In this episode of Industry Focus: Tech, Dylan Lewis and Joey Solitro answer a handful of listener questions. With so many great stocks to choose from, how can investors narrow down their watch lists? Joey and Dylan share tips for whittling down your list and how to choose between a handful of companies for your portfolio. On the other hand, if someone owns a lot of companies like Apple, Amazon, and PayPal, is there any reason to buy ETFs that are heavily weighted in those companies, as so many ETFs are? And how does trading on margin work, and what should investors watch out for when they do it? Tune in to learn more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Jan. 3, 2020.

Dylan Lewis: Today's January 3rd, and we are dipping into the mailbag. I'm your host Dylan Lewis, and I'm joined by Joey Solitro. Joey, happy 2020, man!

Joey Solitro: 2020 is here. My son is due any day now, so I've got my phone on the desktop waiting for that to ring saying the water's broke. It's going to be a dicey 2020.

Lewis: I had to get you into the studio before you were taking paternity leave. [laughs] I had to take advantage of you actually being in here at HQ. Obviously, you're going to have a pretty busy 2020. Your son is not your first child. You have a couple more. So, you're going to have a crowded house.

Solitro: Yes, this is No. 3. Already had to up my wife's car, got rid of my car and got a minivan. Definitely a minivan household now. All the rooms are maxed out, so this has to be the last one, or the expenses are going to mount even more.

Lewis: With all this stuff going on, did you even clear the plate for a New Year's resolution? Or were you like, "No, there's too much going on"?

Solitro: The new year's resolution I'm going with -- my knee is finally healthy to get back into CrossFit, so I'm going to be hitting that hard, get back into that kind of shape that I was in before. But other than that, raise another kid to be healthy, smart, and not a brat.

Lewis: It's laughable for me to hear you say "get back in shape," because Joey is one of the most fit people at The Motley Fool. So if you have work to do, I certainly have work to do.

Austin, our man behind the glass, what's your New Year's resolution?

Austin Morgan: This year in 2020, I have a wedding that I have to participate in pretty heavily, actually.

Lewis: [laughs] Yeah, you're in it. You're getting married.

Morgan: [laughs] So I have to drop a couple pounds to look better. [laughs] 

Lewis: It's one of the most common resolutions for a reason.

Morgan: It definitely is. Joey, with that healthy knee, we're going to have to get you out on the good old diamond.

Solitro: Let's do it.

Lewis: I feel like you guys can help each other out with your resolutions. Joey can make some things happen in the gym, you can make some things happen on the baseball field. Seems like a win-win all around.

Solitro: Symbiotic relationship.

Lewis: There you go. For me, I'm going to try to focus on cutting down on the grocery bills. This was my resolution last year, and I didn't do a good job because I didn't track it. So this year, I'm tracking my receipts from Giant, and I'm looking at what's left over in the fridge. Basically going to be like, "This is the money I'm wasting by the stuff I'm not using." Try to cut that bill down, because that's actually one of the biggest ways that people waste money.

Solitro: You know what you need to find? Find you a Lidl.

Morgan: One opened right next to my house.

Solitro: Greatest store ever. If you go from Giant to Lidl, the prices -- I mean, I told you about my egg incident, where I started buying everything, I thought it was a fire sale. The prices there, it's ridiculous. It's amazing. They're so cheap. It's almost impossible to spend $100 there, and I've got a family of four and a pregnant wife, so technically five. It's an amazing store, and you will cut that grocery bill down quick.

Lewis: All right, there's my hot tip. Listeners, if you have any tips for how I can save money on groceries, or how Joey can get back in the gym with a nicely repaired knee, or tips for Austin losing weight, write in to the show, We love hearing stuff from our listeners, so much so that we're going to focus on notes from our listeners for today's show. This is a mailbag episode. One of my favorite types of shows for us to do.

I'm just going to jump right into this first question. Eric wrote in to the show and said, "Hey guys and gals. As a listener to all The Motley Fool podcasts and a consumer of other financial media, I'm pelted with multiple stock pitches every day. The analysts at The Fool do a great job selling me on their research and getting me excited about the companies they follow. That being said, as a working-class guy, I don't have unlimited funds to invest. I generally follow the buy and hold strategy, so I'm only really buying with new money, not existing invested assets."

