Drafting A Winning Team (Portfolio)

The Virus has canceled sports and that truly sucks. I've been missing the Premier League and the Champions League and the NBA Playoffs. I've also missed watching my kids get their energy out playing soccer. Thankfully, tonight is the NFL draft and I'll probably watch every minute just to get a glimpse of the sporting world again. 

I was daydreaming about the draft while looking at my investment portfolio and it struck me that building a good portfolio is like building a solid team. I want good performers of course, but I also want the players to work together in a way that makes sense. In some ways the team can be stronger than the individual pieces. I never really understood this until recently, as I've had more time to review and update my financial spreadsheets.



Focus and Diversity

Some people like passive index investing and I own indices in some accounts, but I really enjoy actively managing stocks. What I like about an active portfolio is I don't need to invest in every sector, and I can quickly overweight and underweight sectors based on my preference. I like to have 4-5 focused sectors that I can follow carefully, otherwise it becomes too difficult to track what's working and what isn't.

Diversification is also important. Just as you don't want a football team with 22 quarterbacks, you don't want a portfolio with 100% tech stocks or airlines. Diversity ensures that a single focus area doesn't ruin the team.

Portfolio Overview

Here's a snapshot of my portfolio, by sector, as it stands today.

As of 4/23/20 -- can change anytime


Essentially I am focused on 5 sectors, some miscellaneous stock picks (Other), while holding 30% Cash. 

Biotech 19.9%: I'm not sure why but I've always been drawn to biotech. This is my largest sector right now, mostly because I made a lucky investment in Moderna (MRNA) before the crisis and it has become a big winner. Last week I sold some of the position to reduce risk, and now I can let it run. Never know, it could become the next Amgen. I once owned a basket of biotech stocks that I sold too soon and I don't want to talk about how much they've gone up since then.

In the biotech category I have a particular focus on gene editing stocks. I'm fascinated and freaked out by the CRISPR technology (overview here). I think there will be a company that figures out how to use CRISPR to combat some diseases, but I don't know which company. These are early days. So, I've invested in a basket of CRISPR stocks, hoping that one of them emerges as a winner or gets acquired. So far, these investments have been losers, but I'll keep 5-10% of the portfolio here as a speculative play.

Overall, I'm probably too concentrated in biotech but as I said this is only because of the success of MRNA so it's a good problem to have.

Sequencing 5.2%: These companies are related to health care and biotech but really are technology / life science tool and service companies that don't trade in parallel with biotech. Two of the companies do genetic sequencing and another does cloud computing for life science companies. I should probably rename the sector ... it's a small percentage right now.

Gold / Silver 18.5%: I already did some crazy talk about gold and silver. This trade is working very well. Yesterday, gold mining stocks broke above long standing resistance and they now have clear skies ahead. I won't go into the technicals right now but suffice to say that sometimes technicals do work. 





In this case the fundamentals and technicals lined up for a great trading opportunity. Next stop for GDX should be around $40. I plan to keep gold / silver at 15-20% of my portfolio as long as the Virus spurs easy money government policy. At some point, however, I'll take gains and reduce this sector significantly.

Energy 9.6%: I bought Exxon and Total in the vortex of the oil crash. Today I added some Chevron. I like that these companies took the brunt of the crash and have stabilized. As mentioned in Low Tide Investing, I've sort of hedged these positions with Frontline, an oil tanker company that profits from a storage glut. My view on energy stocks might change if the dividends get cut. For now, I like what I'm seeing.

Video Game 7%: I've always liked this sector. Video gaming is a secular trend and somewhat virus-proof as people play at home. Additionally, there will be new Playstation and Xbox consoles out in late 2020, kicking off a new cycle of games. Gaming has its own cycle and has withstood recessions quite well. I own a basket that includes Activision, Electronic Arts, Nintendo, and Take Two. I expect to increase this sector to 15% or so over the next 2 years.

Other 9.3%: I like to leave room for unique picks. In the other category: a municipal bond fund, Canopy Growth (CGC -- the world's largest cannabis company), and Compass Diversified Holdings (CODI -- a niche private equity firm). I really like CGC and CODI. CGC has been a loser but there is a cannabis business growth trend that should mature as the US legalizes. CODI has been a winner with a great dividend, and I could see it becoming a large holding. 

Cash 30.4%: I'm holding a lot of cash. It gives me flexibility in a volatile market. A few weeks ago my cash level was much higher, but as I've written I don't think I should be too bearish right now. Stocks have already crashed and there's opportunity to make thoughtful picks. This is a rather short term view as I would not be surprised (and sort of expect) a bear market that takes us much lower.

Team Performance

So, that's my team. I've got my linemen (energy), a star QB (MRNA), with shifty RBs (biotech) and speedy WRs (sequencing). On defense, I have a solid line (cash) with explosive linebackers (gold) and a recession proof secondary (video games). Finally, special teams with a kicker (CODI), erratic punter (CGC), and consistent long snapper (muni bonds).

It may look ok on paper but performance is what counts. I'd say the team plays together well. On a given day, the whole team is not up or down. I wouldn't want that. If a player has an off day, I want another player or position group to take the lead. I don't think I've had a day where every sector is down except for perhaps a few days during the crash. 

I think this is a good team for the current environment. In a pure bull market I'd want less defense and more offense. Eventually I see myself cutting cash and gold and increasing exposure to growth stocks. But, I'm not sold on this as a pure bull market, so I'm sticking with a strong defense. Offense sells tickets but defense wins championships.

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