“Sprinkle Cupcake”: My Portfolio Strategy

Posted on 16. Oct, 2011 by TheFreeInvestor in Investing Philosophy, Portfolio

I have been thinking about a good way to describe my portfolio strategy. When you ask ten investors about their portfolio strategy, you will get ten different answers about value, growth, income, core, and core plus etc etc. Most of these terms mean different things to different people and way too obscure for a regular person on the street. So, to describe my portfolio strategy, I tried to come up with a metaphor that everyone, including my daughter, will understand — “Sprinkle Cupcake” !

Let me explain. Just like sprinkle cupcakes, my approach to portfolio construction has three distinct layers — a stable cake base, a delicious icing and colorful sprinkles. Now, let me dig into each of the layers.

1. “Stable Cake Base”: Stable, high quality companies

This layer is the foundation of my portfolio. It consists of relatively stable and high quality businesses, e.g., Berkshire (BRK.B), Disney (DIS), Aflac (AFL), Precision Castpart (PCP), Bed Bath and Beyond (BBBY) etc. I will stay away from the traditional investing terms like “value” or “growth”. What matters more to me is that each of these businesses are high quality and relatively stable businesses. Though some pay dividend, it is not one of my criteria for categorizing these as stable companies. I don’t expect these type of companies to double in few years. But, in long-term, I believe they have great growth potential and have some significant competitive advantages. Over the years, these companies have generated market beating cashflows and income for their shareholders. I am betting that for next few years that trend of superior performance will continue and, in long term, stock price catches up with business performance.

2. “Delicious Icing”: Disruptors, innovators and thematics

The companies in this layer make up the bulk of my portfolio. These include innovators, disruptors, and companies riding an emerging theme. Typically, most of these companies are growing faster than most of their competitors by disrupting current industry top players, innovating and creating new markets or better executing an emerging theme. My long list of companies among the innovators/disruptors include Netflix (NFLX), Amazon (AMZN), Whole Foods (WFM), Starbucks (SBUX), Apple (AAPL), Ctrip.com (CTRP), Chipotle (CMG) and Buffalo Wild Wings (BWLD). Some of these companies, e.g., Netflix, Amazon, Apple and Ctrip.com has been growing rapidly, changing the landscape of their industry, and in some cases, creating new industries. Others, e.g., Whole Foods and Starbucks are lifestyle brands that can be both be considered as innovators and thematic leaders. Chipotle is one of the leaders of the fast-casual restaurant concept. Similarly, among my other thematic companies, the prominent names include Cognizant Technology (CTSH), Fedex (FDX), National Oilwell Varco (NOV), Discovery Communications (DISCK) and Dolby (DLB). Cognizant has been a top player in the IT outsourcing space since 90s and continuing to deliver solid growth. As digital entertainment continues to proliferate to multiple devices and channels, I am betting that Discovery and Dolby will benefit from this theme.

3. “Colorful Sprinkles”: Early stage companies, turnarounds and event-driven

Just like the sprinkles on a cupcake, these companies are the smallest layer in my portfolio. As I wrote before, recently I have been adding some early stage companies, e.g., EnerNOC (ENOC), Sina (SINA), Lululemon (LULU) and Infinera (INFN). The market verdict on these companies may not be clear for at least few years. But, I am ready to wait. The event driven investments in my portfolio are just that — investing in companies that are hammered down by market myopia due to a headline-news type negative event. The GOM oil spill last year was one such event in recent past. I bought a few oil and gas related companies on the cheap, e.g., BP (BP), Transocean (RIG), Noble (NE) and ATP Oil and Gas (ATPG) during that time. The last part of this layer are turnarounds. Investments in turnaround situations have not been very successful for me in past. I am hoping this time it will be better — Aeropostale (ARO) is my latest investment in turnaround situation.

There you have it. That’s my portfolio strategy — Sprinkle Cupcake. Of course, with time, business environment and experience, my strategy continues to evolve. So, if I adjust my approach in future, I will surely write about it. But, I doubt it is going to change drastically.

Hop over to the portfolio page for a closer look at my portfolio or to the watchlist page to see what I have been watching recently.

(Disclosure: As of the publication of this post, I hold long position in all the stocks mentioned above. Please read the full disclaimer on this website.)

Tags: AAPL, AFL, AMZN, ARO, ATPG, BBBB, BP, BRK.B, BWLD, CMG, CTRP, CTSH, DIS, DISCK, DLB, ENOC, FDX, INFN, LULU, NE, NFLX, NOV, PCP, RIG, SBUX, SINA, WFM