Yesterday I reached the end of The Psychology of Money book I have been reading. At the end it pointed out that very few funds, ETFs, and individual investors can beat the street. Earlier in the book it also included the statistics that most of the value of the S&P 500 comes from the top ten companies and I had a thought. What if that were the strategy? A weighted average investment in the top ten companies in the S&P rebalanced every year to reflect the new top ten list.
I got some interesting findings. Doing this would have created significantly more wealth than simply investing in the S&P 500. There is no guarantee this strategy would always work and adding weekly deposits would certainly help, and keeping the correct weights in the correct positions would add another layer.
However I felt some strategy was missing from this idea and it became a what if we did it again but this time pulled up the top 15 or top 20 list. The 2016 top ten list included companies like Wells Fargo, Exxon, and GE. Companies that have had a small tumble since then. GE was already well into decline by 2016, Wells Fargo was about to have their scandal, and energy needs were already changing in 2016.
That meant I had to try and think like myself. If we’re creating rules of how to invest then we needed rules. Among the top 15 sat Walmart, Verizon, and then a bunch of companies almost identical to the ones I was removing. I decided the play here would be to include Walmart and a competitor of Verizon because of their dividend trap and that I didn’t like them in 2016. For Verizon I picked T-Mobile and as the last one I looked up fastest growing companies of 2016 and that gave me Netflix.
I now created rules that couldn’t really be tested and I did question myself if I would have kicked out Wells Fargo, but I bank with Wells Fargo and only continue to do so because switching would be too much of a pain. I think if we made a rule to lock the top five and then one per sector from the bottom five that would mean JP Morgan stayed and Wells Fargo went.
The real point of the experiment isn’t to predict what past me would have done, but to create a strategy for future me. So if we are building a future core of stocks then my list would be keep the top five of NVIDIA, Apple, Microsoft, Amazon, and Google. The entire bottom five is removed because Broadcom and NVIDIA are a little close, don’t need two Googles, nothing wrong with Berkshire but I’d want a more purely insurance insurance company, Meta can’t seem to stop tripping over themselves, Tesla is too founder dependent for future thinking, and Micron fits with the Broadcom dismissal. From there I promote JP Morgan, Johnson and Johnson, Visa, Walmart, and with no clear insurance company we promote Travelers from the outside.
That creates a nice ten stock portfolio and we will see in January what it looks like. That is if I can build it. I have plans on how to do it, and we will see if it works.
David Huzzard Writes 