Weekend Reading – Building a moaty stock portfolio

Weekend Reading – Building a moaty stock portfolio

Hey Everyone!

Welcome to a new Weekend Reading edition: my musings about building a moaty stock portfolio.

Before that theme, some recent reads and reminders:

A few weeks ago, I wondered if Fat FIRE (Financial Independence, Retire Early) is even remotely realistic?

Really now, who can save that much by their 40s or 50s?

I wrote about why I continue to hold a bit of BlackRock stock in my DIY portfolio. 

And, this was a new case study on my site for those considering some sort of victory lap retirement:

How your part-time job can support your retirement

Weekend Reading – Building a moaty stock portfolio

As I ponder and try to navigate my own semi-retirement plans in the coming years, I’ve become more defensive with my/our portfolio over the last year or so. 

Maybe rightly so. 

Sure, there are a few “flyers” in my DIY stock portfolio but I believe those few/limited stocks are calculated risks or at least risks I’m willing to accept!

As a DIY investor who does not index invest across the complete portfolio, I’m used to some individual stock risk. It’s been my thing per se for about 15 years now. 

As I age, as I get closer to semi-retirement, I would like to think I can continue to succeed by having less stocks fail. Investing in equities, via indexed funds, using established ETFs might be the best failure mode but I’ve never been convinced (in Canada at least) that indexing works perfectly. 

In Canada therefore, I tend to gravitate to buying and holding mostly moaty stocks and for the rest of my portfolio, beyond a few U.S. stocks now, I use indexed ETFs. 

Indexing in Canada

A few months back, I wrote about some moaty stocks to consider owning.

Weekend Reading - Stocks with Moats

Stocks with moats usually have the following characteristics:

1. Production advantages – a company achieves production advantages when it is able to provide a product or a service at a lower cost than that of its competitors.

2. Consumer advantages – said company achieves consumer advantages when it is able to provide a greater benefit to consumers than its competitors do. Maybe there is a “network effect”, in that more customers use a product or service over time. There is however a “cap” of users for a specific product or service eventually consider. See Netflix! 🙂

3. Brand value – here, a company is able to generate more revenue or charge a premium price for products or services because of brand recognition, ideally due to well-known and quality products or services.

Companies can therefore build their economic moats by achieving economies of production scale, building a network effect, and amplifying a brand, among other work. In doing so, companies get back high consumer loyalty, high market power, and in many cases assure critical legal protections/patents along the way that make it very difficult for other companies to compete with them.

In Canada, there are a few of these companies/sectors that I’ve held for years in my/our portfolio and will continue to do so:

  • Railways and some industrials
  • Canadian banks

Here are a few examples of the returns of such companies, when compared with the broader index (in this case, my favourite proxy low-cost ETF XIU). CNR and CP vs. XIU:

Economic Moats - CNR and CP March 2023

Sources for graphs: Portfolio Visualizer

Check out the return for WCN industrial stock vs. XIU (since I’ve owned it at least):

Economic Moats - WCN March 2023

And finally, some Canadian banks vs. XIU over the last couple of decades as fyi:

XIU vs. Canadian banks

With these results:

XIU vs. Canadian banks pic 2

But not everything is a rose.

Railways, a waste management company, and keeping six Canadian banks in your portfolio is hardly a diversified portfolio. Owning utilities and other sectors is likely wise for diversification purposes even if they underperform the index. (Example below, low-cost utilities ETF XUT vs. XIU, close but not quite.)

XUT vs. XIU July 2023

Indexing in the U.S. 

Moaty stocks also exist in the U.S. and if you’ve been paying attention over the last decade+, the U.S. stock market has shifted significantly to favour tech stocks over pretty much anything else as a weighting factor.

