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So, you've already opened a trading account and you're ready to invest and follow an asset allocation strategy. Every day we often get questions from all of you regarding “What stocks do I invest in,” “how do I invest in stocks,” or “where to invest in stocks.” Our immediate investment advice usually comes in the form of a few questions. Those questions are::
#1 What are your goals?
Is your financial goal to make as much money as possible? Is it to have a steady stream of income? Is it to preserve your capital? Is it somewhere in between? What we are trying to understand here is what is your optimal investment objective so we can make the right recommendation. Before you research on what are the best value stocks and other quantitative investment strategies, be sure to set your investment goals first.
What investors often do not understand is everyone has different goals and therefore the right investment for one person may not be the right investment for another. If someone wants to make a ton of money we may recommend a risky investment whereas if someone wants a riskless investment we will recommend them something else! There is no one size fits all investment decision here!
#2 The second question we often ask is what is your risk tolerance?
Can you tolerate the ups and downs associated with certain investments? Or do you prefer something that is less volatile? If the investment was to not work out, could you tolerate losses? When we ask this question we often are trying to understand how much risk tolerance you have and if the answer clashes with the first question above. If an investor has a financial goal of big gains but cannot tolerate risk, then risky investments that have large upside may actually not be for them! This point is very key here. More risk = more potential gains but also comes at the expense of potential larger losses.
#3 The third question we often ask is what is your time horizon?
Do you want this investment to make you money tomorrow or can you afford to wait over a year? The reason we ask this is because all investments behave different. Generally speaking, for more speculative investments, often only over the course of a long time, can we as investors, truly know if the investment will pan out. Whereas for investors with shorter time horizons, the investment then skews more towards the spectrum of "betting" rather than a true investment.
Long story short, until we understand who you are as an investor, it is inappropriate to make the right recommendation for you. But after understanding who you are, we then can make the right recommendation for you. And so with that introduction, we are giving our 3 favorite stock picks for the most common types of investors we run into.
Using the picture below, let's construct three types of investors and what types of investments they should be investing in.
Long time horizon, can tolerate risk, wants their investments to make significant gains: This is a common type of investor we run into. The investor who has time on their side (is generally younger), can tolerate the daily volatility of an investment, and wants to make money over the longer term. While there is no "best profile" it often is the easiest for the investor to see upside, while minimizing risk, over the long term. For these types of investors, we often recommend growth-type investments. Please note that these investments are very long-term in nature (2-3 years plus)! And for this investor, these are our favorite growth 3 stocks for them!
1) Twilio (TWLO): Twilio is an American cloud communications platform as a service company based in San Francisco, California. Twilio allows software developers to programmatically make and receive phone calls, send and receive text messages, and perform other communication functions using its web service APIs. While Twilio has grown significantly in 2020, we believe they are primed to be massive leaders in the space over the long term.
9/13/21 update: We have and continue to love Twilio. They are one of our top stocks picks EVER. Last we spoke about them, we were extremely interested in their CPaaS platform and the Segment + Syniverse acquisition/partnership. Twilio is making significant strides in their "supernetwork" and should absolutely dominate communications for years to come. This is a stock we're going to be holding for years.
2) Opendoor Technologies (OPEN): Opendoor is an online real estate company based in San Francisco. It makes as-is cash offers to property sellers through an online process, improves and repairs the properties it purchases, and relists them for sale. Think of it like the Amazon for home buying and selling. Given the real estate market is one of the largest markets in the world, we see Opendoor taking significant market share here.
9/13/21 update: They're doing very well in the iBuying real estate market but SPAC's like OPEN have not faired well YTD. We anticipate this trend to continue and therefore lack conviction to add to our existing position. While we think they will do well over the very long term, there are a lot of short term headwinds that they must face. If you're looking to add more OPEN, we suggest waiting.
3) Virgin Galactic (SPCE): Virgin Galactic is an American spaceflight company within the Virgin Group. It is developing commercial spacecraft and aims to provide suborbital spaceflights to space tourists and suborbital launches for space science missions. While space travel/space use cases may take awhile to materialize, SPCE will be a player in the industry for some time to come. As the riskiest investment here, this will take a very long time to likely play out, but if done correctly, this stock will sky rocket (no pun intended) over the long term (many years).
9/13/21 update: Talk about a volatile stock. SPCE has seen spikes and falls around the news cycle that coincided with the launch of their rockets. The next launch in October should yield some buzz around the company but they'll likely suffer in the short term due to a lot of what was just discussed above regarding SPAC's. Given the hyper growth profile and the headwinds against these types of stocks, we are avoiding adding to this position until the macro environment changes.
Average time horizon, medium tolerate risk, wants an investment that either offers steady income or gradual stock gains: For this investor, they are neither growth investors nor are they strictly conservative investors. They fall somewhere in between and therefore should have a balance of both types of investments! For them our favorite types of stocks are:
1) Shopify (SHOP) Growth: Shopify Inc. is a Canadian multinational e-commerce company headquartered in Ottawa, Ontario. It is also the name of its proprietary e-commerce platform for online stores and retail point-of-sale systems. Shopify is another company we believe in thoroughly over the long term. While not as risky as the above, given the maturity of their business, SHOP still has a ton of room left to grow. This makes them a growth investment with a ton of upside. We believe this upside will be realized as they take on companies such as Amazon.
