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Intro
I’m beginning coverage of my very own equity portfolio, explaining in a bit of detail why I’ve selected my positions and the overall strategy. I began this account in February of 2021 with about $100, and have grown the principal balance to $5,383.67 (by principal balance I mean cash inflows into the account, not capital gains) with a market value of $5,424.52. I recently transferred all my assets from my old brokerage to a new one and liquidated many individual holdings that I bought throughout the 2022 dip for a healthy profit (though I sold some throughout 2022 for a healthy loss). I initiated many of the positions in this refreshed portfolio strategy very recently, and want to track the performance publicly. I am a very long-term investor and I have no pre-defined plan to sell any of these positions (with 1 exception detailed below) unless a far better opportunity presents itself and I want to throw a lot of cash at it.
Currently, I’m adding $150/week in principal to this portfolio. I have the following recurring investments: $50/week into Schwab U.S. Dividend Equity ETF (SCHD), $25/week into JPMorgan Equity Premium Income ETF (JEPI), and $15/week into PIMCO Active Bond ETF (BOND). The additional $60/week sits in cash (earning 4.15% interest!) until I find an equity that’s trading at or below my intrinsic value calculation. This style is heavily influenced by Warren Buffett’s approach of sitting on cash until you find a wonderful use for it. I plan to continue adding to SCHD and JEPI until I reach what I call ‘Critical Velocity’, which is the point at which every dividend reinvestment yields 1 additional share. At that point, I will end my recurring investments and let these compound through dividend reinvestment. Further, I use what I call my ‘Individual Security Purchase Plan’ to maintain a consistent, traceable approach to equity investments. I look for what I believe are wonderful businesses with phenomenal growth opportunities at attractive prices. Here’s my current list:
Lowe’s (LOW): $275.22
Adobe (ADBE): $351.41
Tesla (TSLA): $142.35
Taiwan Semiconductor (TSM): $85.73
Berkshire Hathaway (A shares) (BRK.A): $701,920.64
That said, let’s dive into the portfolio and strategy.
Current Allocation
| Ticker | % of Portfolio | Cost per share |
| Schwab Dividend ETF (SCHD) | 37.86% | $76.77 |
| JPMorgan Equity Premium Income ETF (JEPI) | 18.88% | $54.98 |
| Lowe’s (LOW) | 18.46% | $212.28 |
| PIMCO Active BOND ETF (BOND) | 10.17% | $93.10 |
| Berkshire Hathaway (BRK.B) | 5.71% | $308.00 |
| Tesla (TSLA) | 3.59% | $154.69 |
| Adobe (ADBE) | 1.86% | $366.62 |
| Taiwan Semiconductor (TSM) | 1.76% | $88.02 |
| 3x Leveraged S&P 500 ETF (UPRO) | 1.26% | $34.15 |
| 3x Leveraged Nasdaq ETF (TQQQ) | 0.44% | $21.83 |
Strategy Analysis
1) SCHD
This ETF seeks to track the Dow Jones Dividend 100 Index. Most of the holdings are blue-chip companies with strong histories of dividend payments. This fund has generated a better 10-year total return than the S&P 500. This fund is ideal for conservative, passive-income investors but it also presents a lot of potential for capital appreciation. The top 10 holdings, representing nearly 40% of the portfolio, give me confidence in the future S&P out-performance for this fund. There’s a lot of exposure to rapid growth and future-oriented sectors such as semiconductors, 5G, and cloud technology (Broadcom (AVGO), Verizon (VZ), Texas Instruments (TXN), Cisco (CSCO)). Not only are these industry leaders in growing sectors, but they show strong dividend growth which forces financial discipline on management. There are also positions that I believe are safer but provide lower total return expectations, like Lockheed Martin (LMT), PepsiCo (PEP), and Coca-Cola (KO). These are industry leaders in developed industries that aren’t growing rapidly, but they generate an abundance of cash which translates into consistent dividend growth. As you can see below, the top 10 holdings all have at minimum 10 consecutive years of dividend growth and 4 of the 10 have a greater than 10% 5-year compounded annual growth rate.
