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Recently, I wrote about how I construct my portfolio:
- 50% of it is made up of exchange-traded funds (ETFs);
- 30% of it is my forever ‘’til death do us part’ portfolio;
- 10% is made up of second-tier stocks; and
- the remainder is made up of various trading portfolios.
Since the publication of that article, a number of readers have contacted me asking what sits in my ‘’til death do us part’ portfolio – a fair question.
Selecting the stocks
But first, there has to be an understanding of my thinking about these stocks. I am looking for the absolute best listed companies – 10 to 12 of them in total – and considering there are some 400 listed shares, that’s a very small slice of the JSE.
I need them to have very good track records, ideally 10 years or more of consistent growth both in the business but also in the profits.
I also want totally awesome management teams. Then when I do buy them, my intention is to hold them forever until either I die or they die (hence the ''til death do us part' name).
What is important here is that I am ruthless with reasons for not buying into a stock. When researching a company, I quickly look for reasons not to buy and if I find one, I move on. So for example hospital stocks are doing great and have a great business model, but I worry about legislative risk, so I ignore those stocks and look for other, more promising ones.
As for exiting, I have sold maybe half a dozen stocks from this portfolio over the last 20 years and some were great exits, such as when I sold Nedbank at R140 way back in the early 2000s. Other exits were mistakes, like when I got rid of SAB back in the 1990s – a horrid error I still have nightmares about. But I am human and making errors is part of that.
So what’s in the portfolio?
Currently the portfolio holds 10 stocks, namely: BHP Billiton, Capitec, City Lodge, Discovery, Famous Brands, Metrofile, Richemont, Sasol, Shoprite and Woolies.
Regular readers will know Sasol has been causing me concern for some time but after a long period of reflection last year I decided to keep it. Then the company made the announcement about the Lake Charles deal and how it will cost a packet more and deliver less. As a result of this, I am not currently buying Sasol, regardless of price. I am also avoiding BHP Billiton.
The real question is whether very cyclical commodity stocks ever really belong in a long-term portfolio. On many occasions, Ricus Reeders from PSG has said that they do not and he may be right. The nature of commodity stocks is that they boom like crazy and then crash, going nowhere for a long time. They should probably go into the second-tier part of the portfolio – here I buy stocks that are on the move and I hold them until they start to fade (potentially years, but not forever).
The other eight stocks in the portfolio I am 100% happy with. At current levels I am buying: Richemont, Woolies & Shoprite (before the crazy 11% run in one day). Famous Brands I buy below R120, while the others are well above my perceived fair values, so I am not a buyer right now.
As I want 10 to 12 stocks in this portfolio, there is space for two more. After a webcast in June the consensus was that I should also have a look at the following stocks: JSE, Mondi and Brait. (I own the last two in one of my trading portfolios but not in the ''til death do us part' one - there are times when the stocks in these two portfolios overlap.)
This article originally appeared in the 4 August edition of finweek. Buy and download the magazine here.