9/13/21 update: Since we recommended SHOP earlier this year they're up 34% YTD and 57% over the last year. Our conviction on them too has not changed. As more and more companies launch online businesses, SHOP stands as the market leader ready to help scale these partners. We're therefore continuing to hold SHOP and believe they can double to triple in value over the next several years.
2) Lowe's (LOW) Conservative: Lowe's Companies, Inc., doing business as Lowe's, is an American retail company specializing in home improvement. Headquartered in Mooresville, North Carolina, the company operates a chain of retail stores in the United States, and Canada. LOW is a mature company that still offers some upside! We like this investment for this type of investor who wants upside but also wants some income and stability!
9/13/21 update: Up ~30% YTD, Lowe's is a great stock that offers upside as well as income (1.55% dividend yield). With home building going up, and more business coming their way, we think Lowe's sits in an amazing position to continue to perform well over the next year. While their growth will likely lag the broader index (given their growth structure), we like this stock a lot given the risk/reward profile combined with a steady income stream!
3) CarMax (KMX) 50% Growth/ 50% Conservative: CarMax is America's largest used-car retailer and a Fortune 500 company. The corporate entity behind the formation of CarMax was Circuit City Stores, Inc. The first CarMax used-car store opened in September 1993, 1.7 miles from Circuit City's corporate offices in Richmond, Virginia. CarMax is an interesting play here as they make the transition to buying online. Established almost 30 years ago, CarMax is a mature business, yet still very young as they look to take on this massive endeavor. Therefore we believe KMX offers a nice blend between conservatism and growth!
9/13/21 update: While we love KMX and they've performed really well this year (43% YTD), we like their competitor better! That competitor is Carvana (CVNA). We recently wrote them up and think the stock should continue to perform well. While we also think KMX will do well, we believe CVNA should outperform them over the next year. With the online car market exploding, CVNA's technology, customer service and support far outpaces the rest of the industry. Therefore CVNA should continue to grow faster than their peers and expand their margins over time!
Short-term time horizon, cannot tolerate risk, and either wants big stock gains or gradual income: This investor requires proper education. For this investor while they may have an investment objective of massive upside, for them risk should ALWAYS dictate the types of investments they seek. While they may want upside, if they cannot the tolerate the risk associated with growth investments, then they should not be investing in them. Period. For this investor, they should be focusing on conservative investments only. And for this investor these are our 3 favorite conservative investments:
1) SPDR S&P 500 Trust ETF (SPY): The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index. This fund is the largest ETF in the world. For the short-term investor who is risk-conscious, we actually recommend an ETF that tracks the broader market. That way if the market sells off, this investment won't do worse than the broader market and conversely when it goes up, it also will not outperform. This ETF will help mitigate any single stock risk and help diversify holdings across the general market!
9/13/21 update: SPY has and will always continue to make sense as an investment. With the market averaging 10% returns annually over the last 70+ years, investments like SPY come with much less risk. Since outperforming the market is hard enough on its own, investing a portion of your investment portfolio in an index like this, is a surefire way to make sure that you're always participating in the broader exposure to market upswings. While it is a boring pick, it is right for most investors to hold in their investment portfolio.
2) Microsoft (MSFT): Microsoft Corporation is an American multinational technology company with headquarters in Redmond, Washington. It develops, manufactures, licenses, supports, and sells computer software, consumer electronics, personal computers, and related services. MSFT is a staple in the technology world. Transferring from selling software to selling software as a subscription (SaaS), MSFT has been able to weather any storm that comes there way. MSFT should see upside over the future, but also is a blue chip name that comes with less risk than other younger technology companies.
9/13/21 update: There are 3 things that are always guaranteed in everyone's life. That is death, taxes and that Microsoft (MSFT) always goes up. Kidding aside, MSFT has been proving the market wrong ever since their IPO. WIth the stock up 2,945,900% since their IPO, MSFT has been on the road to stardom during their entire public life. Always adjusting with the times, MSFT will continue to be a market leader for years to come. While this pick will not make you rich overnight, it will appreciate, pay out income and be one of the safer tech stocks in your portfolio.
3) Goldman Sachs (GS): The Goldman Sachs Group, Inc., is an American multinational investment bank and financial services company headquartered in New York City. It offers services in investment management, securities, asset management, prime brokerage, and securities underwriting. Founded in 1869, GS is one of the oldest banks in the USA. While older, GS is no stranger to innovation and has been able to remain a leader in the finance world for over 150 years! GS should also provide stability, income and upside for this type of investor!
9/13/21 update: With financials rallying hard this year, GS has outperformed our expectations being up 52% this year and over 100% in the 12 months! While we do not expect this outperformance over the next 12 months, we do think GS is one of the stronger names in all of finance. We therefore are continuing to hold the position, as we believe financials still have more room to rally given their underperformance over the last decade!
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