My portfolio is almost entirely composed of exchange-traded funds (ETFs). While my husband enjoys investing in shares of individual companies, I prefer to play it safe and buy funds that provide instant diversification without requiring me to spend a lot of time analyzing companies.
This means I'm limiting my potential returns, since index funds generally won't outperform the market while companies selected wisely can do so regularly. I'm OK with that since I'm also minimizing my risk and more importantly, since I know myself and am well aware that spending time researching earnings reports and evaluating stock fundamentals isn't my cup of tea.
That doesn't mean I never pick stocks, though. And on the rare occasions when I've done so, it's usually paid off. In fact, two of the three stocks I've purchased in my limited investing career provided more than a 100% return. They were Visa (NYSE:V) and Redfin (NASDAQ:RDFN), both of which I purchased for the first time shortly after their initial public offerings (IPOs) and that I've increased my stake in over time. As of January 2021, I'm up on them 147% and 127%, respectively.
So how did I select these companies that performed so well for me, and is it a technique that can work for you?
Here's how I picked my ace performers
I decided to purchase Visa and Redfin for a simple reason: I used their products, and I thought they offered something unique it would be hard for competitors to replicate.
When Visa went public, all of the credit cards in my wallet were Visas. The company had tremendous name recognition, and their cards were widely accepted (unlike the Amex my then-boyfriend carried). And the company went public in the middle of the 2008 recession when I anticipated demand for consumer credit would increase, which Visa could benefit from without being directly damaged by greater defaults.
When Redfin went public in 2017, I'd been using the service to search for a home and found it easier to navigate and faster with updating listings than most competitors. I liked the way the site worked for searching for homes, and I also thought its business model was smart as I'd become increasingly convinced the standard 6% commission model wouldn't survive the age of the internet.
How to be smart with your stock picks
Based on this knowledge acquired from common sense and personal experience, I invested a few thousand dollars in each company. Now, this isn't necessarily the right way for everyone to buy stocks. In fact, as a general rule, you should have a solid investment thesis and do a lot more research than I did if you're going to routinely purchase shares of individual businesses.
However, it's also not necessarily wrong to put a little of your money into companies you like, even if you aren't ever going to spend the time necessary to become a skilled investor -- as long as a few caveats are met:
- First and foremost, you don't want to chase short-term profits as this is rarely a successful strategy, and it's even less likely to pay off if you aren't doing a lot of in-depth research. I purchased these stocks with plans to hold them for a long time, which reduced my risk.
- Second, you should be devoting only a small portion of your portfolio to buying individual shares if you're picking what to buy solely based on intuition and personal experience. You're taking much more of a gamble using this approach, which is why index funds make up 90% of my portfolio. I only buy stocks with money I can afford to lose without affecting my broader investment goals.
I'm a prime example of the type of investor whom Warren Buffett suggests should invest in index funds. I've mostly followed the Oracle of Omaha's advice and done just that. But, the bottom line is, I don't believe it has to be all or nothing, and I think sometimes it's OK to put a little money on the line when your experience suggests a company has potential even if you aren't interested in becoming an investing guru.
Personally, I'm happy I took the risk to buy shares of companies I believed in. I plan to continue doing it in cases where my experience as a consumer suggests a company is offering something special. I hope my next picks pay off just like my last two did.