Weekend Reading – Building a moaty stock portfolio
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.
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.
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:
Sources for graphs: Portfolio Visualizer
Check out the return for WCN industrial stock vs. XIU (since I’ve owned it at least):
And finally, some Canadian banks vs. XIU over the last couple of decades as fyi:
With these results:
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.)
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 2011||S&P 500 September 2021||S&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:
With these results:
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 Symbol||MER||# of holdings||5-Year Return||10-Year Return||Since Inception|
|XIU||0.18%||60 Canadian stocks||7.98%||8.89%||7.34%|
|XAW||0.22%||Over 9,500 beyond Canadian stocks||7.86%||N/A||8.59%|
These are some of the best all-in-one ETFs to own and why:
- 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!
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:
I wish everyone a great, safe weekend!
See you here on the site in the comments section with more new content next week!