Here are some facts on that, top-10 stocks in the S&P 500 over the years:

S&P 500 September 2011S&P 500 September 2021S&P 500 Now – July 2023
Apple (APPL)Apple (APPL)Apple (APPL)
Exxon Mobil (XOM)Microsoft (MSFT)Microsoft (MSFT)
Microsoft (MSFT)Alphabet (GOOGL)Amazon (AMZN)
IBM (IBM)Amazon (AMZN)NVIDIA (NVDA)
Chevron (CVX)Facebook (FB)Alphabet (GOOGL)
Walmart (WMT)Tesla (TSLA)Tesla (TSLA)
Johnson & Johnson (JNJ)Berkshire Hathaway (BRK.B)Alphabet (GOOG) – Class C
Procter & Gamble (PG)NVIDIA (NVDA)Meta (META)
Alphabet (GOOGL)Visa (V)Berkshire Hathaway (BRK.B)
Berkshire Hathaway (BRK.B)JP Morgan Chase (JPM)UnitedHealth Group (UHN)

At the time of this post, the U.S. market is about 28% tech and likely to move even higher. 

While some tech is good of course, it’s also great to be defensive too when things turn negative or go sideways. The U.S. market cannot and will not go up 20% every year like this year. 

So, I believe in a mix of U.S. tech and a few U.S. defensive stocks in particular as a DIY investor – a U.S. mix outside Canada that should collectively mirror any S&P 500 U.S. index fund (IVV) returns while mitigating downside risk:

U.S. defensive stocks with QQQ vs. IVV July 2023

With these results:

U.S. defensive stocks with QQQ vs. IVV July 2023 pic 2

Notes: These are just examples but I do however own some of these U.S. stocks directly at the time of this post, specifically: BLK, NEE, WM and low-cost ETF QQQ for long-term returns. 

My thesis when it comes to DIY stock investing…

  • There are moaty stocks in Canada (that seem obvious to own as a DIY investor) and there are some in the U.S. to consider too but because the U.S. market is historically more diversified than Canada, I believe it is harder to beat than the U.S. market as a DIY investor – most fund managers and potentially more DIY investors will ultimately lag the index they track via **stock picking. As Canadian investors, we can more easily follow our local companies, and save the time and trouble of following events down South by just owning a U.S. index fund.
  • **Beat the TSX has delivered long-term generous returns to DIY investors, and while it can be an approach that could lag the Canadian index in some years, long-term results should prevail.
  • When in doubt over what to own consider indexing. I’ve been buying more ex-Canada assets myself over the years and will continue to do.

On that note, if you want to avoid any individual stocks consider a mix of XIU for Canadian stock exposure and XAW to own the rest of the world or an all-in-one fund too.

ETF SymbolMER# of holdings5-Year Return10-Year ReturnSince Inception
XIU0.18%60 Canadian stocks7.98%8.89%7.34%
XAW0.22%Over 9,500 beyond Canadian stocks7.86%N/A8.59%

These are some of the best all-in-one ETFs to own and why:

The Best All-in-One Exchange Traded Funds

  • I’ve been and continue to be an owner of some U.S. individual stocks for higher dividend income and growth, but it’s hard to ignore the fact that the U.S. tech index via QQQ is up about 40% for the year at the time of this post. I’ve been an owner of QQQ (not a recommendation for purchase, just what I do!) even before learning some additional lessons in diversification during the pandemic when I actioned by buy even more. The thesis here is: if you don’t own Apple, Microsoft or some other tech stocks directly, that’s OK, QQQ will do the work to generate juicy returns for you!

Lessons learned in diversification – reducing my Canadian home bias

In closing, unless you are willing to own some moaty stocks in your DIY stock portfolio, and stomach some individual stock risk with them, it’s best to put your hard-earned money into one or more low-cost ETFs and ride market-like returns. 

More Weekend Reading…

A Wealth of Common Sense believes we just came out of a textbook non-recessionary bear market.

“The strange thing about the most recent bear market we just lived through is that it was basically average for the type of bear market that it was.”

Related to my theme above, this journal article hinted at how many stocks you should own.

“…our analysis demonstrates that, whether you own ETFs, mutual funds, or a basket of individual stocks, a well-diversified portfolio requires owning more than 20-30 stocks.”

