I've been writing on Seeking Alpha for 8 months now, yet I haven't showcased my personal investing strategy. I recently got inspired by Three Wood Capital's article and want to talk about my portfolio and underlying portfolio as well.
I am a 23-year-old recent graduate in Business Informatics (a mix between computer science and economics), working as a software developer and author on Seeking Alpha based in southern Germany. I aim to build my financial freedom in my young years through long-term-oriented investing in compounding machines that let me sleep well at night. In my first year of investing, I went through a bunch of different strategies, until I found what works for me. Investing is a very personal journey, so what works for me might not work for you. I try to do a buy and hold and check strategy: I hold companies for the long term, but I do check on them frequently and sell if the thesis is not intact anymore. I want to try and keep my stock turnover at less than 20% of my positions per year and I am trying to concentrate my portfolio around 15-20 positions (16 currently) that I know well.
I try to buy companies from three/four different categories:
The main focus of my portfolio is on what I consider to be great capital allocators. I got heavily influenced by Chris Mayer's "100 Baggers: Stocks That Return 100-to-1 and How to Find Them" and William Thorndike's "The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success". Both books talk a lot about the importance of good capital allocation and how it can turn a mediocre stock into a great one.
Capital allocation is what happens with cash generated by the business. Ideally, we want to own asset-light businesses that do not need to put a lot of capital into running the day-to-day operations of the company. This leaves us with excess cash that management can allocate in six different ways (in order of importance):
A proxy to track management's capital allocation is the returns on invested capital a company generates. This should exceed its weighted average cost of capital and ideally consistently be above 15%. Buybacks are good indicators of the capital allocation capabilities of a management team. Below we can see an example of opportunistic buybacks from Zebra Technologies (ZBRA). We can see that the company bought back shares during the Covid crash and then did nothing for 2 years while the stock ran hot. After the price came down back to normal levels the company started to repurchase shares again.
Another important part of my strategy is trying to buy companies with good insider ownership, ideally run by the founder. So-called owner-operators often showcase more prudent capital allocation, because their own wealth is at stake as well. Capital allocation is often noticeable in earnings calls and conferences. I try to listen to how management talks, are they talking about cash flows or simply growing the revenue? Are they prudent with diluting shareholders?
At the end of the day, cash flows are what matter. That is why I look for companies that can grow their free cash flows (FCF) per share consistently and trade at a reasonable FCF yield. Below you can see the FCF yields of my portfolio companies. I try to buy companies around a 3-4% yield, but I am fine buying lower or higher if the growth rate is accordingly. We can also see that Amazon (AMZN) currently has a negative FCF yield. This is due to heavy reinvestment into the business over the last 12 months over $65 billion. I expect Amazon to produce plenty of FCF again soon.
Much like dividend investors often track their dividend income for each stock, I'm tracking the Free Cash Flow my stocks generate for me every year (keep in mind that I applied a random multiplier to the FCF number, as I do not disclose my total portfolio value). The analogy isn't perfect, because after all not all FCF is equal, unlike dividend payments. FCF used in bad acquisitions or expensive buybacks should be viewed very differently than FCF allocated by capable management teams. Tracking FCF massively helps me to stay motivated, because it makes investing more tangible and detaches the company from the stock price. I can only recommend any investor to do something similar that keeps them motivated to keep going, even in tough times like these.
Below you can see my current portfolio, concentrated in 17 companies. I intend to hold all of these companies for many years, but I will always check up on them. Companies should prove themselves to you and show you why it's worth keeping your money invested in them. You can also see a picture of my portfolio composition by segment, which I'll talk about in the next segments and by region. I'll quickly mention every company and what they do (beginning with the highest weighting in each segment) and link my most recent article about them if I cover them on Seeking Alpha.
My largest segment is the so-called "Great Capital Allocators" segment. This bucket consists predominantly of Serial Acquirers from different niches. I am a big fan of serial acquirers that consolidate an industry. These companies need to have great management because acquisitions can destroy a lot of value if done poorly:
My second largest segment is Tech Leaders. I will not go over all of them in detail, because most of them are very well-known companies like Amazon, Microsoft (MSFT), Alphabet (GOOG)(GOOGL) and Salesforce (CRM)(most recent article). I do have some less known tech leaders like Veeva Systems (VEEV), which is the dominating operating system and enterprise software provider with a great founder in the life sciences industry and ASML (ASML), which has a large technology moat with its EUV lithography machines, the most vital part of the semiconductor manufacturing process with a true monopoly. These companies have established a wide and expanding moat and keep creating new growth opportunities in adjacent business segments.
My last segment with current investments is (unprofitable) High growth companies. These companies do not share the same high-quality characteristics that the other two segments share, but are operating in promising niches as the leader with lots of runway for growth and margin expansion. All of my growth stocks need to have high insider ownership, I learned that lesson with my failed investment in Teladoc (TDOC). These are my high-growth stocks:
I currently don't have any stock in my trades section, but this section is reserved for more short-term-oriented investments that I do not intend to hold for a decade. I normally don't do these kinds of investments, but I recently tried it with Prosus (OTCPK:PROSY), which went really well. This segment shouldn't exceed 5% of my portfolio.
I hope you got some inspiration from my strategy and portfolio. I'd love to hear your feedback and how you structure your own portfolio. Do you disagree with any of my approaches? Let me know in the comments below.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of AMZN, GOOG, DHR, MSFT, WSO, RICK, SDMHF, MELI, FVRR, SPOT, ASML, CNSWF either through stock ownership, options, or other derivatives. 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: What do you think about my portfolio strategy? Does it overlap with yours or where do we stray apart? Let's continue the discussion in the comments. This is not financial advice.