He goes on to say he has his 401(k) contributions, but he's usually only making a stock purchase every couple months, at which point his watch list is huge, because he's heard so many ideas from the podcast, from us, and other sources. So, Eric asks, "I would love some sort of defined process for how to winnow down the herd of ideas until there's only one left standing a la Highlander or Hunger Games." Love that.

Joey, let's talk a little bit about how you can take all of the noise of financial media, all the stock ideas, even stuff from us -- we talk about so many different companies on a daily and weekly basis -- and work that into something that's digestible and actionable for investors.

Solitro: I actually faced this issue with my friend Jason this morning. He was rebalancing his portfolio, and he was adding some cash, and he was asking, "What are some stocks I should buy?" And I asked him, "What are your interests?" And one of his largest holdings is MercadoLibre. He's like, "Well, I was thinking about adding Tesla to the portfolio, but I might want to add to MercadoLibre."

So I told him, basically, do like he said in this question, Hunger Games style. If you've got Tesla and MercadoLibre, look at the growth rates and think 10 years out, which of these companies could double or go up 10X? E-commerce in its infancy in Latin America. MercadoLibre has grown revenues, what, 90% in its most recent quarter. Yes, Tesla has hit their delivery numbers, up 50% year over year, they announced this morning. But then I think, OK, auto industry, very cyclical. A lot could go wrong there, we know. Elon Musk has been much better about managing his antics on Twitter and everything. 

Lewis: His personal antics.

Solitro: But then I see that this is a car company that just hit an $80 billion market cap. So when I'm looking, could this 10X in 10 years? I think that's a huge stretch. But I'm looking at MercadoLibre, e-commerce, payments, everything in Latin America, it's around a $30 billion market cap. I could easily see that growing to $30 billion in the next 10 years. So, pitting the stocks against each other.

Like you said, you've got this watch list that grows in names. I do the same thing, where my watch list might get to 5, 10 names. But I just pick my favorite idea, and if I can't decide between two, then you can always buy both. But with our stock picks, if you're subscribed to multiple services, yeah, you're getting pelted with several picks a month. I'd always do that Hunger Games style, compare them, pick your absolute favorite. And then, if you did have a second that might be a distant second, come back around next time you add some contributions. But don't feel inclined to buy everything.

Lewis: Yeah, I think that there are a couple of helpful ways that you can filter down a little bit to get to the point where you're looking apples to apples. You were talking about Tesla and MercadoLibre there. Those are two growth stocks. Those are big growth stories. So I think the first question a lot of people should ask themselves is, what's the mission statement for my portfolio? Companies have mission statements. I think it's OK for you to have that same approach when you're investing, because there are some people that want growth, and they're looking, how can I 10X this portfolio over the next decade, or two decades? There are other people who just want to protect their wealth, and they're really looking for nice, stable growth. It can be low, and they're happy to own dividend payers. Understanding what you want out of your money is going to determine the types of companies that you want to invest in.

Solitro: Yeah, absolutely. The other thing you could do is, basically building on what you just said, if you've got existing holdings to where, say you already own Amazon, Alibaba, and eBay, or something like that, looking at a MercadoLibre. Maybe it doesn't fit. Like, you've got a lot of exposure to e-commerce; it is international.

Or say you're looking at Tesla; you already own Ford and GM, or something like that. First off, you've got some diversification issues. But you can always find, "OK, I needed some exposure to Latin America, so it makes sense to have a MercadoLibre." If you look at your portfolio and think, "OK, I've got a lot of hyper growth, maybe I do need that steady growth with the dividend, like a Verizon or something like that." So, yeah, always knowing what you own, and then deciding where your mindset's at. What stock would make the most sense to add to your portfolio today? Then revisit your watch list, and one might stick out more than the others.

Lewis: I think it's also important to keep in mind, understanding the circle of competence. This is something I'm stealing from Warren Buffett. The idea is, you have this sphere that you understand well. The size of that sphere does not matter that much, but understanding its boundaries is super important.

