The Springtime rains are upon us up here in the mountains of Virginia. I snapped this picture as I ventured off the property:
There’s something magical about seeing the mist floating above the barn on a cool Spring morning. Life on the frontier is a simple life… but I treasure the aesthetics and connection to nature.
Getting back to the world of finance, let’s continue our discussion on asset allocation today.
If you recall, we’ve been talking about how to build a bulletproof asset portfolio utilizing Harry Browne’s old Permanent Portfolio concept with some modern tweaks.
At The Phoenician League, we see a bulletproof portfolio as consisting of:
- Reserve Assets
- Strategically warehoused cash
- Capital-efficient stocks
- Cash Flow Investments
- Alternative investments
We talked in depth about reserve assets and how to strategically warehouse cash last week. Today, let’s dive into capital-efficient stocks. And we have to start with this…
I’ve been immersed in the world of investment research for over a decade now. I’ve read countless research reports and studied more investment and trading systems than I can remember. I’ve also had access to a wealth of expensive tools and datasets to conduct my own research within the financial markets.
This experience has cemented a fundamental principle in my head. It’s something I learned from Porter Stansberry over ten years ago: There’s no teaching, only learning.
That statement sounds a little odd when you first hear it, but I’ve come to realize that it’s eternally true. I believe that from experience.
You see, when I began my journey as a young financial analyst, I thought the key to investment success lie in being clever. I thought the name of the game was to constantly identify asymmetric opportunities in the stock market that could generate significant capital gains in a short period of time.
In other words, I was always looking for the next hot stock. I wanted to find little companies that nobody knew about yet—thinking that the stock would explode higher once those companies had a breakthrough.
But here’s the thing – that’s not an investing mindset. It’s a speculator’s mindset.
That mindset has been amplified today by smartphone brokerages like Robinhood and Webull. My observation is that most people who dabble in stocks do so with a speculator’s mind.
The problem is, you’re not going to bat 1,000% on your speculations. You’ll be lucky to hit .500 with them—which makes that approach a coin flip at best. And to my way of thinking, you’ll never build a bulletproof portfolio with coin flips.
Dealing with this dynamic myself early in my career, I came to a key insight that now drives all of my investment decisions.
Investing is about ownership. When we invest in something, we take ownership in it to some degree.
Of course, this insight isn’t unique to me. Warren Buffett harped on this idea for decades in his annual letters.
But there’s no teaching… only learning. And it took me a little while to learn the importance of this concept – investing is about ownership.
If we understand this, it stands to reason that we should mostly invest in the absolute best businesses—ones that we would be happy to own for a long time. When it comes to the market, that means focusing on world-beating, capital-efficient stocks.
Capital efficiency refers to how effectively a company uses its financial resources to generate profits and free cash flow. The more capital-efficient a company is, the more value it creates for every dollar invested.
I know this sounds embarrassingly obvious. But it’s amazing to me how many investors ignore the principle of capital efficiency – although it’s easy to understand why.
The reality is that most capital-efficient stocks are boring, well-established businesses. They don’t come with the exciting story and low share price that animates Robinhood traders in Reddit forums.
Instead, capital-efficient stocks are businesses who create immense value in the marketplace and constantly crank out free cash flow in the process. These are companies who execute quarter after quarter, year after year – regardless of economic conditions.
When we focus on capital-efficient stocks, we don’t have to worry about timing the market. Instead, we can confidently build up our positions over time.
For example, I like to invest a little bit of money into my favorite companies every week. That is to say, I buy a few more shares in my favorite capital-efficient stocks every single week to cut through price volatility and build out my portfolio.
It’s a slow game at first… but then the magic of compounding starts to kick in.
You see, capital-efficient stocks pay strong dividends. And if we reinvest those dividends each quarter, our portfolio will grow faster and faster over time.
To me, the key is consistency and discipline.
I know plenty of people who think that it’s impossible to come out ahead in the stock market. They see it as gambling in a rigged casino. And I agree with them that it is – if you’re going into it with a speculator’s mindset.
At The Phoenician League, we’re not speculators. We’re investors. And investing is about ownership. That’s why we focus on the world’s best capital-efficient stocks.
And remember, stocks comprise only one part of a bulletproof asset portfolio. We aren’t putting all our eggs in this one basket. As such, we don’t have to worry when the market takes a hit – as it did earlier this month.
Plus, we know that the capital-efficient stocks we’re investing in will be fine during periods of uncertainty. Indeed, our top positions moved higher, not lower this month. They went up in value even as the stock market went down.
And this speaks to the final point I’d like to make today…
Investing in capital-efficient stocks is not about getting rich or trying to retire early… or anything else of the sort. Quite the opposite.
This is about building financial security. And once we have that security in place, then we can dive into the world of cash flow investments. That will be the subject of our next entry.
-Joe Withrow
P.S. You can find more information on this systemic approach to financial security and then financial independence at The Phoenician League.