Disclaimer: the guide below describes exactly how I, the Love Investor, invest my money. No mainstream “money expert” would likely to endorse this, and it might indeed not be for everyone, so take it with a healthy dose of skepticism, examination and judgment. Stock market is inherently risky. You are solely responsible for your financial gains and losses. In case you make a lot of money for your family and yourself, consider naming your kid Jia. It’s a beautiful unisex name.
This is the fourth article of my new blog: Love Investor. I hope by now you understand the need for investing as well as the concept of Love Investing. It’s time to get started and put your money where your love is. Let’s talk about how to be a Love Investor step-by-step.
Step 1 – Love List
List 10-30 public companies whose products and services you love the most. That is, if these companies were to disappear today, the thought of you having to use alternative products upset you (sorry Bing, I just can’t get there with you in case Google goes away). Remember, these are NOT 30 stocks that have done well in the past, or you think will do well in the future. They are all about your love. Suppress your left brain’s desire to calculate and predict, and rely on your right brain’s ability to feel.
In long-term Love Investing, predictions are often wrong. But loves are mostly right.
The minimum number of 10 and the maximum number of 30 are there for a reason. If you have fewer than 10, you will run the risk of putting all your money in too few baskets. Your portfolio would become too risky. If you have more than 30, you will become too unfocused. You would have a hard time managing a portfolio of that size. Your return might also gradually resemble the market at large, which you are trying to beat.
Step 2 – Love Rank
Rank your companies from your most beloved to your least beloved (but still beloved. If you no longer love the company, remove it from the list). Stocks are like kids. You might like one more than the other. In parenting, you don’t want to rank them, at least in front of them. But in Love Investing, ranking is a key exercise because you want to continuously assess how much you love them and if they should stay on your list. Moreover, they won’t have their feelings hurt or develop sibling rivalries.
If you don’t know how to rank all your companies, compare them one by one. For example, say you have Amazon, Boston Beer and Costco on your list. If you were forced to remove either Amazon and Boston Beer from the world, which one would make you sadder? If it’s Amazon, then put Amazon as #1 and Boston Beer as #2. Then do the same exercise with Costco and Boston Beer. If you shed more tears for Boston Beer, then put Costco at #3, and your final ranking would be Amazon, Boston Beer, Costco. But if you cry for Costco more than for Boston Beer, then compare Costco with Amazon. If you love Amazon more, then your ranking would be Amazon, Costco, Boston Beer. If you love Costco more, then it’s Costco, Amazon, Boston Beer. Do this exercise with all your companies. It should be a lot of fun, but prepare some Kleenex just in case it gets too emotional.
You should re-examine and re-rank your loves every quarter. This practice is crucial in Love Investing. When good companies make even better products, they should rise in your ranking. But when they start to make crappy ones in exchange of short-term profit, like Microsoft did during Steve Balmer’s reign, or when their products are supplanted by newer and better products that you love more, like Blackberry was dethroned by Apple, their rankings should drop accordingly. If one day you don’t love them anymore, remove them from your list and portfolio completely. I will explain this in Step 6 – More love/Unlove.
Step 3 – Love Account
Although this sounds like a story about a rich guy and his mistress, I am only talking about getting a brokerage account for your Love Portfolio. If you don’t have one already, time to open one up. The brokerage service has to 1: be commission-free, which most of them are nowadays 2: have fractional trading functions (you can invest in a fraction of a stock, so you can invest say $1,000 in Amazon, even though Amazon’s stock price is $3,000+ per share). Personally, I use Fidelity because I have been using it for the past 15 years. They do a good job keeping track of your history and providing new features. I am not a big fan of Robinhood, mainly because their gamification mechanics are very short-term focused, and their app lacks portfolio overview features. Moreover, the February 2021 Gamestop fiasco showed a lot about the company’s characters and values when the going gets tough. I would suggest you stick with a reputable firm with long history.
Step 4 – Love Investment
Your list and ranking are fun, but they are not portfolios yet until you invest real money in them. Divide your total investment amount evenly among these 10-30 companies. You can start small with $1,000 and 10 companies by putting $100 in each. Or if you have more, say $100,000 and 25 companies, then invest $4,000 in each. Eventually, you should invest half of your take-home income if possible.
Although I asked you to rank your loves in step 2, your ranking should NOT affect how much you invest in each company. In fact, your cost basis for all your holdings should be as equal as possible. The main reason is to reduce the need and your psychological burden of asset allocation, as well as to achieve true diversification. I will explain this in a later article.
Step 5 – Love Tracking
I strongly advise you to track your performance on a spreadsheet by writing down your portfolios’ values every Sunday (you can do it at longer intervals, but I do it every week because it’s fun). Also, write down the value of the S&P 500 and other indexes you want to compare your portfolio with. Although your brokerage service should have performance tracking, they shouldn’t be trusted because 1. their history might be only limited to a limited period such as ten years. Moreover, no company is around forever. If the brokerage firm is going out of business, you would want to keep your own records. 2. if you have more than one accounts, such as IRAs, 401Ks, taxable brokerage accounts, 529, and maybe one indeed for your mistress, across multiple trading platforms, you need a place to track them with an overall picture. You can use personal finance tools such as Mint, Personal Capital, or SigFig, but their integration with the brokerage firms could be spotty, and they often have problems with missing deposits and withdrawals. To accurately track my investment against the market like a nerd, I do the old-fashioned way, with a Google Sheet. I will write an article later to explain how I do it.
