Latest / Money Grows on Trees / #228 - How These 3 Stocks Outperform the S&P 500

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#228 - How These 3 Stocks Outperform the S&P 500 · Money Grows on Trees

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  There's propaganda machine through Bloomberg and other news channels to hate
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  on China because China is seen as the enemy of the United States because it's so advanced now.
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  How you'd run your own business is how you want to buy a business. There's no difference. If
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  you want to get really great returns, diversifying across multiple assets
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  is not a wise strategy to build wealth. The portfolio can swing
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  six figures a day. And when you're first starting out, your portfolio swings
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  very small because you've got a small amount of capital. The S&P 500, I think it's a wonderful way
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  for lay people, 99.9% of people to invest. I'm Lloyd
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  James Ross, seven-figure investor and entrepreneur, and I've helped thousands of
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  business owners and professionals turn financial stress into
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  success. If you're stuck in old money habits, overwhelmed by investing,
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  or unsure where to start, this is for you. I'll give you the mindset
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  and strategies to take control, grow your wealth, and achieve
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  financial freedom. It's time to make your money work for you. Everyone
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  says diversify, but what if the truth is you're just watering down your
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  returns? Today I'm talking about de-worsification. Yes,
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  you heard that right. When you diversify too much, you can de-worsify
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  and underperform when it comes to your returns. And this is what happens when people
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  own a lot of different assets. They own some gold, some crypto, some
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  stocks, their property, private equity, art, Lego,
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  blah, blah. They just got everything everywhere. They're just so
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  spread thin that the actual returns, they might feel smoother,
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  but they're a lot lower. And so Warren Buffett has been coined
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  to say that he prefers a bumpy 16% a year than
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  a smooth 12% a year. And so you have to understand
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  if you're going to focus your investments, you'll get a better return, but
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  it will be bumpy. It's quite volatile. So it's not everybody, but in
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  this particular episode, I'm going to dive into what it looks like to beat
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  the market. And it's not an easy thing to do to beat the market, which means beating
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  the performance of the S&P 500. But for the last 12 months, I
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  have beat the market in our portfolio. It's not the first time, hopefully
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  not the last. But I did that with a simple three
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  stock portfolio. And what people might see there is
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  a very focused investment strategy. But for me, it doesn't seem that
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  way. And I'll dive deep into this episode and explain why. And if you've been listening
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  to the show for quite a few years, you'll know that I almost went
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  into indexing because it is a very sensible strategy. So this is
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  definitely not an episode where I'm beating up the S&P 500. I
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  think it's a wonderful, like indexing is just a wonderful way for
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  every, you know, lay people, 99.9% of people to invest. And
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  it's not me saying that, Warren Buffett and Charlie Munger at the Berkshire
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  Hathaway meetings, like more than half a dozen times, so
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  many times I've said this, people have said, hey, what do you do with your money if
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  you don't want to be an active investor and do it all yourself.
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  And they've said on multiple occasions openly and publicly, hey,
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  it's probably best just to buy some sort of broad based index fund
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  and continue to buy that and you'll do pretty well. So I'm
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  not here to beat it up. I love indexing. I'm all for it. It's
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  just that I love and really it is my passion to
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  actually deploy capital and actually actively invest in our
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  own portfolio. And I do that with the intention to beat
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  the market. Meaning, if our portfolio does not
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  outperform the S&P 500 index, then what am I doing with
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  my time? It's a waste of my time. I may as well just index, spend no
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  time in it, and get a reasonable return, which is an intelligent thing to think
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  about and do. And so I do think about this a lot. I
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  actively invest. And for the last, yeah, last 12 months, but certainly year
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  to date, our portfolio year to date is up about 30% and
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  the S&P 500 is about up 1.5%. So year to date, we're
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  absolutely thrashing the S&P 500, but for the last 12 months,
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  we have also outperformed it with a very concentrated portfolio.
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  Just a bit of a caveat here. It's not financial advice. I don't want to dive into that. I'm
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  going to touch on what some of the things I've looked at and do, but
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  I don't want to give away anything because I don't want you to just go and copy me and do that. This is for education
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  purposes only. It's not about hype or gambling. It's just a
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  lesson about, hey, if you want to get really great returns, Perhaps
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  diversifying across multiple assets is not a wise strategy to build
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  wealth. But without a doubt, to maintain your wealth, diversification
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  is incredibly powerful and it's definitely to be done. But
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  I'm talking to those who really have the intention to really
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  go after it and grow their money. who want to pay attention to it and do the
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  work, all right? And if that's you, you will probably find this episode really interesting,
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  all right? So if you want above average results, you got to stop selling for an
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  average strategy. Charlie Mung used to say, if you don't have the emotional intelligence
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  or the stomach for volatility to see your
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  portfolio go up and down a lot, then you deserve the mediocre return you're going
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  to get. And so this does require not IQ,
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  it kind of requires a bit of EQ. It requires being able to manage your emotions and
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  look for data and do your research and just actively understanding
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  what you're owning. So for many years, I've actively deployed
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  our cash in our portfolio, in our share portfolio into
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  individual companies. And some parts I've indexed very
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  briefly, but I've actually avoided that for quite a long time because I
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  have a bit of a knack for finding good quality companies that outperform
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  the index. So I'd like to do it. It's a passion. It's not for everybody, but
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  hopefully this episode gives you a bit of insight to what goes on in my head. So let's get into it.
