If There’s Only 1 Stock I Could Buy Right Now, This Would Be It

One investment to rule them all?

I admit it’s attractive to cherry-pick companies to invest in now with the steep market correction.

But investing in just one company for the foreseeable future is extremely risky in my opinion. While the business can be great, a small mishap from the firm could wipe out an entire portfolio.

Therefore, given the risk of concentrating my portfolio on a single stock, I’m going to diversify my portfolio in an instant with a single investment.  

And that investment would be buying an exchange-traded fund (ETF) that tracks the Standard & Poor’s 500 index, more commonly known as the S&P 500 index.

There are plenty of ETFs available that closely track the index’s return, but my pick would be the Vanguard S&P 500 ETF (NYSE: VOO).

Why Is the S&P 500 Index Attractive Now?

For those who may not know, the S&P 500 index consists of around 500 large-cap US companies in leading industries. Such companies include iPhone purveyor Apple (NASDAQ: AAPL), computer software maker Microsoft (NASDAQ: MSFT), and e-commerce retailer Amazon.com (NASDAQ: AMZN).

The S&P 500 index is generally seen as one of the best representations of the stock market as a whole. According to Investopedia, the index has returned a historic annualised average return of around 10.5% from its inception in 1957 to 2021.

To be part of the S&P 500 index, a company must meet some of the following criteria :

  • It must be a US company;
  • The market capitalisation must be US$14.6 billion or higher;
  • It must have positive as-reported earnings in its most recent quarter, and over the most recent four quarters summed up; and
  • The stock must have adequate liquidity and must trade for a reasonable share price.

The strict entry criteria form a barrier and ensure that investors are getting to invest in some of the best companies out there with relatively low effort.

The S&P 500 is in negative territory, having fallen 12% from a peak of 4,796.56 seen on 3 January 2022. Only last month, it was in bear market mode with a fall of 20%.

A fall of over 10% may sound terrifying, but therein lies the opportunity, if we have a long-term focus.

(Fun fact: A 10% fall in the stock market is a common occurrence.)

Over the short term, anything can happen to the US stock market, but over the long run, history has shown that stocks tend to rise.

During the depths of the Great Financial Crisis (GFC) back in October 2008, famed investor Warren Buffett explained the need to look at the long term in an op-ed for The New York Times entitled, Buy American. I Am. (emphasis is mine):

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

Since that op-ed, the S&P 500 index has gone on to rise over 300% to close at 4,210.24 on 10 August 2022. Those who had invested during the GFC would be sitting on juicy returns over the past 13 years or so.

Right now, people are fearful that the inflationary and rising interest rate environment could trigger a recession.

While a recession may happen and stocks could continue languishing before recovering, we should remember that this is not new and that humanity has survived several market crashes previously.

So, “this too shall pass”.

And once the storm is over, stocks should continue climbing higher, as history has shown time and again.

Source: MacroTrends (grey bars show recessions)

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Why Vanguard S&P 500 ETF?

I’m choosing the Vanguard S&P 500 ETF to invest in since it has the lowest expense ratio among the S&P 500 ETFs of 0.03%.

The SPDR S&P 500 ETF (NYSE: SPY), which was the very first ETF listed in the US and is the more popular option, has a higher expense ratio of 0.0945%. An ETF’s expense ratio reveals how much investors are paying as fees annually when investing in the ETF.

Bringing down expenses when investing is essential since a fund with high costs will eat into our returns.

Another attractive aspect of the Vanguard S&P 500 ETF is that it allows instant diversification with a single click of the button.

To understand how diversified the ETF is, let’s take a look at the following snapshot showing the fund’s sector composition:

Source: Vanguard

Based on the Global Industry Classification Standard (GICS) sector classification, information technology (at 27.1%) contributes to the bulk of the ETF, followed by healthcare (14.4%), and financials (11.2%).

In terms of specific companies, Apple takes up 6.5% of the pie, followed by Microsoft, and Amazon. The top 10 companies occupy around 26% of the fund.