So, I think if you are looking for stocks that fit what you want, either growth or income, stability-wise, and then you're also thinking about, "What are the industries I understand?" If you use those two filtering techniques, you're probably going to get down to a list that you can really then start doing that side-by-side comparison, like you're doing with MercadoLibre and Tesla.

You can say, "These are two high-growth companies. Here are their growth rates. Here's their current profitability. This is roughly what I think the total addressable market might look like." On the flip side, with income stocks, looking at their payout ratio, looking at whether they're growing their net income and their revenue enough to support the dividend that they're paying, and looking at the yield and all those types of things.

So, I think with a couple quick filters, you can get down to that apples-to-apples comparison. At a certain point, you have to just buy something, start small, and keep tabs on it as well. It's unfortunate that it's a zero-sum game when you're working with limited amounts of money. But if you're always adding, there's always the opportunity to pick up more.

Solitro: Yeah, and with commissions now being zero across all the major platforms, you could always buy small positions in every stock on your watch list and then slowly grow those over time. Like you said, you could have your favorite ones. You could own small portions. And if you have limited funds, then slowly grow those. Or maybe then you'll figure out, "You know what? I do like this one company more." Then you sell the rest and put everything into that one.

Lewis: Yeah. We have fractional shares becoming more and more available. There are specific platforms out there that allow you to create your own mutual fund. You can pick a basket of stocks and then buy into that basket. There are ways around this kind of thing. But I think at core, what our listener here is really looking for is, how do you filter down? You have to create your own mindset and your own schema for doing that.

I will say, I don't know that anyone at the Fool is better at this than David Gardner. You listen to his podcast, or if you're a Rule Breakers member, you've probably seen this in the write-ups for the stocks they recommend -- there's very organized thought. There's nothing wrong with looking at some of how our premium analysts break things down with these stock recommendations they provide, and stealing that and using that as your own framework for looking at companies.

Solitro: Yeah. One of the analysts I look at a lot, not even here the Fool, Brian Feroldi on Twitter. He'll post a lot on there, @brianferoldi. He has his strict checklist, and he goes down, and he'll rank his stocks. So, if you've got your watch list, that's actually a great idea. If you've got your watch list of five companies, create your own checklist, or steal Brian's. He'll be the first one to tell you how it works and how to score it on your own. Run down that checklist. You might have one that scores much higher than the rest that, it's your go-to.

Lewis: Yeah, and we've had him on the show to walk through that exact breakdown before. I think it's eight steps or nine steps or something like that. And it's really excellent to have that organized thought.

Solitro: I definitely say, my investing man-crush, @brianferoldi. Not afraid to admit it.

Lewis: [laughs] He's such a great dude.

All right, our second question. We have listener Ben writing in. Ben asks, "Hey, guys, can you please talk about whether or not it makes sense to use margin with long-term positions? Thanks."

I was going to have you on the show either way, Joey, but then I saw this question, and I was like, "Well, I need to have Joey on the show now because he's going to do a much better job giving the pro-margin argument than I will."

Solitro: This got me excited. I'm not afraid to admit it, I use margin quite a bit. I've got a significant amount on margin right now. But I never exceed more than 15% of my total funds. You don't want to get too deep into margin where you're leveraging 50%, because if it drops too much, you're out of money.

Lewis: Let's talk a little bit about the mechanics with margin, and what it is and how it works, first.

Solitro: Margin is basically, you're borrowing money from your broker to invest. Say you've got $100,000 in your account, and you're approved for margin trading. It might be dollar for dollar, where you can invest $200,000, or it could be $0.50 on the dollar, where you're able to leverage an extra $0.50. The reason you might want to do this is because it can increase your returns over time. Say you've got $150,000 invested; 30% return, then you pay down that margin, you've got more significant returns, even though it's not what you have in your actual account. But you borrowed it.

Lewis: It's the same idea with leverage in real estate. You have the down payment, and you have interest payments that you're making. But if you sell the house for more than you bought it for before the full mortgage is up, you're probably enjoying some leverage.

