The Most Critical Investment Decision Is Not What You Think
This is Porter’s Daily Journal, a free e-letter from Porter & Co. that provides unfiltered insights on markets, the economy, and life to help readers become better investors. It includes weekday editions and two weekend editions… and is free to all subscribers.
60/40 portfolio is the most popular method… 100 minus your age… Erez Kalir shares his allocation strategies… The barbell approach… Know your investment horizon and risk tolerance… The debt keeps piling up… Apple is a buyback machine…
Editor’s note: We will not be publishing the Saturday Stock Screen and Sunday Investment Chronicles for the remainder of August. The two weekend Daily Journal features will resume publication on September 6 and 7.
As regular readers know, at Porter & Co., we provide world-class investment research for individual investors. We write about the stocks and bonds of individual companies, their current and anticipated valuations, the timing of buying and selling them, and the risk involved in owning them.
But there is one more step involved to bring it all together… asset allocation, which is the topic of today’s Daily Journal, adapted from a Big Secret On Wall Street essay from March 2024.
The specific combination of assets in a portfolio can explain between 80% and 94% of its total return.
Asset allocation – how investors invest, or “allocate,” their capital across (and within) different asset classes like stocks, bonds, real estate, and commodities – is critical. In fact, research suggests that asset allocation can play a more important role in investors’ long-term success than which individual investments they own.
However, proper asset allocation is also a highly individual matter. No one-size-fits-all allocation is appropriate for every investor in every situation.
The academic foundation of asset allocation dates to the early 1950s, when Nobel Prize-winning economist Harry Markowitz showed that investing in a combination of stocks and bonds produced better risk-adjusted returns than investing in either asset alone.
Markowitz’s research led to the development of the popular “60/40 portfolio” – consisting of a 60% allocation to stocks and a 40% allocation to bonds or fixed income – which is still widely recommended by financial advisors, more than 70 years later.
Of course, this is just one way an investor might assemble a portfolio. Another popular approach is the “100 minus your age” rule, which designates a gradually smaller percentage to stocks (and therefore, a larger percentage to bonds) as an investor grows older.
The idea here is to reduce investors’ exposure to riskier and more volatile stocks, as they move closer (and into) retirement – a time when they’re more likely to need to access their capital. This is generally an improvement over the static 60/40 portfolio, but still excludes allocations to other assets – like real estate, commodities, gold, and even Bitcoin – which can add further diversification and potentially produce better risk-adjusted returns than stocks and bonds alone.
The reality is there are virtually endless ways to invest across various asset classes depending on personal circumstances. And we simply can’t provide the kind of individualized advice that would be required to make those decisions on your behalf.
That said, there are some general guidelines that can be helpful in making these decisions. And Porter & Co. Biotech Frontiers analyst Erez Kalir recently joined Porter for an in-depth discussion on this topic.
The full 40-minute video of their conversation – which includes how Porter allocates his own personal portfolio, some of his favorite investments, and details on the extraordinary opportunities Erez sees in the biotech industry today – is available exclusively for our Partner Pass members.
Partners who missed this video can catch up right here. And readers who are interested in learning more about becoming a Partner Pass member can contact Lance James, our director of customer care, or a member of his team, at [email protected], or by phone at 888-610-8895 or +1 443-815-4447.
However, given the importance of this topic, we’ve decided to share some key highlights from this discussion with all of ourreaders in today’s Journal.
Balance Your Risk Barbell
One allocation idea Porter and Erez discussed is the risk barbell.
This is the simple yet useful concept that investors should seek to balance risk across their portfolios.
If you think of an investment portfolio as a barbell, the goal is to offset any high-risk assets on one side with super-safe assets on the other, so that overall portfolio risk is balanced.
Of course, if you’ve been reading The Big Secret On Wall Street for long, you know we believe investors don’t need to take a lot of risk to earn market-beating returns over the long run.
But this rule implies that if an investor does decide to invest in riskier assets, he must take care to own super-safe and prudent investments as well. And generally, the more risk an investor takes on one side, the more conservative he should be on the other.
This idea also encourages sensible position sizing, helping to ensure an investor doesn’t invest too much capital into any one position.