Source: Vanguard

Now could be a good time to start investing in the Vanguard S&P 500 ETF. According to JP Morgan’s Guide to the Markets (3Q 2022) , the index is selling at a forward price-to-earnings (P/E) ratio of 15.9x, as of 30 June 2022. For the past 32 years, the S&P 500 index’s forward P/E ratio stood at an average of 16.2x. This suggests that the index is fairly valued right now. If its valuation comes down further, investors have the chance to dollar-cost average (DCA) into the ETF, diversifying across time as well.

The Power of Compounding

Since Vanguard S&P 500 ETF’s inception in 2010, the fund has produced an annualised return of 13%.

Source: Vanguard

US$100,000 invested in the Vanguard S&P 500 ETF some 12 years ago would have turned into almost half a million dollars by now. That’s the power of compounding taking effect.  

Warren Buffett said in his 2016 Berkshire Hathaway shareholder letter that “investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”

That’s what I’ll be doing by buying a low-cost fund with Vanguard S&P 500 ETF and sitting on it for the long run to allow the magic of compounding to occur. To add icing to the cake, my overall return could be higher than average as I’ll be investing during a bear market. 

Knowing Your Downside

All investments come with risks, and investing in the Vanguard S&P 500 ETF is no exception.

One risk is to do with foreign exchange. Since this ETF is denominated in US dollars, any adverse fluctuations against the US dollars for a Singapore investor could harm the overall returns.

The volatile market condition is something else to take note of.

Stocks in general are subject to wide movements in share price in the short term. That’s what we are experiencing currently. As we discussed earlier, stocks could fall further before they recover, depending on how the economic conditions plays out.

Having said that, we should also understand that volatility is part and parcel of investing in the stock market, and it’s not a bug in the system.   

If one is willing to stomach the short-term volatility and stay the course after investing in the ETF, the investor should reap the rewards over the long run.

As author and investor Morgan Housel once mentioned:

“Volatility is the price of admission. The prize inside are superior long-term returns. You have to pay the price to get the returns.”

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Disclaimer: This information provided in this article is purely based on my opinions and is not intended to be personalised investment advice. The ideas discussed here are not recommendations to buy/sell any stock.

9 Investing Lessons From “Breaking the Rules With David Gardner” Podcast

Here are some of my key takeaways from an interview with The Motley Fool’s David Gardner.

I recently listened to the “Breaking the Rules With David Gardner” podcast hosted by Trey Lockerbie of We Study Billionaires.

David Gardner is the co-founder of The Motley Fool, an organisation that I had the chance to be part of when it operated in Singapore from 2013 to 2019.

Here are some of my key takeaways from the interview with David Gardner.

Link to podcast on Apple Podcasts

(A huge thank you to The Investor’s Podcast for providing a transcript of the interview, which helped me in my note-taking.)

Six Attributes to Find a Rule-Breaking Company

David Gardner first touched on how he picks stocks.

He has six traits he looks out for in a rule-breaking company and they are listed below with Gardner’s explanations.

1. Be a top dog in an important emerging sector

“So the first attribute is probably the most important one, being a top dog and a first mover in an important emerging industry. So I love to find the companies that are the leaders, if you’re not the lead Husky, the view never changes. And so we’re always asking, who’s the leader? But not anywhere, not in big oil today or telecom, I love important emerging industries. That’s where most of the great stocks come from, the ones that make you money for 20-plus years.”

2. Have a sustainable competitive advantage

“Number two, we’re looking for a sustainable competitive advantage that takes many different forms. Examples would be, we’ve got Jeff Bezos, you’re down. So the founders, the human capital and companies. Certainly within the world of biotechnology, there’s patent protection for 20 years for your successful new drug, that’s an example of a competitive advantage. And others’ competitive advantages, if everybody else is inept and you’re not smartest guy in the room, kind of a thing.”