Solitro: Yes, that's exactly what you can look at margin as. I'll lead off with, if you're going to use margin, you're approved -- of course, you have to apply for it, and your broker has to approve it -- the next step is, you want to call and get that margin rate down. Interactive Brokers has it at the lowest rate. It's right around 3%. But TD Ameritrade, Charles Schwab, those other guys -- it'll be upwards of 8%, 9%. You don't want to be borrowing money. That's almost like having high-interest credit card debt. That's not something you want to do. So first off, you want to get that margin rate down significantly. And you can call by basically saying, "Hey, I'm going to move my account to Interactive Brokers unless you can do that." I literally did that before we came on the show. 

Lewis: It was great -- we listened to the whole thing. [laughs]

Solitro: So, my margin rate, I think the flat line, it's like 8.75% on TD. Mine was right around 4%. And I said, "Hey, Interactive is at 3.06%. I need that, or I'm going to move my assets over there."

Lewis: Like a lot of things, we talk about being an advocate for yourself when it comes to dealing with big firms. I think this is a good example of that. If you are working in margin, the rate can crush your ability to do anything. This is something where you're arbitraging the cost of borrowing versus what you think you'd be able to get with returns. If the cost of borrowing is 8%, well, you're getting pretty darn close to annualized stock market returns right there.

Solitro: Exactly. Having it down below 5%, that makes more sense. If you're borrowing 8% and you invest $10,000, you have to know, you have to return 8% on this, or we're going to be breakeven at the end of the year. That's a bit much. I'm aiming for stocks that return significantly more, so 8% is something I could do if I had to, but you never want to pay more than you really need to. So that's another thing. Just call your broker, get that down significantly. Say, "Hey, I heard a podcast. The guy's paying around 3.5%," and they'll get it down.

Next off is, if I'm going to use margin, it's because a stock's at a level that it's irresistible. It's like, say you have a budget of $50 at your store, and you pass one of your favorite shirts, and it's usually $30, it's $10. You can't resist. That's when I'm looking at these stocks. Like, this is so cheap or so undervalued, so misunderstood, that I can't pass this up right now. I ran through some of the recent trades before we jumped on the podcast. Say you've got your watch list of five companies. Of course, all your capital is allocated to other positions, but one of those that scored highest on your checklist, it drops to a level that you think, "I can't pass up on this." That's when I would use margin.

And I've done that a lot lately. I do that a lot during sell-offs. December of 2018, during the market bloodbath, is when I leveraged my margin quite a bit. It's basically a way to maximize your returns, but you always have to eventually pay that back. The best situation for this is, say you've got excess income, where you might be able to add $2,000 or $3,000 to your account each month. If you use $10,000 or $20,000 on margin, knowing, "Hey, I can pay this back in five months and only pay 3.5% on it," it makes sense if you think that stock can return 25%, 50% in the near term. You always want to take calculated risks and know what you're doing.

The other thing I would say is, I'm looking at the market every day. This is what I do for a living. But, say you drive for UPS, you're on the road all day, you can't look at your phone, you can't look at your account -- you probably shouldn't be leveraging margin too much, because you've got to know what's going on at all times.

Lewis: Yeah, this is something that's truly for sophisticated folks. You really need to both know what you're doing and be able to pay attention to it.

Solitro: Yes. I'm far from sophisticated, but...

Lewis: [laughs] I think in the investing sense, you're sophisticated, Joey. And for my money's worth, I am someone who avoids margin simply because of the complexity of it and the attentiveness that it requires. I am the long-term, buy-and-hold approach, very rarely in and out of stuff. I like the peace of mind that comes with that. I enjoy just being able to buy stuff and then see those dips as buying opportunities. I don't think I can handle the anxiety of working on margin and possibly being in debt, especially for something that could continue to dip. So, that's something that I have sidestepped. And I think for a lot of newer or even moderately experienced investors, it's OK to stay away from it.