Step 6 – Love Newcomers
Continue to add new loves to your list. As soon as you engage in Love Investing, you will notice your behaviors change. Your mind will become a radar looking for companies to love. Every time you buy an awesome product, you will start pondering adding the company that produces it to your Love Portfolio. Good! Add it! If you have 10 companies on the list, simply expand the list to 11. You can keep adding until you hit the maximum number of 30 loves.
If you are already at 30, this is where the ranking comes in handy. You will compare your new love against your #30. If you love the new company more, then remove #30 from the list and sell the stock, and use the proceeds to buy the new company stock (I will explain this at the bottom of Step 6). This process is called Unlove. It’s brutal but necessary to keep a healthy and focused Love Portfolio. Your #30 is constantly on the chopping block, unless it rises up in the ranking. That’s why you indeed want to make sure it’s the company you are most OK to Unlove.
For your new love, it doesn’t automatically become #30. You will want to compare it to #29, #28, all the way up until you find the necessary slot for it on the ranking. For example, when I discovered DocuSign through my business, I loved the service so much I immediately added it to my portfolio and slotted it at #21, and pushed everything below it down the ranking, and Unloved my old #30 (sorry Philips! Sonicare is still cool though).
Now, when you buy stock in your new love, only buy the same amount as your other holdings. If you have leftover cash from selling your old #30, spread it evenly across all 30 stocks, and keep the cost basis for all stocks the same.
Step 7 – Love More:
Investment is not a one-and-done endeavor. You should continue to invest your extra income. Peter Lynch, my favorite investor once said “I’m always fully invested. It’s great feeling to be caught with your pants up.”
When you invest more money, spread evenly across all your holdings. Let’s use the example below:
Cost basis Current Value
#1 $4,000 $4,500
#2 $4,000 $6,000
#29 $4,000 $3,200
#30 $4,000 $4,300
New investment amount $3,000.
Some trading app such as M1 can do this automatically. So the it would spread the $3,000 evenly across all 30 stocks at $100 each.
But if you use a more old-fashioned brokerage service, and your app can’t easily spread your new investment equally, I would suggest you simply make a minimum investment threshold for all your holdings, and invest that threshold on the top of the list. For example, my personal investment threshold is at $2,000, so I would invest all $2,000 in #1.
Cost basis Current Value
#1 $6,000 $6,500
#2 $4,000 $6,000
#29 $4,000 $3,200
#30 $4,000 $4,300
Cash left over: $1,000
When new savings come in, as soon as I have more than $2,000 in cash, I would invest down the list, at #2, then #3… until I hit #30. I will then go back to invest in #1.
This process is called Active-passive investing (I will explain in a later article in detail). It’s very mechanical but could be a lot of fun since you get to enjoy the process of putting money into your loves.
Step 8 – Love Sell
Warren Buffett once famously said, “Our favorite holding period is forever.” Stock markets go up and down, but if you don’t panic sell during the downs and don’t over-leverage during the ups, and constantly invest in new money, the stock market will be a great wealth generator, which averages over 10% per year in growth.
Love Investing is similar to long-term investing, but they are not the same. Namely, you should stay invested in the company for as long as you love the company. For the vast majority of your holdings, they should be held for years, if not decades. However, if your list is at the full 30, the bottom of your list is constantly in danger of being Unloved, since you will keep finding new loves to replace them. When you have to replace #30 with a new love, go back to the Unlove section in Step 6.
In the ideal world, outside of Unloving a company, you should never sell stocks you love. However, there are times that life circumstances would necessitate you to sell. Maybe you need the money for a house down payment. Maybe you are temporarily unemployed. Perhaps your family needs your help. Or you might have retired and would like to enjoy your nest egg by gradually selling some. In these cases, I would suggest you sell stocks in an unorthodox way.
Most “money experts” would advise you to sell your oldest holdings, which is called FIFO (first-in-first-out). The main reason is tax. If you sell stocks you bought within a year, the stock growth is counted as short-term capital gains, and taxed at your current income level. If you hold it for more than a year, the growth will become long-term capital gains, which are currently taxed at 20%, usually lower than your regular income tax rate. Selling FIFO would reduce the chance you sell shares within a year.
I, the Love Investor, will advise you to sell FILO (first-in-last-out). You want to keep the shares you bought long-time ago for as long as possible, and sell only the newly purchased shares. For example, if you bought 10 shares of Amazon at $170/share 10 years ago for $1,700, they would be $30,000 by now. When you have to sell, don’t sell those 10 old shares. Sell the new share you recently bought at $3000/share.
Why? For psychological reasons. You want to treat the shares bought years and decades ago that have grown many folds like collection items. They will keep bringing you joy and satisfaction, and will help you stay invested. Moreover, by only selling the newest purchased shares, your growth performance for all your holdings will stay much more accurate for comparison reasons.
Yes, FILO might cost you a little more in tax. You can mitigate it by not selling any stocks you bought within a year, period.
You have just read the step-by-step guide of Love Investing. Again, this investment strategy is based on my personal experience as well as my understanding of human nature. You should use ample judgment and research and not implement it based solely on my words.
When you talk to other “money experts” about it though, prepare to be called names. They might think Love Investing is too simple, too weird, or not going to work.
When you are considering their words, make sure you ask them for their own investment performance over the past 5 to 10 years, and compare it against your own 5×5 Love Exercise. If they are indeed crushing it, by all means, go with them!
Or you can just go ahead and put your money where your love is. In case you make a lot of money over the years, consider naming your kid (or your yacht) after me.