David Gardner went on to explain:

“Because truly, a sustainable competitive advantage means so much more to me than an attractive looking price to sales ratio. It’s so much deeper, it’s harder to earn, and it’s so much less ephemeral. It will stand the test of time in a time where people are memeing stocks up and down like silly, and it’s all so short term, and it’s not really going to create sustainable wealth for people playing short-term games.”

3. Have strong price appreciation

“Number three, strong past price appreciation. This one goes against a lot of people’s instincts, and even my own human instincts initially. We love stocks that have been amazing already.”

4. Have good management  

“Number four, we’re looking for good management and smart backing. It’s the people in the end, not the product, not the service, not the industry or the competitive set or whatever, it’s the people that are making the decisions.”

5. Have strong customer appeal

“Number five, we’re looking for companies with strong consumer appeal. I love to find the great brands. Turns out Starbucks, yeah, Apple, yeah. The great biggest brands of our time are also the greatest, biggest performing stocks if you really look at it over meaningful periods of time, and that is not luck, that’s a one-to-one. So the strength of creating a great brand, really a good thing to look for in your stocks.”

6. People saying stock’s overvalued

“And then number six, the final one, is we’re looking for companies that people think and call out as over valued. Again, that goes against our instinct, just like trait number three, which we talked about strong past price appreciation, we’re talking here about the stocks. A lot of those six attributes I just shared with you are about the company, not the stock, but number three, and number six are looking at the stock.”

In summary, if the company is a top dog and a first mover in an important emerging industry, has a sustainable competitive edge, and possesses strong past price appreciation, good management, smart backing, and strong consumer appeal, but people are saying that it’s crazy overvalued, it’s usually a great signal in David Gardner’s books.

He said the traits don’t work in isolation; they have to come together.

“Because the whole framework hangs together, if you just isolate one of those factors, like that last one you mentioned, it doesn’t work every time. There are things that are crazy over valued and that you wouldn’t want to buy, but when you’re seeing the full integration of the model and you’re saying, “Yes, yes, yes, yes, yes,” in those first five, and everybody’s saying it’s overvalued, that really does work.”

How David Gardner Discovers Stocks to Buy

David Gardner has never used a stock screener to look for stocks. His style is more inductive than deductive.

He went on to explain:

“So it’s grassroots, flip up a stone, look what’s underneath that stone. Oh, that’s interesting. And once you flip up enough stones, you start to get some pattern recognition about what’s working and what’s not, or what are the interesting companies or what’s not. So it’s just one stone after another that you’re flipping up because you’re learning, you talked about that earlier, you’re learning as you go. It’s so helpful always to be learning machines in this world. So you’re learning a lot, but I will say that it’s really important to me not to try to deduce or be the really smart guy, because it sounds so smart, Sherlock Holmes sounds so smart, but it’s not really a way to successfully invest, I don’t think.”

The Rule-Breaker Approach to Investing Doesn’t Work Every Time

There’s no perfect way of investing as we all know. The rule-breaker way of investing is no exception.

David Gardner said:

“It doesn’t work every time, by the way, and when it doesn’t work, you can lose dramatically. And we’re going to talk, I know, about losing dramatically and what that really means. … But for me, the math of it is so wildly in our favor when we can find companies that have these great attributes and everybody is not believing in, because what happens on the market is as is often said, “Great stocks climb a wall of worry.” And so if everybody thinks in 1997 that Amazon is crazy overvalued, is near bankruptcy, is never going to make it, then those people don’t own the stock.”

It’s in the holding through the ups-and-downs that fortunes are made and lessons are learnt. Gardner went on to say:

“Because Amazon went from three when I first bought it, to 95, and then in the wreckage of 2001/2, it went back to seven. That hurt a lot. We had a 30 bagger, and then it basically lost almost all of that, but we kept holding, and we kept holding all the way through. So I’ve held all the way through and it has been an incredible front seat lesson into what really works if you take the rule breaker approach. I also want to just hasten to add that there are many approaches to investing. The one I’m giving you, that I’ve shared in many ways for 20-plus years is just mine.”