Solitro: Definitely. This is something where, if you're doing this daily, or you're able to stay in front of your computer all day, and you know the risks associated with it, you know these companies well enough to do it, then by all means, I'd bless it. But if you don't really know what you're doing -- and I'm the first one to admit, I don't know a lot of things. If my daughter doesn't know a certain dance move, I'm not going to watch it on YouTube and say, "Oh, this is how it's done." I don't have that kind of technique. When it comes to investing, I know what I'm doing here. I'm OK with doing it here. But if someone says, "Hey, a dancer broke their leg, can you fill in?" "Oh, yeah, I got this." No, I don't. I know what I'm good at, so I'll stick with that. But take a step back and think, "OK, am I good enough at what I do? Am I serious about investing? Am I OK with the risks that come with it? Can I pay this back in a respectable period of time?"

Lewis: Yeah, you have to be aware of the risks. There are some true horror stories of people being a little over-levered when it comes to margin. We'll drop it in the show notes so that people can see exactly how catastrophic things can get. But like most things with debt, there is a serious downside there, too. Buyer beware.

All right, Joey. We have one more question here. This one's from Jordan. Jordan writes in, "Hey, Industry Focus! I wanted to know your thoughts on something I've been pondering. My 10 largest positions are Microsoft, Disney, Amazon, Alphabet, MasterCard, Shopify, Visa, Apple, PayPal and Facebook. But I've been thinking about diversifying more with some Vanguard ETFs. But I see that many of the heavyweight stocks that I own are already a large portion of these ETFs. Should I add to my top guns winners? Or do you think the ETFs are a good addition to my portfolio? I'm 23 and just got into investing this past year and appreciate what you guys do on a daily basis."

I love this question.

Solitro: Wow. First off, bravo, because that is a beautiful, beautiful mix of stocks.

Lewis: Yeah. Beautiful mix of stocks. Jordan's 23 and has already started investing -- that's awesome. I think the real reason that I love this question, though, is Jordan did the due diligence on looking at these ETFs. Jordan named a couple specifically, but we didn't get into it when I read the question. But most people will blindly buy ETFs or mutual funds because they're like, "Oh, it's instant diversification." They'll look at the returns, they'll look at the expense ratio, maybe the yield, and will just throw stuff in there. What Jordan did here is say, "Oh, actually, I'm not getting all that much more diversified by owning these ETFs." You need to dig into that stuff.

Solitro: I had this exact issue. I've got some friends that are teachers, and they have their retirement plans, and they're looking at these ETFs or these funds. And, yeah, if you look at the mix of these, chances are they're going to be heavy-weighted into Microsoft, and Apple, and MasterCard, and these heavyweights. Especially Apple. That's in every big ETF you look at, because it's a dividend payer, it's technically value, its growth -- it's everything. Definitely, this is something that everybody could learn from. If you're going to buy these ETFs, look what's in there, especially these diversified growth or value or international. Chances are, they're going to overlap quite a bit.

Now, if there's an ETF that's more like biotech, and you don't own any biotech, that would make more sense. But I really do like that you did your research. I would say, with that mix of stocks you've got, I would continue to add to those. You don't need ETFs, because clearly, you are intelligent, and you're very young, so you don't need ETFs. I'd keep going with these individual stocks. Man, that is a beautiful mix.

Lewis: That's a great basket right there. Yeah, to your point, a 23-year-old has a pretty long time horizon to be working with. The way that I generally approach diversification with ETFs and mutual funds and buying individual stocks is, my 401(k) and my Roth IRA I have in mutual. They're index funds and they are broad based, they're well diversified. My brokerage account where I own individual stocks is where I'm owning my individual stocks. That's a little bit more of my fun play stuff, because I know that I'm going to have market-matching returns with my 401(k) and with my Roth IRA. So I would say to Jordan, if you're in a position where you have retirement accounts or some other money set into mutual funds and ETFs, then stick with the winning stocks. You're picking winners. The whole point of buying individual stocks is, you're able to separate the wheat from the chaff and invest in the good stuff. That's clearly what Jordan has done here with this lineup of stocks.

