Durable Dividends

How to Beat the Market With a Well Diversified Portfolio

Nick Ward

56 postsJune 22, 2021

When I write articles that discuss my personal portfolio – which generally includes 65-70 positions – I inevitably receive feedback that I own too many stocks…

That my 10 best ideas are better than my next 10 best ideas, and therefore, like famous investors such as Warren Buffett, I should stick to my highest conviction picks…

That it’s impossible for me to out-perform the markets due to over-diversification…

That I’d be better off simply buying an index fund…

All of these comments ignore the data I provide which shows that it is very possible to beat the market, both in the short-term and over long periods of time while owning a well diversified portfolio.

How is this possible?

Well, the truth is, my strategy is not one that lacks conviction. Actually, it’s this conviction and the discipline associated with it that has allowed me to beat the market, regularly, over the last decade or so.

Really, what the naysayers here aren’t conceptualizing is simply a difference in priorities.

You see, I too believe that owning the highest quality companies over the long-term is the best way to beat the market.

I’ve read numerous studies that show the best long-term results are generated by those who buy and hold blue chip stocks.

Fidelity performed probably the most interesting study along these lines about 10 years ago. The firm gathered information about its best performing accounts, and which types of investors do you think had the best performance?

Dead ones.

Yes, you read that right: the deceased, people who were kaput, those who’ve passed away, people whose bodies are oftentimes compared to doornails, etc.

Why? Because they were no longer messing with their holdings. They obviously didn’t have the ability to. And therefore, by simply holding onto their assets and allowing them to compete, grow, and compound, the dead made up the focus group that was able to best overcome human emotion and most reliably generate alpha.

I believe in the metaphor: A stock portfolio is like a bar of soap, the more you handle it, the smaller it gets.

What I mean is, over-trading is a great way to make mistakes in the market. The fact is, no one knows where the market is going to go…especially in the short-term.

Anyone who says differently is a liar, plain and simple.

The market’s short-term volatility is driven by investor sentiment. In other words: emotions. And, as anyone who has studied human psychology will say, human beings are very fickle creatures. We’re often irrational. And that’s especially the case when fear and/or greed is calling the shots.

Behavioural psychology shows that while we know it’s best to buy low and sell high, fear and greed inspire humans to do the exact opposite. We’re more likely to chase momentum, and buy high, as well as give into fear and sell low.

This creates a cycle of poor returns. And, being that fear and greed are what move markets on a day-to-day basis, I believe investors are best off avoiding short-term trades.

Over the long-term, fundamentals eventually rule the day. We know this. However, far too many traders believe they can focus on things like technicals and momentum related metrics to game the system. I’m certainly not one of them.

And this gets me back to my original point about owning a highly diversified portfolio…

I’m not going to sit here and tell you that I know exactly which blue chips are going to perform the best over the next 10 years, 20 years, 30 years, etc. No one can peer that far into the future with any sort of clarity.

However, I do believe that blue chip companies are most likely to out-perform over the long-term. Once I buy shares, I generally don’t sell them (meaning I take the potential of fear to inspire a mistake out of the equation).

For instance, while it’s true that I prefer PepsiCo (PEP) to Coca-Cola (KO) in the food and beverage space because of Pepsi’s exposure to the snacking industry, I don’t have any idea which company will post the best relative performance over the coming decades. What I do know is that human beings must drink liquids to survive (this is never going to change), and these two companies offer a wide array of tasty beverages which meet this need. Furthermore, Pepsi and Coke have the best distribution networks in place, they dominate grocery store shelves, and the size and scale of their manufacturing capabilities provides them with pricing power over their peers. Therefore, I simply own shares of both.

The same thing can be said of rivals like Visa (V) and MasterCard (MA). Both of these payment processing companies have generated amazing double digit bottom-line growth CAGRs since becoming public and neither company shows signs of slowing down. Sure, MasterCard’s growth has been slightly more impressive, but Visa’s valuation is typically lower, which makes up for this when buying shares. And, being that I believe we’re headed towards a cashless society and digital payments are going to continue to grow far into the future, I’ve been more than happy to buy and hold shares of both of these blue chips.