Being a Rule-Breaker Investor Is Not Easy Psychologically

The rule-breaking investing way is never easy and it goes against human’s instincts.

And there will be losers.

David Gardner said he’s very comfortable losing. And the beauty of losing in investing is the most you can ever lose is 100%. This is unless investors are doing something really silly like using margins (which Gardner has never done).

He went on to say:

“And then also, I want people to know that it’s okay to stomach volatility and to realize that you’ll have some losers alongside these kinds of companies. But as you said earlier, when you have a stock like this [referring to Nvidia], it powers your portfolio to market beating returns on its own. So this is really what investing is. And to me, this is Rule Breaker Investing, and this is often not taught and certainly not practiced by most of the institutional traders today. And it’s just one approach, but I can’t think of a better one.”

On Selling Stocks

David Gardner explained when he sells stocks:

“I do sell. I don’t do it very often, I don’t think I’ve sold a stock that wasn’t bought out that I had to sell out for a few years now. And I’m just talking here about my own personal portfolio. I basically do in public what I do privately, which is, I just find great companies to buy and hold them. When do I sell? I sell when thesis is broken, I sell when I love the company still, but somebody else came around with something better. There’s a better mouse trap or a new approach, there’s disruption happening. I’m a big Clayton Christensen fan, The Innovator’s Dilemma and that thinking.”

On Knowing the “Sleep Number”

If we are able to sleep well at night, we have won more than half the battle in investing.

David Gardner said:

“And so taking that different angle, you have to be comfortable winning and losing, and you have to recognize, especially, that loss is overrated if you’re willing to show resilience and if you aren’t doing silly things. And I earlier mentioned not trading on margin, a lot of people are doing crazy stuff or they have everything in one stock. I’ve often talked about the importance of knowing your sleep number, which I define as the percentage of your portfolio that you would put in your biggest holding, that you would allow your biggest holding to occupy as a percent of your allocation and still be able to sleep at night.”

On the Topic of Optionality 

David Gardner is looking for a company with infinite possible futures.

He went on to explain:

“Andy Cross, our longtime chief investment officer at The Motley Fool and firstly, a great friend Tom and to me, Andy once said about me. He said, “You know, David, what I realized is Buffett is looking for companies with one future and you know what it’s going to be. It’s still going to be car insurance, five, 15 years later. It’s still going to be chocolates, it’s still going to be The Washington Post back in the day. He loves the certainty that this company is going to do its thing. And you are looking for companies with infinite possible futures as a directly different approach.”

Gardner used the example of the technology company Alphabet:

“And I was like, “You’re right, I am looking for companies that have lots of possible futures.” That means they have usually lots of irons in the fire, you think about Alphabet. It was initially Google, but these days, it’s Alphabet partly showing the optionality of one powerful business idea and what else it can lead to. But you see companies morph over time when they have possibilities. It takes two things primarily to have this kind of optionality, which is the word that we use, I use a lot for describing this. The first thing it takes is capital. You don’t have a lot of optionality even if you have a cool new app or a cool business idea, and you don’t have any money in the bank, you don’t have cash on the balance sheet or you’re beholden to lots of debt.”

He went on to say how the internet provides an excellent platform for optionality to happen:

“So the number one thing you really need to be optional and to have new possibilities is you have to be able to screw up a bunch because that’s what we do as innovators and humans, we screw up a bunch. You need to be able to spend the money through that, to get to the right idea or the next hill to take for your business. And so that’s the first thing you need. Of course, the second thing you need is you need an open-ended context. The internet is an incredible platform for optionality.”

What Is “Risk” in Investing?

Risk is not equal to the volatility of a stock as many would perceive it to be. Risk is about having a permanent loss of capital.

David Gardner said:

“I define risk as the chances that holding this instrument over a long period of time, you would suffer in the end a dramatic loss. That’s the risk that I try to avoid. If it’s just beta, like how much does the stock bump up and down, I don’t think that’s a very satisfying approach to risk. That’s like using batting average, going back to baseball, to evaluate who’s a really good valuable hitter in baseball. It’s intuitive, in some ways understandable, but how much does stock bounces around, is not really, to me, what risk is about.”