Know Your Investment Horizon And Risk Tolerance
A second critical idea Porter and Erez discussed was the importance of knowing your investment horizon and risk tolerance.
One category name in The Big Secret portfolio is “Forever Stocks,” which are stocks you can buy and hold forever… We believe the surest way to build wealth in the market is to simply buy great businesses when they trade at good prices and never sell them – allowing the magic of compounding to multiply your capital tax-free.
However, we also understand that holding an investment for decades isn’t practical for every investor. Depending on one’s age and personal circumstances, an individual’s investment horizon may be far shorter. And this should play a significant role in their asset-allocation decisions.
For example, investors with a shorter investment horizon – if they need a specific amount of money for a home purchase or retirement, for example – would generally be well served to allocate a greater percentage of their portfolios to fixed-income investments and less to equities. Porter would go even further. As he explained…
I would tell you that you shouldn’t own any equities in your portfolio that you are not happy to hold for at least five years. I would just say that most people’s [horizon] is just unreasonably short.
You know, I’ve run a lot of different businesses in my life, and it takes two or three years to fix a business problem. It doesn’t disappear overnight. And so, when problems occur in companies, you have to give them time to be fixed. It would be a shame for you to go sell, say, Coca-Cola or Hershey because there’s a short-term market tizzy about an issue that sends its stock down 20%…
So, if you have capital that you’re going to need within five years, my advice is to stick strictly with fixed income.
Similarly, risk tolerance should heavily factor into an investor’s allocation decisions.
For example, as Porter noted, even Warren Buffett’s Berkshire Hathaway – one of the greatest businesses in history and an extraordinarily low-risk stock – has temporarily lost 50% of its value on three separate occasions over the years before rebounding to new highs.
Investors unable to tolerate that type of volatility would be wise to minimize their equity exposure as well and focus more on lower-volatility fixed-income opportunities, such as those we focus on in Porter & Co. Distressed Investing.
Maintain a Reasonable Number Of Positions
This idea should be relatively obvious – but is often overlooked.
In short, there is a limit to how many investments any investor can monitor effectively. Even full-time or professional investors only have so much time and mental bandwidth to devote to each investment position.
Yet it’s not uncommon for many investors to end up owning dozens, or even hundreds, of individual positions. This is a recipe for poor returns if not outright disaster.
Porter and Erez agree that most investors should limit the total number of individual investments to no more than 18 positions. This is a small enough number to be manageable for most investors, while still allowing for a good amount of diversification.
The one major exception to this rule would be broad-market or broad-asset exposure held through mutual funds or exchange-traded funds (“ETF”) that don’t necessarily require the same degree of oversight.
Embrace Change With Dynamic Allocation
Finally, Porter and Erez encouraged investors to adopt a flexible approach to investing with what Porter calls dynamic allocation.
This idea acknowledges that markets – like the seasons – change. Some assets, sectors, and individual companies come into favor, while others fall out of favor. Some become wildly overvalued, while others are left for dead.
Investors who are willing to occasionally “break the rules” and allocate significant portions of their portfolios to extreme value can earn incredible returns with very little risk.
As Erez pointed out, this approach was a favorite of the late Berkshire vice chair and Buffett sidekick Charlie Munger.
Investors would routinely ask Munger how to get rich in stocks, and he would consistently point to these kinds of rare opportunities – opportunities that may only come along a handful of times in an investor’s entire lifetime.
The key, Munger noted, was to have the patience to wait for these “fat pitches” to come along… and then to have the courage to “swing hard” when they inevitably arrive.
Porter has previously shared two quintessential examples of this approach from the Global Financial Crisis…
First, in the fall of 2008, investors were clearly panicking. Warren Buffett wrote a letter to the New York Times explaining why it was time to buy stocks hand over fist – and was criticized on CNBC for doing so! If there has ever been a better contrarian indicator, I’ve never seen it.
Meanwhile, you could have bought shares of iconic beer maker Anheuser-Busch (BUD) for around $50 for several weeks in October and November in 2008. At the time, global brewer InBev had an all-cash deal in place to buy the stock for $70 per share. I told my subscribers that the situation was so safe, they should put 25% of their assets into the shares.