All in all, I believe SCHD is a great choice for any passive investor who wants long-term capital appreciation and income. Keep in mind, dividends get taxed at your personal income tax rate, so in most cases, they carry a higher tax basis than long-term capital gains. There are definitely better opportunities for long-term total return, but this is a safe and consistent pick that will help you sleep well at night. Further, this has one of the industry-leading expense ratios at 0.06% compared to the 0.48% average, meaning you can expect significantly less money to leave your pocket in management fees. That makes the baseline for SCHD even better, because many ETFs may outperform the S&P in terms of capital appreciation, but may lose out in terms of total return because of the burden of the expense ratio. For reference, a 0.06% expense ratio represents a total loss of $77 over 10 years on a $10,000 investment. Additionally, SCHD has a below-average portfolio turnover ratio, meaning total loss attributed to commissions and capital gains tax is below average.
The underlying logic, or strategy, for this holding is one of a baseline. Any investment in an individual security is held to the yardstick of “Do I expect this to generate better returns than SCHD in the long run?” If the answer is no, then why would I put money in a security when I instead could put it in SCHD? With 244% total return over the past 10 years, that sets the baseline expected return for any equity investment over the next 10 years. If I expect less than 244%, there’s no reason to buy an individual security instead of SCHD.
2) JEPI
This ETF has been on every income investor’s radar throughout 2022, and rightfully so. This fund far outperformed the performance of the S&P due to the use of covered calls (in the form of Equity-linked notes, or ELNs). These notes are derivative products that represent out-of-the-money call options used to generate income. A covered call works like this: if I own 100 shares of Lowe’s, I can sell a call contract which represents the requirement to sell 100 shares at a certain ‘strike’ price by a certain expiry date. If Lowe’s does not exceed that strike price by the expiry date, the contract will expire worthless and I won’t be required to sell my position. In this scenario, I’ve profited from the premium paid for the call contract and haven’t liquidated my position. However, if the price did exceed the strike price, the contract owner could call the option and buy all 100 shares of Lowe’s at the agreed-upon price, which is less than the current market price. In this scenario, I still keep the premium from selling the contract, and earn some profit from the sale (based on my cost basis), but lose out on some capital appreciation (the difference between the strike price and market price). In a bear market, you can expect this type of fund to outperform, since selling a call gives you cash in hand and with the market dropping, it’s unlikely the market price at expiry will exceed your strike price. However, this limits upside potential in a bull market. JEPI is still relatively new, but has a below-average expense ratio and has produced a very impressive yield. I do not expect the double-digit yield to continue throughout 2023 unless the bears win the year. In a bull market, this likely will only produce a 5-8% yield and less total return than the S&P. This is my income-generating asset and psychological safety net. I’m not immune to the pain of a 20% drawdown in equities, but a large position in a covered-call fund makes it significantly easier to maintain composure throughout a bear market. For now, I plan to keep this fund compounding through dividend reinvestment, but I’m not opposed to using the monthly distributions for individual equity purchases if the price is right. My long-term goal is to have significant stakes in individual equities, but I only intend to buy at the prices I’ve detailed above.
3) Lowe’s
This was my first significant investment in an individual security. I initiated the position with a touch over $1,000 at a price of $212.28. Despite Berkshire Hathaway being more undervalued based on my estimates, I chose to invest in Lowe’s because I used much more conservative estimates in my valuation for Lowe’s than I did for Berkshire. I am all in on Lowe’s and I’m throwing every penny I have in my account at Lowe’s until the price reaches at least $275.22, which is my current fair value estimate. I expect very strong returns from Lowe’s because of strong management, strong growth tailwinds, and phenomenal dividend growth. This is my favorite security right now, and I am confident that this is a wonderful business, with wonderful management, and will make me very happy in the long term.
4) BOND
The PIMCO Active Bond ETF is my emergency fund. This is a low-volatility bond ETF that generates above-average income. I plan to keep the value of this investment at roughly 10% of my total portfolio value as a personal emergency fund for myself and my family. Bonds are attractive for their stability and predictability, but sacrifice total return compared to stocks. I believe PIMCO adds value through its active management, so I am not apprehensive about the above-average expense ratio. This also gives me exposure to corporate bonds, which I wanted but didn’t have the confidence to initiate any positions myself. I’d much rather pay the professionals at PIMCO to do it for me, so I can focus on finding individual securities that I like.
5) Berkshire Hathaway
For any long-term investor, Berkshire ought to be on your radar. Warren Buffett and Charlie Munger are perhaps the kings of value investing, and it’s foolish for 99.99% of people to believe they can outperform them. I am no different. Although it represents a fraction of my portfolio currently, Berkshire is second in line behind Lowe’s, and I will continue to grow this position as long as Berkshire is undervalued. Even after the Buffett-Munger era, which is coming to an end, I have every confidence in the future performance of the portfolio they built. They own incredible businesses and anyone would be foolish to ignore this stock.
