My “Never Sell” Portfolio

Original post

I have a confession to make.

The duration and extent of the market sell-off that started in October caught me off guard.

The usually reliable convergence of the fourth quarter rally and third year of the presidential election cycle rally never materialized.

My long-term options positions all went sharply against me.

Even my go-to strategy of trading index and commodity futures for quick daily gains faltered in these choppy markets.

After all, this was a stock market where a single presidential tweet…

Or a tiny shift in the tone of Fed Chairman Jerome Powell’s remarks…

Could move the S&P 500 by more than 1,000 points in a single trading session.

At the close of 2018, I took some time to reflect on the events of the year.

As I surveyed my portfolio, I had an epiphany.

I suddenly realized there was a group of stocks in my portfolio that I treated differently than I did others.

Yes, I watched the prices of this group move sharply in response to the market’s mood swings.

But it did not bother me at all when they tumbled.

In fact, I genuinely welcomed any pullback.

After all, these pullbacks allowed me to both add to my positions at lower prices and buy and sell options around them to generate additional income.

So what allowed me to achieve this calm, Zen-like state with this part of my portfolio even as the relentless daily swings in the market left me unnerved?

Here is what I found…

With one exception, the companies in my “never sell” portfolio have the following in common:

  • Each has a wide “moat” – dominating its market with little or no competition.
  • Each produces a product or offers a service I use every day.
  • Each is growing steadily and reliably.
  • And I expect each company to be around “forever” – or at least as long as I am.

And there’s another reason that keeps me from ever hitting the sell button…

As much as I believe in these companies…

Equally important is the fact that I’ve held their stocks for many years in a taxable account…

So if I ever sell them, I’ll just be giving up a big a chunk of my profits to Uncle Sam in capital gains taxes.

So What Are They?

At this point, you may expect me to reveal the stocks in my “never sell” portfolio.

But I’m afraid I will disappoint you…

And do so for your own good.

That’s because I know that my list of “never sell” stocks will differ from yours.

Yes, you might find some of the stocks on my list compelling.

But your reaction to others might be…

“That Vardy is crazy! I would never hold that stock!”

And therein lies the reason behind my hesitation.

Say you replicate my portfolio of “never sell” stocks.

All would be well… as long as the stocks were going up.

But could you endure a 20% pullback in any of the stocks without selling, based on my recommendation alone?

Perhaps.

What about a 50% pullback?

Doubtful.

As it turns out, one of my “never sell” stocks just suffered a 50% drawdown.

Yet I never even thought about selling it.

Why?

Because I’m so convinced of its business model.

It’s the single most unusual business model I have come across in my more than 20 years of investing.

And I can almost guarantee you’ve never heard of it.

That’s because the stock is not covered by any analysts on Wall Street.  The company has only 10 employees. Yet it made more than $150 million in net income last year. That’s more than $15 million in profit per employee.

Still, after a 50% pullback over the past three months, chances are you would have sold it. (No doubt cursing me under your breath.)

So let me sum up the lesson I have learned during this market correction… and how you can apply it to your own investing.

There is a portfolio of “never sell” stocks that I will hold through thick and thin.

There is such a portfolio out there for you as well.

The challenge is that your portfolio of “never sell” stocks will look different from mine…

And it will reflect your deeply held personal preferences and beliefs.

Yes, I can help you on the journey of developing that portfolio.

But the ultimate responsibility lies with you.

Good investing,

Nicholas

P.S. Speaking of responsibility… As the parents of a headstrong toddler, my wife (a clinical psychologist) and I have decided to go “old school” in our parenting philosophy. UCLA psychiatrist Dr. Robin Berman’s book,  Hate Me Now, Thank Me Later: How to Raise Your Child with Love and Limits, offers some terrific, if rarely heard, “parentally incorrect” advice. The early results are impressive.

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