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Currently, the stock market is in a weird situation where most stocks have exposure to the systemic risk of COVID-19. As it is highly likely that social distancing will become the new norm, a long list of businesses will be badly hurt: airlines, restaurants, movie theatres, music events, conventions, lenders, etc.
If the COVID-19 situation drags on for 3+ years, you don’t want your portfolio to blow up because of it. It would make sense to put a good portion of your portfolio into less risky investments that will survive. Because individual stocks can blow up, it is a good idea to diversify (e.g. 10-30+ stocks). It’s also a good idea to avoid owning too many stocks with similar risks (e.g. stocks in the same industry, too much COVID-19 risk, etc.).
Stocks discussed: CNC, UNH, CHTR / LBRDA, TSN, HRL, COST, PGR, V, MA, MCO, SPGI, FB, GOOGL, IAC / MTCH, VRSN.
I’ve started an experiment where I’m keeping a public portfolio of large cap stocks via the Motley Fool CAPS system- you can view it here. I would like to see if I can generate value on the long side… something that I find much, much more difficult than shorting.
My criteria are:
- Pick only the quality businesses in a particular sector. For example, Dollarama is the clear leader among discounters.
- Not overpriced. For that reason, Amazon and Netflix don’t make the cut (just look at what happened to Amazon during the Dot-Com Bubble).
- I avoid industries where there are no clear industry superstars. Oil and mining stocks simply don’t make the cut as none of them are quality businesses.
- Lastly, I avoid dying or shrinking industries. Profits ultimately don’t grow in dying industries and therefore those stocks almost never do well.