6) Tesla
I believe Tesla is paving the way for a sustainable energy future. In the same way Google (GOOG) (GOOGL), Apple (AAPL), Microsoft (MSFT), and Meta (META) have built extensive product & service ecosystems for our digital life, I believe Tesla is building an energy ecosystem for real life. I can envision a world in which average Americans generate energy with a solar roof, store that energy for household use in a Powerwall battery, use that energy to charge their car, and sell the excess energy to the grid to make some money. I can see that future in America, and I see Tesla paving the way. Tesla has a first-mover advantage comparable to that of Standard Oil and is well-positioned to benefit from the worldwide shift to sustainable energy. I believe Tesla can become the most valuable company in the world within the next 10 years; however, my fair value calculation accounts for the significant risks associated. Elon Musk is a double-edged sword who has consistently done the impossible but his personality has garnered a lot of negative press. Further, the sustainable energy market is becoming increasingly crowded and is still a very nascent industry. We’ve yet to see if Lithium-ion technology will truly be the king of this sector, or if viable competitors like liquid hydrogen are a serious threat. At the end of the day though, I do believe in the future of Tesla and I believe Elon Musk will continue to do what seems impossible today. Many people compare Tesla to other automobile manufacturers and are intimidated by the market value, but make no mistake: Tesla is much more than a car company, and should not be viewed as such.
7) Adobe
Adobe is the king of digital content and has one of the widest moats and most extensive network effects I’ve ever seen. It’s pretty simple actually, Adobe’s SaaS products are the industry standard for beginner, amateur, and professional digital designers. Adobe is led by Shantanu Narayen, who has been on the management team and a major shareholder since their initial public offering. Narayen oversaw a nearly flawless transition to cloud-based services and has positioned Adobe as an incredible cash-generating machine with its subscription-based revenue model. With a growing world population and increasing worldwide adoption of the digital world, Adobe will continue to be the industry standard and will produce amazing returns for the foreseeable future. I see no reason that Adobe is not in the same conversation as Apple, Microsoft, Google, and Meta as the kings of big tech. Adobe does present some risks, namely bloat from acquisitions and its reputation as a monopoly. However, the risks are far overshadowed by the potential returns, and I am all-in at the $351 price point.
8) Taiwan Semiconductor
TSMC has an unbelievable moat in one of the fastest-growing sectors. By far the leading manufacturer of semiconductor chips, value is practically oozing from this company. Every dollar they spend on new production facilities will pay off with many multiples once production begins. Many chip companies are ‘fabless’, meaning they design chips but do not manufacture them. Not TSM. They have a significant share in the chip manufacturing market and really have no serious competitor. I’m very bullish at the $85 price point, but it would be foolish to ignore the severe geo-political risk here. Taiwan is shaping up to be the center of China-U.S. tensions, and much of that is driven specifically by the desire to control this company. Chip production is vital for ongoing innovation in artificial intelligence, the Internet of Things, machine learning, 5G, and many other tech innovations. Both China and the United States stand to benefit significantly from TSM’s chips.
9) Finally, UPRO and TQQQ!
For these, my strategy is simple: if it drops more than 5% on any given day, I buy $10. I plan to continue accumulating equity, with plans to sell 10% of my holding each time the respective index hits an all-time high. Although you experience volatility decay (-5% is more in nominal terms than +5% since the starting value is higher in a negative return, so over time you lose value just by the essence of volatility). I feel more protected from volatility decay due to my strategy of only buying on red days and only selling on green days. I believe over time, this will significantly outperform the market and generate amazing returns. However, it’s far too risky to put in large sums at a time or to make a single large purchase. These funds track the performance of the indices on a 3-to-1 basis, meaning a 1% rise in the S&P/Nasdaq yields a 3% rise in UPRO/TQQQ and vice versa.
Conclusion
Following the common investing maxim, sticking to a strategy is more important than the strategy itself. In that light, I recognize that my strategy may not be perfect, but I plan to be disciplined in my investment approach and follow this strategy to achieve market-beating returns. I look forward to future installments of this portfolio review, and hope for lots of success in the meantime!
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