Should You Take the "Basket Approach" to Investing in Tech Stocks?

Thanks to technology, large industries are being remade for the 21st century and growing at a rapid pace. Picking the right stock from a very large segment of the economy can be tough, though. That's where the "basket approach" comes into play. In this video from the Motley Fool Live program "The 5," recorded Sept. 16, Fool.com contributors Jason Hall, Clay Bruning, and Nicholas Rossolillo discuss this investment style.

Jason Hall: Richard O., this is good. I like what he's saying and I think it applies pretty broadly, he says, "Gotta love medical devices, basket approach, Intuitive Surgical, ShockWave Medical, DexCom" -- the huge winner in diabetes testing -- "InMode, Inari Medical" -- getting into some that are a little more up-and-comers -- "Stryker, Medtronic, Abbott Laboratories, riding the wave." Sometimes one of the great ways to invest is to find trends. We talked about the aging trend, talked about the middle-class trend internationally. For healthcare, it's a great opportunity. But I think for a lot of these cloud companies, that basket approach works really well, too, Clay.

Clay Bruning: This is how I operate in my portfolio rather than buying an ETF in a theme that I really like. I looked at that ETF or I do some research of those underlying names and I try to find the ones that I think has the highest probability of placing in terms of being one of those top two, top three players. I'm with you there, and I do that in multiple themes and multiple industries. Personally, it's the way I attack it so obviously I think it's a good way to go about.

Hall: Sometimes your biased and you are also right. That's OK. Nick, what are your thoughts here?

Rossolillo: Yes, I do the same thing as Clay does. Especially if it's a new company or a new industry that I'm not super familiar with, one of the first things I like to do is, see who they compete with, what's the competitive landscape look like? Oftentimes you find multiple companies that have these great growth stories. Rather than picking, which one is going to be the best growth story over the next two decades, the basket purchase, fantastic. It allows you some leeway because if a couple of them don't work out, you still have those few that are the real gems that maybe early on you couldn't tell which one was going to ultimately come out on top.

Hall: I think the important thing to remember here too, is that a lot of time as you see a big trend and there are a lot of moving parts to it. You think about the Cloud, for example, or just determine like SaaS. You might have 50 companies that do 45 different things and trying to pick one or two or 10 out of that group that are going to be the ones to perform best out of all of these companies benefiting from a larger, secular tailwind. Sometimes it's just like I call it the precision fallacy here. There's no bonus points for getting too cute and picking the perfect company. Sometimes you just want a margin of safety.

Rossolillo: Yes, absolutely. Especially if a movement like the Cloud, like you said, if it's that big, we're talking about hundreds of billions of dollars in incremental spending every year. For years to come there's not going to be just one winner. In fact, some of those companies that are going to ultimately be the biggest winners, they're still going to have their down-year. Taking the basket approach helps get you some more consistent growth year-in and year-out from these really massive secular growth trends.

Hall: Right. You can have individual companies that went in particular areas, so you might have like a Zscaler that's showing itself is like the dominance in zero-trust and the kind of area that they live in, but then a related area of Cloud security, you've got another big winner like CrowdStrike. They're not really going head-to-head on a lot of stuff. There's some overlap. But you find all the horses in all the races, and you bet broadly and you can do pretty well.