For beginning investors, deciding how to fill out your portfolio can be a dizzying experience. Should you buy into the stocks that all of the "experts" recommend, or focus on the highflying international sector you heard about at the water cooler? The sheer amount you have to learn can easily become overwhelming.
Today, I want to cover just two ways (out of thousands) to go about filling out your portfolio. These methods have worked for my fiancee and me; we are proud of our portfolios. They're not necessarily the "right" ways to pick your stocks; I just offer them as a starting point for your own stock-picking adventure.
1. The "Buffett Method"
Every year, Warren Buffett hosts his company's annual shareholder meeting in Omaha, Nebraska. Often dubbed the "Woodstock of Capitalism," the meeting offers us mere mortals a chance to glean whatever wisdom we can from Buffett and fellow company leader Charlie Munger.
It also offers shareholders the chance to buy products from the myriad of companies under Buffett's umbrella. Attendees can buy a new necklace at Borsheims Jewelry, upgrade their eating experience with The Pampered Chef, and fulfill their sweet tooth at See's Candies. The displays show what it means to be a long-term investor. Buffett doesn't just buy pieces of paper; he buys the companies they represent -- just as we should.
If you, dear Fool, were to have your own "annual meeting," what kind of products would be on display? I constantly ask myself this question, which has led me to buy market-thumping positions in several companies. My annual meeting would have something for everyone: a lululemon athletica (Nasdaq: LULU ) booth for the yoga enthusiasts, and movies streaming throughout, served up by Level 3 Communications. And if you brought your kids, no worries: You'll find a section run by toymaker Hasbro (Nasdaq: HAS ) .
This strategy offers a huge advantage from an information standpoint: It forces me to buy what I know. A good stock analyst will read just about everything the Internet can offer about a company -- but that doesn't mean that the analyst is actually out there, using the products.
My fellow yoga enthusiasts were instrumental in leading me to lululemon before its recent breakthrough. And when it comes to Hasbro, my nine-year-old cousins, who live nearby, will play a huge role in helping me to determine whether the company's "The Hub" TV channel is popular among kids. As rudimentary as it might seem, these insights help me gain an edge over any analysts spending all of their time in a cubicle.
Furthermore, this strategy helps me sleep better at night. I won't stand on a bully pulpit and tell you what moral investing should or shouldn't be, but I will say that you need to be comfortable owning the companies that you own.
Judging by metrics alone, Altria (NYSE: MO ) looks like an excellent dividend stock, with healthy cash flow and good returns on investment. But how would I feel if my future child took up smoking at an early age because cigarettes were readily available at my yearly meeting? Along the same lines, I view private prison outsourcer Geo Group (NYSE: GEO ) as a great hedge on municipalities trying to save money any way they can, especially on employees who might otherwise create long-term pension liabilities and other labor costs. But what would that display look like at my meeting? Give people a chance to sit in a prison cell? It just doesn't sit right with me. (And again, that's just me.)
Method No. 2: Would I like to work here?
My fiancee focuses on how companies treat their employees. She likes to see that workers are compensated fairly, receive benefits that help them meet their needs, have low rates of turnover, and are generally valued by their company in word and deed.
Using these criteria as general guidelines, she has filled her portfolio with market-beaters in their own right. She owns Starbucks (Nasdaq: SBUX ) because it continued to provide health-care insurance for employees despite its struggles during the economic downturn. And steel-producer Nucor (NYSE: NUE ) is in her portfolio, since the company's "pain-sharing" arrangement has reportedly ensured that no one gets laid off during tough economic times.
Again, this approach has a huge built-in advantage. Happy employees make for productive employees, especially those who do the grunt work for companies. Starbucks baristas or Nucor metalworkers who truly value their jobs will show it, and that effort pays dividends in the long run, for workers and investors alike.
At no time in recent history has this been more important than the past two years. Forced to tighten their belts, corporations began to ask their employees to do more with less. These companies could rely on a motivated workforce to squeeze out all the productivity they could for the company that had treated them so well. In fact, Starbucks has almost quadrupled from its lows two years ago.
What's your method?
As I've said from the beginning, there are a million different methods one can choose from when investing. The Motley Fool's Rising Stars series offers 16 more views on how to go about building your portfolio. Use the space below and let us know how you started out buying stocks.
If you're just getting started with your investing, learn the ropes with confidence. Follow the Fool's 13 Steps to Investing Foolishly and get a better grip on your investing today.
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