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  Number one, why just three stocks? Most people over diversify end up
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  with like 100 stocks, and that's not an
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  ideal way to build a portfolio. Bill Ackman, who's one of the best investors
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  of all time says, you know, a 10 stock portfolio would equip
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  you with plenty of diversification. Think about it. If you own a
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  coffee shop, right, and a house, you have two
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  assets that you're diversified into. If you owned 10 different businesses,
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  you're very diversified, right? So that's what stocks are. Stocks are
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  just pieces of businesses. So if you own pieces of 10 individual stocks,
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  you effectively own 10 different businesses. That's very
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  diversified. And so people often say that a
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  portfolio of 10 stocks or less is actually a very concentrated portfolio,
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  but I actually think that a portfolio of three businesses is
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  a concentrated portfolio. And it's not just me, Charlie Munger, who
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  has outperformed, well before he passed away sadly, outperformed the
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  S&P 500 by a long mile for many years before
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  he joined Warren Buffett and Berkshire Hathaway, where they've beaten the market for, since
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  1965. He would often say that his personal wealth was
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  in three stocks. He held Berkshire Hathaway, Costco, And
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  up to when he passed away, it was probably Alibaba, right? So three core
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  stocks. In fact, it was primarily Berkshire Hathaway and
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  Costco, and then a private real estate portfolio, like I think one or
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  two residential houses. And he would often say that if you had a business and
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  a piece of real estate and some stock, you're pretty invested. So you
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  don't have to go over the top. And I see this a lot with people with their portfolios. They'll, I've
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  got 100 stocks. I'm like, whoa. You're so diversified that returns
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  are going to get hurt. But for me, three positions, in
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  fact our portfolio at the moment is four positions and they're quite big
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  bets and so you have to have a lot of conviction and do a lot of research and
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  do a lot of work to know what you own. And the way to approach it is when
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  you buy a stock, you have to understand the business because
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  you're buying a business. So you're really more of
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  a business picker than a stock picker. So you have
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  to understand what the business does, how it makes money. Will it be disrupted
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  by AI? Will it be competed away by its competitors? Will it
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  still be here in 20 years? This is why I don't invest in high-tech companies, because
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  it's difficult to see where they're going to be in 10 years, which is why I've not touched Tesla.
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  It's just too hard to see where it'll be. And I think people can get
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  caught up in the hype and the fun of tech. But look where a lot of the dot-com bubbles,
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  tech stocks went to. They went to zero, because people were getting excited about
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  the tech. It's not the tech, it's the business model. And it's the competitive advantage and
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  durable competitive advantage that a business has against its competitors that
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  matters most. A great business can also become broke.
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  So you have to be very careful about what you're doing. So we have a four-stock
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  portfolio at the minute, but the three stocks, even with the fourth one, It's
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  outperforming the index, okay? So it's been a fun year and you
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  gotta be very careful. So I'm under no qualms about
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  what that looks like. But at the same time, the portfolio can swing,
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  like last night it swung, it can swing by six figures a day. And
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  when you first starting out, your portfolio swings very small because you've got a
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  small amount of capital. But when it gets to the multiple millions, you know,
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  one day it can swing, I remember during COVID it swung 300,000. And
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  it can swing big. And so you have to detach yourself from
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  the volatility. What you've got to focus on is, is the business
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  doing well? And so many times I've seen wonderful annual
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  reports and quarterly reports, because public financial companies have to report
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  quarterly their financials. And I mean, lately,
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  one of our positions, they reported incredible growth, 24% growth, 14% earnings
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  growth, lots of cash in the bank, no debt, growing. It
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  was a wonderful report. And the stock went down in the
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  short term. The stock market is a voting machine,
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  meaning people are voting for like, oh, buy and sell. But in the long term,
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  it's a weighing machine, Warren Buffett would say. Just quickly, if you're ready to
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  take control of your finances, but feel stuck on where to start, I
• 8:50
  have a solution. My book, Money Buys Happiness, simplifies
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  investing and wealth building with practical steps to help you achieve financial
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  peace. Get your copy via the link in the show notes and let's get your
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  money working for you. Now back to the episode. And a weighing machine
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  means that over time, the stock price will follow the performance of
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  the business. So as long as you're focused on the performance of the business, the
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  stock price will look after itself. So you can't get carried away with what
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  it'll do even quarter to quarter. Like even with your own business, like
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  in our businesses, income goes up and down a lot.
