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Why a "Basket Approach" to Buying Stocks Is a Great Strategy

By Jon Quast and Sanmeet Deo – Nov 4, 2021 at 8:27AM

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Usually there's more than one winning investment in a space, so it makes sense to buy stock in more than one company.

There's no secret formula for creating a winning stock portfolio. Some investors have more time, more first-hand experience, and a knack for understanding business models. These people are probably more suited than most to have a smaller portfolio of stocks -- companies carefully selected for their merits. But other investors can still win by diversifying across several companies in the same industry. This is sometimes called the "basket approach" to investing.

In this video from Motley Fool Backstage Pass, recorded on Oct. 18, Fool analyst Sanmeet Deo and contributor Jon Quast talk about their own basket approaches. And when it comes to investing in video games, both would put Unity Software (U 6.25%) stock in their baskets. Here's why.

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Sanmeet Deo: Jon and I are actually a little newer to the gaming industry and we're learning as we go here, and so our idea is trying to learn with you guys when it comes to the gaming industry, new companies, what's happening, stocks that are interesting, and especially with some of these industries, and a approach that I take, and Jon I'd love to hear your feedback on it. This industry or any industry, if it's an industry, I don't know a deep amount on, but I'm very interested in it, I will start to try to learn about different companies, the industry in general, things like NPD data will give you a sense of trends in the industry and where they're going. But based on that, too, I like to maybe just take a basket approach because I'm not going to know all the winners.

The industry is so big, especially this one, and I guess I'm recommending any of these, but you can own something like an EA and Unity and have that as part of your gaming basket in your portfolio. Because then, it gives you different exposure, like Jon said with Unity, you are not as reliant on just them producing one big hit, you're relying on them being a big player in the mobile-gaming industry and being big mobile-ad player in the industry and being the operating system for VR/AR, metaverse, and such. Then EA, you gave some of that sports subscription type, gaming exposures, and all the other different games that they're doing.

I don't know, Jon, do you take a basket approach when it comes to this industry or any industry in general?

Jon Quast: Yeah, I do at times. One example of this would be in the advertising-technology industry. I just think that there's so much growth in that sector right now. It's not winner-take-all in the first place. And second, there's so much growth in that industry as a whole that you don't need to pick just one. There's going to be several winners, and so I own both Magnite and PubMatic, and they're direct competitors, but I own both of them because I think that there is market-beating upside with both.

That would be my basket approach. One of these two is going to be a winner, so I'm just going to buy both, so I'll be sure to get one. It's not an either/or in my thinking, it's they're both going to be winner, so I wanted both in my basket.

I guess this is how I was meaning to Jack's question, would you take a basket approach? With video games, I think I would take a basket approach. I am not sure that I'd put EA in it, and I don't want to sound like I am shorting EA or ultra bearish on EA, that's not the point. I'm not sure that there's market beating upside with a company like EA, so I'm not sure it would go in my basket. Unity, I think, would go in my basket. Roblox, I believe, would go in my basket. Not that those are guaranteed to beat the market, but with the business model that I've seen, and the trends in the video game market that I'm seeing, I think that those two are strong candidates. Those would be considerations for my basket over companies that are a little bit more dependent on the video game release schedule.

Sanmeet Deo owns shares of Roblox Corporation and Unity Software Inc. The Motley Fool owns shares of and recommends Magnite, Inc, PubMatic, Inc., Roblox Corporation, and Unity Software Inc. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.

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