I’ve been targeting some semi-retirement ideas for a few years now, hopefully next year (?) but we’ll see. This MoneySense article caught my eye on that theme:

Is semi-retirement stressful? You bet—here’s what to do about it

I wish everyone a great, safe weekend!

See you here on the site in the comments section with more new content next week!

Mark

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

10 Responses to "Weekend Reading – Building a moaty stock portfolio"

    1. I’m just not a fan of covered calls/leverage for our investments, that’s all. I like common stocks and “common” ETFs like QQQ.

      “HCAL is designed to track 1.25x the returns of the Solactive Equal Weight Canada Banks Index, investing in Canadian banks — using modest 25% cash leverage.”

      So, leverage bumps up the yield for sure but is very likely to reduce capital gains and total returns because of that. Dividends/yield and growth are two sides of the same coin IMO.

      I think if you decide to own it, keep in registered accounts since other assets/ETFs/stocks are more tax efficient in a taxable account.

      Thoughts back?
      Cheers!

      Reply
  1. To play defense in retirement it is about sector selection. In my look at the financial crisis they were 50% better than a typical 60 / 40 balanced portfolio. And that is, in a retirement funding scenario.

    Consumer staples. Healthcare. Utilities.

    Of course we mostly look to the U.S. and international for staples and healthcare. We can use Canadian utilities.

    With a defensive sector equity overweight, one might then be able to lighten up a bit on the bonds and cash.

    Reply
    1. I continue to believe utilities in Canada and the U.S., are defensive and can be a great core to build around. Even if these sectors underperform the broader index from time to time. A good example of each is XUT in Canada and XLU in the U.S. Long-term returns (10-year) of each are about 7%+ which provides a very good indication you should expect about the same over multiple decades.

      Last time I checked, we all need healthcare too. 🙂 With you on that.

      I like your thoughts on easing up on some bonds with utilities in the portfolio.

      Have a great weekend,
      Mark

      Reply
      1. Clearly the best time to buy is when a company is really beaten down and left for dead. I recall in 2020 this was case with CNQ. After doing my research I decided to buy quite a substantial stake and was greatly rewarded. With respect to TRP, like you I own a bit of the stock and have been collecting the dividends for years. As to whether it’s a great buying opportunity, so far I don’t have enough visability as to the furture of the company and don’t feel the current government’s policies are that friendly to the industry. I will continue to hold what I have and research the company, but for now I won’t be adding to my position. That may change as new information becomes available.

        Reply
        1. Yes, CNQ was very beaten up; hard to believe it was about a $15 stock just over 3 years ago. Now $80. I think our energy cycle is going to exist much longer-term. As in years.

          I own CNQ and continue to do so. Same goes with TRP. Will to continue to own – TRP is just 2% of my entire portfolio and I tend to have a “rule” whereby I try and keep any individual stock to ~5% of my overall portfolio to avoid individual stock risk. Not very worried here to be honest but things can always change!

          Thanks for reading Marcel, nice to hear from you.
          Mark

          Reply
  2. Hello Mark. For us during the accumulation years building a ” moaty” core , quality, long term holding portfolio was greatly advanced by having several DRIP type securities ( BNS, TD, CNR, FTS, BCE, T…) Small amounts were able to be added , dividends reinvested (often at a discount )while allowing compounding to really work over the years at a low fee cost. Even partial shares were added. With quality companies this practise l enabled the growth of our portfolio. The process was not difficult , but just enough ” cumbersome ” that we were inclined to leave the securities alone during several tricky market periods. Long term compounding really works. Regards. Mike

    Reply
    1. Awesome, Mike. Like you along with many other Canadian dividend investors – we also own Canadian banks (all big-6 here), with CNR, CP, FTS, BCE, T and a few more, like WCN. Very happy overall. Outside of a few dividend cuts over the last 15 years, growing dividends.

      Compounding does work over time but it’s not without some ups and downs to stomach and weather!

      Thanks for your comment.
      Mark

      Reply

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