How to choose assets in a long-term portfolio?

in Trading3 months ago (edited)

Most investors don't have much time to actively manage a portfolio, so the best solution for them is to build a long — term portfolio. But how to choose assets in it and where to start in general? Step

  1. Select industries
    It is always necessary to start from the top of the iceberg and look further into the depths.

The first stage is the choice of the industry.

If you are building a long-term portfolio and don't want to spend a lot of time looking for a point company, then look at industries that are growing rapidly, let's say + 10-15% yoy.Often this helps the basic outlook. For example, almost everyone knows the company Netflix (NASDAQ: NFLX) — it is the largest player in the video streaming market.

How do you know if the industry is growing or not? There are several paths here:

  1. Google, for example. enter in the search engine: "video streaming cagr". The first thing you will need is analytical research with a projected growth rate. The very first in the search for me was a study by the popular agency Grand View Research, it predicts the growth of the video streaming market by 21% yoy. Okay, it suits us.
  2. Look at the dynamics of passive index funds. There is a beautiful website, which aggregates the majority of funds in the world. You can go to the screener and see what funds, how much they brought in for 1-3-5 years of existence.

For example, if you look at funds with a total return of > 40% over 3 years, these funds will be allocated to the IT sector, green energy, solar energy, semiconductors and biotechnologies.
It is also useful to see reports on the latest trends. This is usually the research of venture analysts-CB Insights, Crunchbase.1. Growth of financial indicators

Buffett pays special attention to the company's financial indicators, namely, their growth. At the same time, it is important to look not only at the growth of conditional revenue, but also the growth of the company's marginality, that is, how much the company makes a profit per $ 1 of revenue.

The logic here is simple. Revenue may grow, but expenses may grow faster, and as a result, the company's operating margin falls, and it returns less to shareholders — such companies should be avoided.

In addition to, there are several services where you can look at the dynamics of the company's performance
: American companies: Seeking Alpha, Simply Wall Street.
Russian companies: BlackTerminal, Smart lab.2. Product uniqueness

For long-term growth, it is important to take companies that are "protected" from losing market share with their unique product. If you take a company in your portfolio whose products are easy to replace, you risk losing money on it. This is clearly seen in the example of Zoom Video Communications — NASDAQ: ZM), a popular video communication application. After COVID-19 moved most people to a remote work format, the company's shares soared 5 times. But after that, Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOGL), and many other major services released their own similar applications. As a result, the stock has fallen 40% from its highs and is still priced at 25 future payouts, 8 times the industry average.Buffett also recently acquired companies from the healthcare sector-Merck (NYSE:MRK) and Bristol-Myers Squibb (NYSE:BMY). Large companies in this sector have patents on the developed drugs, as a result of which they are protected from copying drugs. The cost of developing the drug is extremely high, which additionally creates barriers to entry into the industry for other companies with their new products. Therefore, in this sector, leaders remain leaders.

  1. Evaluation of the company

Let's say you found a company from a fast-growing sector and its financial performance is only growing. Should I buy the company? To decide, you need to look at the multipliers of the company and compare them with the average industry.
The company is worth 148 future profits. That is, if you buy it at the current price, it will pay off in 148 years.

Despite the fact that the multipliers themselves are not very informative, they help novice investors to weed out extremely overvalued companies. For example, Zoom is expensive for both current and future multipliers.

But if you take AMD, which also has high current multipliers, then the market rightly puts the growth of financial indicators in the company's assessment, and future multipliers do not look so terrible:
4. Shareholders of the company

An important point is the composition of the company's shareholders. The ideal situation is when the company does not have a majority shareholder (usually > 50% of the voting shares) who can advance the decision, regardless of the opinion of others. As a rule, most large American companies have just this: the majority of shareholders are funds with shares of 5 to 15%.

But if you take Facebook (NASDAQ: FB), then the sole shareholder is Mark Zuckerberg:
Take Zoom. On the resource we can view the forecast multipliers for the company:Accordingly, all decisions on the development of the company are made by Zuckerberg. In such a situation, corporate conflicts often arise, since dissenters cannot change the course of events, even if they unite. In this case, when investing, you need to decide whether you trust Zuckerberg's policies or not.

Information about the shareholders can be found on the company's website.

How to choose assets? - Shortlist

  1. Choose a fast-growing industry (>10% YoY);
  2. Choose a company with steadily growing financial indicators;
  3. Choose a company with a unique product;
  4. We look at the overheating of the multipliers in comparison with the average industry indicators;
  5. Choose a company with a diversification of shareholders;
  6. Get Profit!

in investing minimizing downside risk while maximizing the upside is a powerful concept.