Paper portfolio challenge- Part 2

Hello everyone, this is the part 2 of my paper portfolio challenge.

In this part. I have further included the detailed analysis of each approach to select the stocks in the paper portoflio. You may skip the first 1st of this part as it is very identifical to the part 1 here:

You are recommended to watch the video version as usual for more animated illustration. Also, please subscribe my channel and like the video if you find the information useful!

This portfolio is suitable for the following investor:

i) Want to sleep well at night as aggressive market monitoring is not required

ii) Low risk- if any of this company go burst, this means the whole sector is game over already.

iii) Manage to beat the bank interest, CPF or even market consistently. I am looking at an average of 15-20% annual return per year over 10 years.

I also believe that they will be able to make it during the bear market, while also manages to hit new high or generate good returns after the market reverses or in a bull market.

In addition, for a well-diversified portfolio, I think that a portfolio consists of 8-12 stocks are good enough. If we have too many stocks, it will be very difficult for us to monitor each of them. It would be better just buy an ETF instead.

Here are my portfolio for the retirement, and their respective sectors. To make it simpler, I allocate each stock an equal amount of weightage, with 12.5% each.

This is the sector allocation:

You may find that I still prefer technology, which consists of 37%. Communication service (Google) can be considered within technology sector as well. Healthcare and consumer defensive sectors are relatively defensive, consists of 38%. BRK.B is for value stock allocation, which consists of 13% of my portfolio.

Why I prefer a portfolio with a higher weightage of technology?

1st: Technology is creating future. And stock market is about Future.

1st: These companies must show a consistent growth of revenue, net profit and operating cash flow. Take Microsoft as an example.

The last 5 years revenue trend: A clear up-trend

Earning per share (EPS)- Up-trend; Operating income: Up trend

Microsoft is a good company that can make consistent revenue, net profit and operating income.

2nd: These companies must show healthy debt profile. This is to ensure that they have enough cash flow and assets to even sustain during recession.

We can use Altman Z-score, which is a numerical measurement that is used to predict the chances of a business going bankrupt in the next two years. I am not going into details of the model. Basically, when the Altman Z-score is smaller than 1.8, it is in distress zones, in between 1.8 to 3 is grey zone, while more than 3 is in safe zone.

From the Guru focus, Microsoft has an Altman Z-score of 8.71, which is very safe! Even we look at the history data, the minimum for Microsoft is 3.12, which is still in the safe zone. Thus, Microsoft is a safe company to invest in as it is not easily go burst based on its current financial status.

3rd: Strong economy moat.
A company with strong economy moat could easily survive during the high inflation era and during the period of monetary tightening, such as during the current market.

Credit: Old school value

This is a simple illustration of gross margin. The higher the revenue, the more economic value the outputs have.The higher the gross margin, the higher the amount of economic value is added.

A company with higher gross margins is been able to do three things:

i) Create value for their customers

ii) Keep that value away from their competitors

iii) High switching cost

Above 3 factors are important to increase the stickiness of customers. Take for example, if Microsoft increases its license price for 5%, will the whole company change their whole operating system from Microsoft to IOS? Or other operating platform? Most likely they won't. Not only it will cost a lot more to change the whole operating system, the down time in between and the training cost will also significant higher than just pay the 5% increment of the license fee. Thus, when the inflation is coming, the company with strong moat can just increase their price.

Microsoft has a profit margin of 60-70% for the last 10 years. This suggests that Microsoft has a strong moat and maintain its competitiveness.

4th: Market cap.
For the stock to hold for long term, I prefer a company with over $10 billion market capitalization. Large-cap stocks are generally more stable compared to small and mid-cap stocks. The volatility is relative lower as well, as large amount of shares are hold by insiders and big institutes.

In addition, small cap or penny stocks can be easily manipulated. For instance, Singapore High Court convicts two for $6B penny stock manipulation. We could lose a lot of our hard earn money because of these manipulations. By contrast, it is extremely difficult to move the price of big cap stocks through manipulation.

As on 30May2022, Microsoft has a market cap of 2000 billions. It will be extremely difficult for a single institute or retail investor to manipulate the price.

5th: Long term up-trend. This is one of the technical criteria.

Using weekly chart, we can see that Microsoft is in a long term up-trend.

This is the summary for the 8 stocks by evaluating with the above 5 criteria:

I have done the homework for these 8 stocks.Please subscribe my channel and give me a like if you find this useful. As it is quite time consuming to prepare and organize the data to show them in the video.

I put a general acceptance criteria for each parameter. For example, profit trends have to be increasing, Altman Z-score >3, market cap > 100B and long term trend must be up. Take note that Gross margin is depending on the sector. We can see that COSTCO has a lower gross margin, but it is mainly because of its business model. For BRK, gross margin is not applicable. I will talk more about it in the future video.

I will prepare a more detailed analysis for each stock in future. In fact, I have more than 10 steps to identify a good company with good fundamental before invest my money in. I will also prepare a series of tutorial videos, for a step by step guide to identify a company with a good fundamental.Please subscribe my channel if you would like to receive the latest update.

Of course, this video is for educational and research purpose only. Please do your own research before investing in any stock.

What are you criteria to screen for a stock to hold for retirement? Or you prefer ETF? Let me know in the comment below.

Please give me a like before you go. Thank you and see you in the next video.