It was the easiest and safest way to make a lot of money that I’d ever seen. Even if the deal fell through (and it couldn’t – it was an all-cash deal at a reasonable price)… the stock was worth far more than $50 a share. In my view, there was zero downside and an almost certain $15 to $20 profit in just a few days.
Second, a few months later – in February 2009 – shares of renowned jeweler Tiffany (TIF) were trading for less than $25. The company has large inventories of gold and precious stones. Subtracting the value of its inventory from its debt load and dividing by the shares outstanding revealed a liquidation value of around $24 per share.
In short, you could have bought Tiffany – one of the premier luxury brands in the world – for the value of its inventory. That means, you could have gotten the real estate, the brand, and all the future profits for free.
It’s at times like that when you must be willing to make large commitments.
Putting It All Together
Investors who keep these four principles in mind are likely to dramatically outperform those who blindly follow the generic allocations recommended by many financial advisors (or worse, those who don’t think about asset allocation at all).
A good place to start, of course, is The Big Secret On Wall Street. Right now, there are 40+ positions inside The Big Secret portfolio… and the performance across the board is absolutely exceptional.
However, some companies we recommend provide more lucrative investment returns at the current moment than others.
This is why, for Big Secret subscribers, we added a membership benefit highlighting these companies. Every month, we review every position in our portfolio and select the three recommendations we believe are the current Best Buys. We will be adding two news recommendations to the Best Buys on Thursday.
Since we added this benefit in February 2023, our Best Buys have handily outperformed the S&P 500:
For those who are not members of The Big Secret On Wall Street, we’ve carved off our Best Buys and created a new publication that gives you access to our top three Best Buys every month. And, most importantly, gives you access without needing to invest $1,425 for a full Big Secret membership.
So, if you want our Best Buys every month, call 888-887-3259 to get access to Porter & Co. Best Buys.
Our top three experts – Jim Rickards, James Altucher, and Enrique Abeyta – just went live with an URGENT briefing, where they revealed the #1 idea that they’re going all-inon. This single idea is set to potentially surge 1,494% over the next year, beginning with a landmark announcement from President Trump, and represents a major recalibration of the U.S. economy. Make sure you are caught up on everything ASAP.
1. Another debt milestone. The U.S. national debt officially crossed $37 trillion last week. The U.S. has now added more than $780 billion in debt since the debt ceiling was raised on July 4, when President Donald Trump signed the “One Big Beautiful Bill Act” into law. That represents roughly $22 billion in new debt per day. Repeat after us: the spending will never stop.
2. A data-center building boom. In 2018, spending on office-building construction was 7x that of spending on data centers. But ever since the launch of ChatGPT – the breakout moment for artificial intelligence (“AI”) – investment in data centers has surged. By the end of 2025, it is expected to fully surpass spending on general office construction. The race to build the computational backbone of the parallel-processing revolution ramps up.
3. Apple has become a buyback machine. Since Apple (AAPL) started its share repurchase program in March 2012, it has bought back more than $700 billion of its own stock. This sum is greater than the market cap of 488 companies in the S&P 500, and it has reduced Apple’s shares outstanding by nearly 60% over the past decade.
And One More Thing… Lithium Market Recovery In Sight
China’s excess lithium production has sent prices down over 80% since 2022. But that’s all set to change, with Chinese President Xi Jinping now pushing back against excess capacity – refusing to grant a permit renewal for his nation’s largest lithium mine. Lithium prices – and shares of mining companies – surged overnight. The Trading Club just recommended a trade in one of the world’s highest-quality lithium miners. We’re opening up membership in The Trading Club in a little over two weeks… stay tuned for the details.
Please note: The investments in our “Porter & Co. Top Positions” should not be considered current recommendations. These positions are the best performers across our publications – and the securities listed may (or may not) be above the current buy-up-to price. To learn more, visit the current portfolio page of the relevant service, here. To gain access or to learn more about our current portfolios, call Lance James, our Director of Customer Care, at 888-610-8895 or internationally at +1 443-815-4447.
