From the goose to the SWAN

Tomorrow morning, my alarm will go off at 5:30 as it always does. And, as I always do, I’ll put on my walking shoes and head outside.

As I walk along, there’s a pretty good chance I’ll get to hear geese up above me. They’ll be flying together and communicating with one another as they make their way toward whatever destination they’re headed to.

And in that shared goal, they’re sharing responsibilities along the way.

Many people don’t realize this, but those V formations they make in the air are actually very strategic. Instead of all flying next to each other, one bird takes the lead, taking the heaviest wind resistance in the process.

The others behind it benefit from lessened pressure, with those at the very back required to do the least amount of work comparatively speaking. But only for so long.

Once the lead bird gets too tired, it falls to the back to take it easy and another goose takes its place.

There’s something beautifully simple about it. No single goose has to do everything. And the entire flock (or gaggle, as it’s properly called) gets further on one flight as a result.

It might not be a fast and furious way to get from Point A to Point B. But it’s effective nonetheless.

Stocks, in my humble opinion, should behave similarly.

In a well-formed portfolio, each asset should be carefully placed to compliment the others. That way, when one hits too much turbulence, the others can make up for it.

This kind of purposeful diversification means you’re not dependent on any one company, sector, or asset class. That might not always look impressive, as other portfolios make mad dashes ahead.

But your investing outlook should rarely be about reaching your destination as quickly as possible.

It should really be about reaching it safely.

That’s why, while I enjoy the physical sight of geese, I’m all about the financial benefits of SWANS: stocks that help you Sleep Well At Night.

Pursuing SWANs isn’t about chasing high yields, owning hot stocks, or knocking it out of the park every quarter. It’s about owning high-quality businesses that feature:

Because these companies know what they’re doing, how they’re doing it, and for whom – with great leaders in charge to keep the main thing the main thing – they’re able to keep growing in value year after year. Moreover, since they’re very conscious of their responsibilities to their investors, their shareholders keep benefitting from growing dividends year after year as well.

Now, even then, we need to make sure to purchase them at sensible valuations and with diversification in mind. That’s how you can really have full confidence in your portfolio.

I’ve lived long enough by now to understand that life is filled with ups and downs. And the market is part of life.

There will always be economic turbulence that comes our way at some point or another in some form or another. It could be by way of a recession, high interest rates, or a market crash.

Or maybe it’s one single company or sector that comes under pressure – like business development companies (BDCs), which I’ll be writing about next week.

For the record, even SWANs find themselves swimming against harsher currents sometimes. While they tend to be less volatile than other investments, market misunderstandings do still happen from time to time. And their share prices can drop temporarily as a result.

In short, we can’t eliminate the turbulence. But we can build a portfolio designed to fly above it, or at least safely through it.

That’s our ultimate goal here at Wide Moat Research regardless of whether we’re analyzing:

We analyze all of that because, as previously stated, we want diversified portfolios: a collection of investments that work together for a collective good.

As in ours.

I bring this back up again because I need to clarify something about diversification. It’s critical to understand that you don’t want to simply own more stocks.

You want to own more cash flow sources: assets that make money in different ways so that they’ll respond differently whenever interest rates – or consumer spending, inflation rates, or economic growth – change.

That way, you’ll be covered regardless.

It’s the investment equivalent of those geese taking turns in the lead. The group keeps moving forward no matter which bird is doing best.

Here’s another layer of diversification to consider: What “job” will each new investment fill for you?

Will it offer immediate (yet sustainable) income to help you cover bills or your kid’s next semester of college? Or do you need it to facilitate dividend growth for retirement or other long-term goals?

Depending on factors such as your age, family situation, and financial situation, you might very well need both. And it’s up to you to figure out how many of each is ideal for getting you to where you need to be.

The same goes for investments that provide defensive characteristics versus higher-risk, higher-reward propositions. Just because you base your portfolio on a SWAN foundation doesn’t mean you can’t put a reasonable amount into more exciting assets (again, depending on what you have and what goals you have).

Occasionally, an opportunity will even come along that captures all those possibilities at once: income, growth, and capital appreciation. That’s the sweet spot.

Though only if it’s priced well. If it’s not, put it on your wish list and find something else to do with your money in the meantime.

I’m not kidding. Even the greatest companies can turn out to be poor investments when you overpay for them.

So don’t.

Because when you focus on valuation, quality, and intelligent diversification… then give the resulting portfolio some time… you tend to get compounding wealth.

By “some time,” I don’t mean it’ll happen overnight. And, in case I need to say it again, you’re going to see volatility along the way.

Even so, when your SWAN stocks keep raising your dividend year after year and – better yet – when you reinvest those dividends faithfully as well, something remarkable can happen.

Something that can make your days a whole lot fuller and your nights a whole lot more restful.

That’s ultimately the portfolio I want you to build: a gaggle of durable assets that can weather whatever strong winds come along. It’s more than possible; it’s outright probable when you follow this path…

The one the geese keep displaying and the SWANs keep swimming in.

Happy SWAN investing,

Brad Thomas
Editor, The Wide Moat Daily