Written by Erich M. Imphong CFP®
A friend recently asked me, “How do you know what stocks to invest in and where do you even start?” I thought about his question, and realized the simplest response is we invest in companies we understand.
However, the question made me realize there are other ways to discover great companies besides screening for them over spreadsheets. I recalled that Google CEO, Larry Page, uses the “toothbrush test” when considering acquiring another company, according to The New York Times David Gelles. Specifically, he considers, “Is this something you will use once or twice a day, and does it make your life better?” This logic is very similar to Warren Buffet’s maxim of investing in what you know.
To marry these approaches, consider the brands your household uses on a daily basis, and you may be surprised to find a rather diversified stock portfolio built around large blue chip companies that you know very well.
I applied this to my household for a day, and below could be a portfolio based simply on what my wife, kids, and I use once or twice a day:
- Apple (AAPL) – iPhones, iPads
- Colgate (CL) – toothpaste
- Exxon Mobil Corporation (XOM) – gas
- Costco (COST) – Kirkland brand
- Abbott Laboratories (ABT) – baby formula
- Johnson & Johnson (JNJ) – BAND-AID’s
- Verizon (VZ) – cable & internet
- Unilever (UN) – soap
- Facebook (FB) – like
- American Express (AXP) – credit card
- Visa (V) – debit card
- The TJX Companies, Inc. (TJX) – household clothing
- Under Armour (UA) – recreational clothing
- Amazon (AMZN) – anything ordered online
- Google (GOOG) – goes without saying
I used 15 spots here because in personal finance, having at least 15 individual companies should be sufficient for diversified exposure to help reduce firm and industry risk. What this portfolio does lack, though, is international exposure and fixed income for a balanced portfolio. However, I was curious to see how this portfolio would have returned over the past two years of this bull market (limited because of Facebook IPO) if I assigned an equal dollar amount to all the companies above. The returns here were quite impressive:
It is important to note that past performance does not indicate future performance, and 2013 was an extraordinary year for returns.
This does show, though, that by being aware of the brands/companies your household uses on a daily basis may be the same brands that countless other households use, and thus suggest profitable companies. Researching the underlying positions and consulting with a financial advisor would be the prudent next steps in determining the level of risk these position(s) may add to your portfolio as well as how they may correlate with current positions. Lastly, diversification is always key when building a portfolio…so don’t put all your eggs in one basket!