Now, if Jordan doesn't have any of those types of accounts already set up, it's something to consider, especially if there's a 401(k) available at work with an employer match or something like that. Otherwise, yeah, maybe start thinking about some ETFs and mutual funds.

Solitro: Yeah, you've got growth and value right here. I would continue to add these. If anything, add some more great stocks like these into your mix. But you've created your own growth/value ETF. This is the Jordan ETF. I'd continue to build your own. I have a self-directed 401(k) because ETFs and mutual funds make me sick. So, I always own individual stocks.

Now, the only way I would do this -- say you don't have any biotech in here, and say it's not your strong suit. I'll be the first to admit, biotech is just not my strong suit. It's a guessing game to me. So, if I felt the need to own a biotech, then yeah, the IBB biotech ETF, or something like that. But with the stocks that you've got, depending on how long you've had them, I'd continue to grow these or just mix in some other great names like these, and make that Jordan ETF.

Lewis: [laughs] The Jordan ETF. Watch out, Jason Moser, with your basket of stocks. Jordan's coming for you. Also, to circle back to what we were talking about before, the idea of diversification for diversification's sake isn't great. Going back to the idea of your sphere of competence and what you understand, buying biotech so that you have exposure to biotech, you can do it, but at the end of the day, you're not going to know whether any of those companies are actually doing what they're supposed to be doing and that they're on track to provide good returns for you. So I say, if you want to be diversified, buy something broad based like the S&P 500, then get a little bit more specific with the stocks that you own. Don't necessarily hop into an industry-specific ETF just because you feel like you need to get access to that stuff.

Solitro: I always throw it back to my investing coach, Young Jeezy. He stated very clearly, "Scared money don't make no money." So, own great individual stocks. Go for growth, especially when you're 23. You've got a long, long way to go in your investing career. You've got a long time to lose everything and still retire very wealthy. And you're not going to lose anything with these stocks.

Lewis: No, not with those companies. None of these companies are going anywhere.

Solitro: You've got a very good taste. Keep building that. Keep doing your Young Jeezy, Jordan. You've got this.

Lewis: [laughs] All right, before we wrap, I have another iTunes review. I mentioned earlier that if folks leave us a five-star review, we will be reading those, especially if they have questions in them, on the show. This one comes from Sand. "I listen every day. Episodes are always informative and upbeat, with just enough chatting about life to make them personable, along with the content." I feel like we're striking a nice balance there, Joey.

Solitro: We're hitting that out of the park today.

Lewis: "All the hosts are great, and I appreciate that they are responsive to reader requests." And here we are, doing that again. Look at that.

Solitro: Two for two.

Lewis: "My only idea for improvement would be to have a few more women regulars, but I wouldn't be surprised if they are already looking. I think it would encourage more women to invest. Thanks for all you do. Happy female Fool since 2001."

This is absolutely right. We are doing our best to make sure that our audio/video programming, our services, represent all the faces and voices of the Fool. We are thrilled to have Emily Flippen on the lineup this year for Industry Focus. But one of our big initiatives in chatting with a lot of the people that handle the investing premium team is working more people into the rotation for podcasts, for video content, and making sure that all of our analysts are ready to hop on camera, because it's a great way to connect with our members. So expect more people to be hopping on the show in 2020 as we look to boost our bench of people that are audio- and video-ready.

Sand, perfectly valid criticism, and one that we're working on. Thank you for holding us accountable and making sure that we're continuing to get better and more inclusive.

Solitro: Absolutely. Thanks, Sand!

Lewis: Otherwise, I think that's going to wrap up today's show. Listeners, we would love to hear whatever your money resolutions are. Let us know over on Twitter @MFIndustryFocus. Or you can write in to the show if you have any questions that you want us to hit. Ideally, I would love to do this show once a month, Joey.

Solitro: This was a lot of fun, especially that lineup of questions. I remember, you Slacked it to me yesterday, I got excited. These are great. Let's keep them coming.

Lewis: These are our favorites. Write in, Or you can tweet us @MFIndustryFocus. We love hearing from you guys.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for all his work behind the glass today. For Joey Solitro, I'm Dylan Lewis. Thanks for listening, and Fool on!