G should be a huge catalyst for the company going forward. This is another one that if left to my own devices, I would continue to hold.
Marathon Oil: I have been trying to get out of this stock now for over a year. The company and its assets are great; however, I am just not a believer in the long-term, stable profitability of the oil exploration industry. It has turned into a cyclical yo-yo with shorter and shorter cycles. I want to sell this above $20 and not look back. I missed my opportunity to sell in 2018 at $21 and will not miss another.
Barrick Gold: I originally purchased Randgold simply for gold exposure to my portfolio and have done ok with the holding, up 15%; however, gold miners have been pretty terrible, long-term investments, and I am thinking my principal can be better utilized here. I liked Randgold better as a stand-alone investment than the combination with Barrick. I may hold on to this one for a bit to see how any synergies play out with the merger, but this is not a likely long-term holding for me.
Gilead Sciences: I am down slightly on this position and simply do not see any immediate catalysts here. The dividend is ok; however, I was waiting for a NASH breakthrough, and so far I have received a whole lot of nothing. The balance sheet is good however, and if left to me, I would hold a bit longer, but my patience is wearing thin, and capital could likely be used better elsewhere as well.
Bayer: This company has been a huge disappointment to me, as I do not think many people expected the roundup issues to be taken quite as seriously in the courts as they have. I still think this company has a ton of long-term potential, and it has been massively oversold; however, if forced into choosing upon a court order, this one would likely be my first sale as the hangover from roundup and the Monsanto acquisition will be here for years to come, along with the fact that I could harvest some substantial losses for tax season.
So, what happened!
The short answer is that the prenuptial agreement eventually did what it was supposed to do, and my wife and I reached a final agreement in court ordered mediation that was fair to us both, and my portfolio was left intact. I am now attempting to rebuild and emotionally process the last year of my life while wishing my wife nothing but the best in hers going forward.
I am bound and determined to come through this process a smarter and better over all human being, emerging from this chapter of life as a beautiful butterfly would from his cocoon.
Although I did not have to act on my template for splitting assets, this portfolio's self-reflection has not been at all a waste of time or energy. As a result of this exercise, I have decided to part ways with Starbucks and Union Pacific, along with trimming a few positions in my tier 4 positions to use the proceeds to rebalance my portfolio and add to my positions in tiers 1 and 2. I continuing to look for an exit to my Marathon position, and I hate to admit it, but I will also be adding to my General Electric position yet again. I just can't admit defeat on this stock, and am fully aware that at this point, it is pretty much fully an emotional holding (I am allowed to have 1).
I have also come to realize that some of my individual equity holdings are held for diversification reasons and not purely fundamental reasons. My tier 4 holdings and even some of my tier 3 are a fine example of this. Having a clear understanding of why I am holding these will allow me to make better decisions going forward to rebalance my portfolio toward purely fundamental analysis, which I intend to do throughout 2019.
I have gained a new confidence in my portfolio during this process, and whether I over- or under-perform the market in the coming years, I can surely say that I did my job and my due diligence.
I sincerely hope that you are able to objectively look at your own portfolios on your own terms to determine the reasons behind holding what is in your portfolio. I am planning to perform this exercise in full once a year with a clean slate to re-rank and re-examine my confidence in my holdings. Hopefully without the divorce lawyers hounding me to do it in only eight hours next time.
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Disclosure: I am/we are long ALL STOCKS MENTIONED EXCEPT BMY. 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.