One of my favorite podcasts is Rule Breaker Investing from David Gardner who is co-founder of The Motley Fool Money. He already has two lists of principles, and he created the third list, 6 principles of a Rule Breaker portfolio, and as it is always possible to learn something, from his lists of principles I will bring them here.
On his podcast, he talks about a variety of topics, but his focus is on Rule Breaker companies, that is, innovative and disruptive companies that are “breaking the rules” today and creating their own rules.
In addition to the podcasts they make available for free, they have subscription services where they have recommended companies, etc.
Speaking about the list, this one is a combination between you and your stocks that becomes a portfolio.
The 6 principles of a Rule Breaker portfolio are intended to be generic, as each person is different and has different goals, making their portfolio different.
The 6 Principles of a Rule Breaker Portfolio
The list of the 6 principles of a Rule Breaker portfolio is divided into two parts. The first 3 principles are principles for building a portfolio, the last 3 are principles to help you maintain your portfolio.
Before starting, David himself mentioned that this is still a draft, and maybe it will be improved it with feedback from his listeners.
let’s go to the list
Principles for building the portfolio
The principles below refer to the construction phase of your portfolio.
1 . Make your portfolio reflect your best vision for our future
Photo by Anastasia Petrova
This is one of the phrases that David speaks the most, he always tells you to invest in what you believe in. Putting your money into companies you believe will make the future better.
By investing in a company, you are in a way endorsing the company, so by investing in companies that go against your best future vision, you are in a way supporting them.
Therefore, David advocates that you invest in companies that somehow reflect your way of consuming and seeing the world.
Suppose you are in favor of reducing plastics, then it makes sense to put companies in your portfolio that are making decisions to reduce plastics.
Another example: If you are a smoker, it makes sense for you to invest in tobacco companies as you consume and love the product. (Although it is a product harmful to health).
Each person will have a different vision, and that’s the idea, build your portfolio accordingly. With this, each person will have a different portfolio.
From the first time I heard this I started to reflect and little by little, I was shaping my portfolio for that. This is one of the reasons I stopped investing in JBS, ExxonMobil, etc… Let’s say that my global investment portfolio still doesn’t fully reflect my best vision of the future, but it’s getting better and better.
2. Name your purpose and whether or not there will be money coming in
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The idea of naming is to define its purpose. Know why you are doing what you are doing.
If your goal is to invest for your retirement, name your portfolio Retirement (or something similar). So, in case something happens in the short term that you are tempted to make moves, remembering the name of the portfolio will make you remember its objective to avoid making decisions that go against your real objective.
Additionally, in addition to defining the name, write a few paragraphs about its purpose, and always come back to that paragraph when buying and selling something or when trying to make trades in the heat of the moment.
An important point is that the objective, and perhaps even the name, should evolve as your goals and needs evolve.
The second part of the principle tells you to define whether there will be money being contributed money regularly or not.
I believe most readers will always have money coming in regularly, as most should be accumulating. But there are cases where you may be in retirement, and you will start enjoying the investments.
Knowing whether or not there will be money coming into the portfolio will help you better manage it.
3. Fair starting line
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David advocates that when starting a portfolio, you assign equal weights to all stocks in the portfolio. That is, if you want to have 30 different stocks in your portfolio, you would allocate 3.33% of the portfolio to each stock.
David also argues that when starting a portfolio, the minimum number he likes is to have 20 stocks, each of which would have 5% of the total portfolio.
But it’s good to remember, that he’s talking about building just a portfolio with Rule Breakers companies. I take a slightly different approach, putting 0.5% to 2% of my capital into a new position depending on the risk/return expectation I have with it.
Principles for portfolio maintenance
The principles below are designed to help you maintain your portfolio.
4. Set your sleep number
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The sleep number is the maximum percentage that you can keep in one stock and still be able to sleep peacefully.
Therefore, when you define, or find out, what your sleep number is, you will know when you will need to cut the positions that pass this number.
Investing shouldn’t be something that keeps you up at night. If you’re taking out, you need to review your portfolio and strategy. So it’s good to know what your sleep number is.
That’s also because over time, over time, some companies will grow much more than others, and as you let the winners win, they will (thankfully) come and go past your sleep number.
Let’s say your sleep number is 5. That means you’re not comfortable with more than 5% of your portfolio in a single asset.
What is your sleep number?
In my case, mine is 20. That is, I start pruning positions after they start to exceed 20% of my portfolio.
Entrepreneurs usually have a very high number, as they probably have the majority of their portfolio in their own company.
Another case is that generally the older you get, your risk tolerance decreases and consequently your sleep number since you depend or are closer to depending on income from investments or capital.
5. Good news, you can invest throughout the race
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Many seek to buy low and sell high, but David’s thinking is a little different, he wants to buy high, and stay with her for as long as possible, as good companies tend to grow. In addition, good companies are always “expensive” according to traditional valuation methods.
Following this, investing throughout the run means being able to buy stocks multiple times during the company’s “run”. So if you bought it and a few years later the company is still good or even better, you can buy more, and so on.
As he always says, let your winners win. Another of his sayings is “go away, don’t bend down”.
6. Review your portfolio quarterly, and manage accordingly
Photo by Debby Hudson
The last principle on the list is a portfolio essential, review the portfolio.
David indicates that the portfolio review should be done on a quarterly basis. As for “manage accordingly”, this is where you rebalance by closing positions that no longer make sense based on your worldview. Or maybe it’s the positions that have passed your sleep number.
David also always advises looking at the portfolio in percentage and before making contributions and buying new companies, look at your portfolio and see if there is any company that deserves to receive the contribution.
This is a summary of the 6 principles of a Rule Breaker portfolio with a brief comment on my approach to some of them. If you want to hear the full episode click here.
Happy investing!