Another example is my semiconductor basket. I own shares of a wide variety of semiconductor names, such as Broadcom (AVGO), Intel (INTC), NVIDIA (NVDA), Qualcomm (QCOM), and Texas Instruments (TXN). Why? Because while I don’t claim to be a master of knowing who will eventually dominate Silicon Valley, I do see the digital revolution as a strong secular trend…just about everything we buy these days is chock-full of computer chips…and over the long-term, I suspect that demand for semiconductors is only going to increase. Competition in this industry is fierce. Innovation is constant, driven by Moore’s Law. So, instead of attempting to pick and choose the ultimate winner, I’ve spread my wealth around. And, this strategy has worked out just fine, due to the secular tailwinds that all of these names benefit from.

But it’s not just about identifying secular trends and the highest quality companies that are likely to benefit from them.

This is where we circle back to my priorities.

Why do I own so many companies?

While I believe owning the highest quality companies is important, I also believe buying the lowest values plays a role in long-term out-performance as well.

It’s the marriage of quality and value that leads to out-performance.

Therefore, I buy the cheapest blue chips that I can find at any given moment and then hold them with so-called “diamond hands”.

Over the long-term, blue chips do well because their fundamentals reliably grow and therefore, increasing profitability metrics lift fair value multiples being applied to their stocks over time.

However, investors can bolster these returns by putting the force of mean reversion in their favor.

When buying and holding undervalued blue chips, not only do investors put themselves in a situation where they’re going to benefit from improving fundamentals, but also multiple expansion as the market eventually realizes its folly and rewards the formerly cheap stocks with a higher premium.

And while I’m not willing to speculate as to which blue chips are going to perform the best over the long-term, I am willing to stick out my neck and say, with a fairly high degree of confidence, whether or not a given company is undervalued in the present.

This is because valuation is based upon objective data. Sure, there is always a bit of speculation involved when performing due diligence on a company because forward looking estimates do factor into the evaluation process.

But, management teams provide annual guidance which is generally fairly accurate. And, on top of this, investors have access to consensus data with regard to future sales and earnings.

Therefore, in my view, there is enough data to sift through which makes it possible to come up with fairly accurate estimates for top and bottom-line results when we’re only attempting to look a year or so out into the future.

And, when looking at fundamental data, growing trends, and historical pricing premiums being applied to equities and their growth prospects, we can begin to paint fairly accurate pictures of where fair value lies.

It takes a lot of work to crunch this data. It’s even more difficult to stay disinclined, attempt to keep personal bias from tainting the equation, and focus purely on the numbers. However, at the end of the day, the numbers don’t lie and by trusting in them, it’s possible to build a portfolio – no matter how many positions it includes – that beats the market.

Is owning 70 stocks right for you? Maybe not. I’ll be the first to say that there is more than one way to skin the cat when it comes to generating wealth in the stock market.

The proper amount of diversification is going to vary from investor to investor, depending on their risk tolerance.

What matters most is that you put yourself in a situation where you’re able to sleep well at night with your holdings. When doing so, you likely won’t feel as tempted to over-trade, and therefore, you’re more likely to eliminate mistakes and post solid performance.

If identifying undervalued blue chips, buying and holding them, and using stocks to generate a reliably compounding income stream that regularly increases over time is a strategy that you’re interested in, please check out The Intelligent Dividend Investor.

This newsletter service includes an actively managed portfolio where the practices that are discussed throughout this article are put into play.

And, like my personal portfolio, the IDI portfolio has generated relative out-performance when compared to the S&P 500 since its inception.

Disclosure: Nicholas Ward is long PEP, KO, V, MA, AVGO, INTC, NVDA, QCOM, and TXN.

Nick Ward

56 posts

View all my Posts

Nicholas Ward is a research analyst who currently writes for Seeking Alpha, The Dividend Kings, iREIT, and Forbes Real Estate Investor. Before that, he was Founder and Editor-in-Chief of The Dividend Growth Club, as well as the Income Minded Millennial. Nicholas has also contributed to Sure Dividend, Investing Daily, and The Street, where he covered stocks in Jim Cramer's Action Alerts PLUS Portfolio.

Nicholas holds a bachelor of arts from The University of Virginia, where he studied English and studio art. Prior to transitioning into the financial industry, he managed a vineyard in the foothills of the Blue Ridge Mountains.

There’s More to Life Than Krispy Kreme

REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

How to Beat the Market With a Well Diversified Portfolio

Nick Ward

56 postsJune 22, 2021

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