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  And people are expecting it to be nice and flat and smooth. It's not. We're
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  in business, right? So stocks are no, like, it's
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  never going to be smooth. As long as the fundamentals are improving. Is
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  the business growing? Is it got good leadership? Has it got no debt? Like these are
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  all important. How you'd run your own business is how you want to buy a business. There's
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  no difference, right? So if you've done your research and understand the business and
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  you find three great businesses you want to invest in, like,
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  They're your three best ideas. Charlie Munger will often say, why
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  would you bother with a fourth idea if you, like, you better have to put
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  more into your best ideas. And he and Warren Buffett would often put over
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  100% of their net worth into one business. And that makes a lot of
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  sense because you actually have, if you've got one business and other assets, you've
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  got your entire net worth in that business. So you're actually all in on there too. So
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  I think it's pretty diversified to have a few stocks depending on what
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  you choose, all right? So what are the stocks? Let me explain the three
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  share portfolio that's outperforming the market. I'm not gonna tell
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  you the exact stocks because you're gonna get into it. I don't want you to do that. I'm just gonna give
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  you an example of what they are and why they've been selected and what
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  we anticipate to happen over the next 10 and 20 years. The first one is China's largest
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  internet retailer. The second one is China's online version of
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  Costco. And the third one is Warren Buffett's trillion dollar company, okay?
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  There's some little, that's kind of what they are. They're not random picks. I've been reading
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  Berkshire Hathaway shareholder letters since 2011. And hopefully
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  this year I get over to the meeting, to the Berkshire meeting and I've studied Warren
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  Buffett and I understand what I own in that business. That business actually owns
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  70 publicly held companies and probably around the same number
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  of private companies. So we could say Ballpark figured owns
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  between 120 and 140 different businesses in one. So in itself, is
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  like its own little mini index fund. So for that business or that stock to
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  go to zero, all 140 or all 70 stocks
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  it holds has to go to zero and all 70 operating businesses also
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  have to go to zero. Now, the odds of that happening are very, very, very, very, very
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  low. Does that mean that the business can't get in trouble? No. Right now they've
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  got a lot of cash, but it's a well-managed business, it's got a wonderful culture,
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  and for however many years, since 1965, it's just done so well.
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  And so understanding these concepts of, actually, what do I own?
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  Well, I own a lot of businesses in there, so it makes a bit of sense. Now,
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  looking at the other part of the portfolio too, a very large portion of
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  it is actually allocated to China. When some of my buddies talk
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  to me about what they're investing in and stuff, and I talk to them about the large allocation we
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  have in our portfolio to China, they all freak out. Like,
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  they go, what? China's so risky and da-da-da-da-da-da. Because they're
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  indoctrinated by the media to hate China. So what's happened
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  in the United States is there's propaganda machine through Bloomberg and
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  other news channels to hate on China, because China is
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  seen as the enemy of the United States because it's so advanced now. And what actually
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  happened recently with TikTok, the TikTok ban, is a lot of TikTokers
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  went to Red Note. And when that happened, the American public started
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  to see that China was what it was, a very well-developed
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  economy. So if I look at that, it's growing at 4.5% GDP growth, It's
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  got a lot of macro headwinds and stimulus coming. It's managed
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  well. It's got good leadership and invested in its people. I mean, it's got some of the best businesses
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  in the world. Some of these businesses are astounding, and they're cheap, and
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  they've got cash on the balance sheet. You get more bang for your buck there. And
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  Charlie Munger would often say, if you're going to fish, Fish where the fish are. So right
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  now, the market's so high in all these places that one of the few places left
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  of any value is China, which is why the portfolio is angled that way. So
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  looking for undervalued conglomerate companies that, in fact, one of them has
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  got six businesses in one. So you can see here that, yes, it's
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  a three-stock portfolio, but all three positions own more
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  than one business in the company. So it is a very diversified portfolio.
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  It just looks like it's not. And that's the trick to it. So why
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  am I doing this now? Again, most
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  of the markets in the world are actually really overvalued. And
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  what I want to do with our capital is deploy it in areas where I'm getting more bang for my buck.
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  And one of the few places in the minute to do that is China. And one of the best things
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  to do, too, is to partner with Warren Buffett. And I find it
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  very hard to buy real estate right now in other places. So it's...
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  It's a reason why we've positioned it that way. All right. So I've held diversified portfolios
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  before. I've held very concentrated ones. I try and allocate the
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  capital to areas where it's going to safely grow over time to
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  beat the market. Okay. And that just happens to be where it is now. If that ever changes, you
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  change the portfolio. All right. So that's why sometimes you
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  got to concentrate and double down on your best bets. Why put
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  stuff in your second best position, right? It's not about gambling. It's about backing
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  what you know. know what you own, understand it, deploy it,
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  and be patient. Diversification feels safe, but it can just water
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  down your results, right? So the wealthy don't just scatter their bets, they place
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  bold, informed ones with conviction. So if you've done your research,
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  understand the business, and believe in the long-term upside, and back it,
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  because average strategies get average results. I'll see you in the next episode.
• 14:14
  Thanks for listening to Money Grows on Trees. If you enjoyed the episode, leave
• 14:18
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• 14:24
  if you're serious about building wealth, make sure to check out the links in the show
• 14:28
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