Investing Experiment: Adding to the Winners

*This post may contain affiliate links. Please see my disclosures.

My investing style has always been to invest in both index funds and individual stock investments.   I’ve been interested in individual stock since college, being one of the early members of a club that invested part of the university’s endowment.   My experience has been mixed, having some significant winners, some painful losers and an abundance of average returns.   The main reason I invest in individual stocks is personal enjoyment and with that, some years come with alpha and other years trail the market.  

Premise

Starting with my days in the investment club, I’ve been a value investor.  Figure out the present value of future cash flows, discount it back to today, and come up with a stock price.  Is the stock trading for a price higher or lower than this value?   This mindset was reinforced through my finance degree and a decade and a half of loaning to companies. The challenge is this caused me to overlook some great companies where I couldn’t comprehend their value.  I’ve slowly changed this mindset, thanks to Peter Thiel’s book Zero To One and studying a growth investment philosophy.

There will still be some companies I can never invest in (here’s looking at you Netflix), but I’ve become more understanding of growth investing.  With technology, the path to a monopoly or oligopoly is faster and the payoffs can be exponential.   Management talent is also tough to get right inside the large public companies we have available to invest in.  Companies with great management tend to win, then winners have a tendency to keep winning.   In the past, companies at an all-time high scared me, now I’ve become okay with investing in companies at their highs. Investor sentiment is high when a company reaches an all time high, as no current investor has experienced a loss.

I’ve historically been quick to take profits and slow to take losses, selling some winners too early while riding some losers for too long.   Finally, I’ve also constantly sought out the excitement of new investment ideas when the best strategy may have been to just add to the winners.  

To help enforce this discipline in me in the future, I present:

Adding to the Winners Experiment  

I had some idle cash to put to work and decided to add $5,000 each to five of our historically winning stocks.  I’ve then included two identical investments in the indexes, the Vanguard Total Stock Market ETF and the Vanguard Dividend Appreciation Index ETF.

Thanks to Google Sheets, the values and gain/loss imports automatically.   I happened to start this experiment during earnings season, so the gain / losses were already accumulating the day I built this sheet.

The Companies:

#1 – O’Reilly Auto Parts:   I owned this company and sold it too early in 2018.  I’ve since bought back some shares and enjoyed outsized performance.  The auto parts aftermarket is a four company oligopoly in the United States, split between O’Reilly, AutoZone, Advance Auto, and Genuine Parts (NAPA).   O’Rielly and AutoZone have historically been the top performing companies and are disciplined in returning capital to their shareholders.   I believe the decline in new car manufacturing in 2020 and 2021, the age of the fleet in the United States will get older and the economics of repairing vs. replacing help the outlook for aftermarket auto parts.  

#2 – Sherwin Williams:  Another company I owned and sold too soon in 2019.   The paint business is a three company oligopoly:  Sherwin Williams, Benjamin Moore (owned by Berkshire Hathway), and PPG.   I already own some Berkshire stock and have generally chosen Sherwin Williams products.  The stores are always busy and professionals seem to choose them first.   I like companies that sell a consumable product:  Houses/walls need occasional repainting.

#3 – Home Depot:  This has been a massive miss for me over the last decade.  This industry is dominated by two companies and the housing inventory in the United States is getting older.  In 2011, I was fortunate enough to hear Frank Blake, the former CEO, give the best in-person interview/speech I’ve ever heard.  The current CEO of both Home Depot and Lowes decided from Mr. Blake’s management team.   Since I heard that interview ten years ago, Home Depot has returned 1,026%.  Home Depot is disciplined in reducing it’s share count and I am hopeful it generates a similar return over the next decade.   (There isn’t a lot written about Mr. Blake, but if you want an interesting listen, Tim Ferris got an interview with him in early 2018)

#4 & #5 – Facebook and Google:   Like it or not, internet advertising is a duopoly dominated by Facebook and Google.  Facebook captures eyeballs through social media engagement while Google focuses on search and YouTube.  They each carry some regulatory risk, but investors would argue that the sum of the parts could be worth more than the conglomerate companies.   Buying Google in 2019 after reading Zero to One is one of the best investments I’ve made.  I owned a small amount of Facebook and decided to add more through this experiment.

What Was Excluded:

Costco is our largest holding at just over 6% of our net worth.  I love Costco, but made a decision in previous Investment Policy Statements not to make purchases that push any single stock concentration above 5%.   We added some Costco at $310-$315/share in February of 2021 and the stock has since risen by 35%.   As much as I love the company, the recent run up has the company exceeding my concentration limit.

What Happens Next:

My plan is to hold this portfolio over the next decade and I will provide incremental updates to this experiment on the site.   Two of the companies pay small dividends and I’ll need to figure if and how to adjust the numbers to reflect total returns.  

What do you think of the experiment?  Do you do something similar?  Leave a comment with your thoughts below.

4 Replies to “Investing Experiment: Adding to the Winners”

  1. I think Google and Facebook used to be MySpace and Yahoo. They might still dominate in ten years or they may just be a historical footnotes. That’s the problem with having any concentration in individual stocks. Nobody knew that Apple and Dell would dominate the personal computer industry in the early 80’s. It could have been Osborne, Gateway or Texas Instruments. For that reason I limit individual stocks no more than 2% per company, which is really just like having a custom mutual fund or index fund. At 5% you are doing the same thing basically except you are picking your own stocks and I’m letting Personal Capital pick mine. I think it is a perfectly valid strategy, especially if you enjoy doing it. I suspect you’ll out perform since you are willing to put in some research time. Arkansas just finally arrived, we got our first Costco this month, but it is 100 miles from here.

    1. Warren Buffett has a great Q&A out there from 2001 (University of Georgia) comparing Internet stocks then to car stocks in the 1920s. You know the industry is going somewhere, but picking the winners is difficult when there are hundreds or thousands out there.

      I just enjoy the research and hope it’s rewarded with some alpha

  2. I’ve had a similar experience with individual stocks; taking profits way too soon and holding onto losers for way too long. Even break-even with those losers is still a bad bet, since the money could have been in a much better performing asset. So I like the idea of adding to winners, especially if that breaks you of your habit of selling the good ones too soon!

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