Gardner has a 25-point checklist for risk that he uses when picking stocks.

Every time the answer to a question is “Yes”, that’s good. But every time you say “No” to the question, that’s bad, and you add a point.

If there are 25 “No”s, that’s 25 points, giving the riskiest imaginable investment. Therefore, the higher the rating, higher the risk.

Here are some examples of what the 25-point checklist contains:

  • “Was the company profitable during the previous quarter and past 12 months?” 
  • “Does the company maintain a high standard of disclosure consistent with SEC guidelines in the US?”
  • “Would an intermediate level investor find the company’s financial statements and management ownership disclosures relatively easy to sift through and understand?” 
  • “Would potential new competitors face high economic technological or regulatory barriers to entry?” 

What is Conscious Capitalism?

David Gardner touched on the important topic of conscious capitalism and why it’s important as an investor.

He said:

“For me, it’s just a better way to practice capitalism. Capitalism is much maligned and there are all kinds of examples of excess and failure and greed that have been part of the American story. And the worldwide story of capitalism run a mock in years past. And Enron, which was a stock that I had in one of my portfolios at one point would be a good example of poster child a lot of us can relate to, but there are many examples of failed humans who are running businesses or failed enterprises. And that’s not what we’re talking about when we talk about conscious capitalism, because most of those failed enterprises were either really short-term oriented, which tragically Enron really was, just trying to look great for a little while.”

Gardner went on to explain:

“And the ones that really get that and do that well, I would say the conscious capitalism enterprises out there, the employees know that and feel that. It’s authentic, it’s not green washed or pasted on by a CEO or a private equity firm that bought the company. It’s why it was started, it’s why you started your business, Trey, out of a vision of making the world better, a product or service, a guy who had a light bulb and the guts to start something.”

As investors, we have to consider whether the company is making the world a better place to live in.

Because at the end of the day, we would want to invest in companies that take care of the world.  

As David Gardner famously says:

“Make your portfolio reflect your best vision for our future.”

The power of compounding

Albert Einstein once said, “Compound interest is the eighth wonder of the world”.

Compound interest arises when your current sum of money earns a specific interest in the first year and the total amount obtained at the end of the year is allowed to compound for a specific period without removing the entire sum. The earlier you start, the more the money works for you and gets compounded.

If you invest $3600 every year for 25 years at 12% per annum return (this return can be achieved by investing in the stock market and choosing your stocks wisely), you get $480,001 at the end of the 25th year. But if you procrastinate just 1 year, the same $3600 invested every year for 12%p.a. return, gives you only $425,359 at the end of the 24th year. You can see that by delaying a year, we have lost $54,642 in future value. Thus, it has been advocated by a lot of people who-have-been-there-done-that to start saving and investing early starting from your first paycheck. Strive to set aside at least 10% or more of your monthly income for savings and investments and see your money grow. Becoming financially secure and free is not that hard after all, if you know what to do.

Investing is the best way to make your money compound. Investing is essential as by putting money in the bank, a paltry interest rate of around 0.1% per annum (p.a.) is given but the average inflation rate in Singapore is around 2.7% p.a. So, by depositing money in the bank, we are actually losing 2.6% p.a. Therefore, we should all learn to invest in a instrument that beats inflation.

Another advantage of investing is that it gives you passive income. Income is divided into two categories: Active and passive. Active income is income you get from your daily 8-to-5 job. By working, you are trading your time for money and there is only so much a person can work each day. Passive income is income you get while not working. Example, from dividends, rental income, royalties and businesses, among others. Thus, one needs to have multiple streams of income. During the financial crisis in 2007, top executives lost their jobs as they were getting expensive to be paid. People who worked for 40 years in the company and some who were directors were retrenched and were helpless. Relying on your salary is the worst thing you can do to yourself and your loved ones as job security is non-existent nowadays.