Recently my son asked “Dad, are you beating the market?” I listen to investing podcasts in the car so he had heard the commentators reference whether a stock will “beat the market” and how “to beat the market” as an investor. “Of course” I said without hesitation but then I began to think about my largest holdings. Some were up for the year and some were down. It was time to evaluate whether the time I spend learning about companies and buying stocks was making me richer than if I simply bought S&P 500 index funds on autopilot.
First some background. “The market” refers to the S&P 500 index which includes 500 of the largest US companies. The S&P 500 index increases or decreases as the weighted average price of the 500 stocks increases or decreases. You “beat the market” when your portfolio of stocks increases by a greater percentage than the S&P 500 index. In other words you make more money than if you had just bought an S&P 500 index fund, such as VOO.
Since the S&P 500 index is an average, the price gains of some stocks are diminished by the losses of other stocks. If you can just buy the gainers you should beat the market. Easier said than done since a small percentage of stocks produce a high percentage of stock market gains. Had I picked the winners?
Ten companies, my largest 10 holdings, comprise 38% of my portfolio of individual stocks. I own about 70 other stocks but these drive the bulk of the returns. I have owned all these stocks for at least 3 years, some of them for 5 or more. Let's dig in.
The first thing to notice is that these are all large cap companies and the list includes three of the largest companies in the world: Amazon, Apple, and Google. Some were large when I bought them. In 2017 Apple’s market cap was already $860B and Alphabet was at $729B, similar to where Nvidia is today. I think Nvidia could be one of the next trillion dollar companies thanks to its essential role in so many current trends I discussed recently, including cryptocurrencies, gaming, virtual reality, artificial intelligence, and autonomous driving. Nvidia is off its 52 week high and a good long term investment.
Other companies on the list were small when I bought them. I bought Etsy when its market cap was under $5B and its share price was $44. It is $185 today but just two months ago, November 2021, it was nearly $300. I bought The Trade Desk, which markets software and digital advertising, three years ago at around $24 per share when its market cap was $11B. Both of these are still great long term investments especially now that they are down so much. Etsy is a powerful and growing e-commerce company that proved long ago it could outcompete Amazon. Have you ever bought anything from, or even heard of, Amazon Handmade?
I discussed Dexcom in depth in an August post and it was my top pick for investing in diabetes care. It still is. Since August the stock ran up over 30% but is now back down to where it was. This is a second chance to buy some great companies at deep discounts.
The most interesting thing about this table to me is how different it would have been a couple months ago. Block, formerly Square, would have been much higher. It has lost half its value recently. Tech stocks have sold off severely since December meaning Docusign, which is down 57%, would have been on the list. Paypal also would have made it but it is down 40%. During 2020, Teledoc (TDOC) peaked at $308 per share. It is now down over 70% but is still among my largest holdings. It would have made the list. The value of diversification is that when some stocks are down others are up. Costco, a boring retail company, is up almost 50% this year not including dividends.
So, have I beaten the market? Yes. Just barely, by 1%, in the past year since tech stocks got crushed recently but I handily beat the market by 192% and 703% with these stocks over 3 and 5 years. This is even with Block down 34% for the year and 3 others with only 3%-5% gains. The lesson here for me is that diversification and long holding times work. Especially in volatile sectors like technology stock frequently move 30% or even 50% but if you just keep holding and your companies are good it works out.
Of course this is just 10 of my stocks. Although they account for 38% of my holdings I know my son’s first question will be “What about the others, Dad? You can’t just talk about the good ones.” Fair enough, I’m already working on the next ten.