In the last post, My advice was not to pick stocks but rather use index funds (ETFs) to fill your portfolio. Today, I will cover one techniques I’ve used in there past to pick stocks when I’ve wanted to increase my returns and I’m willing to accept some additional risk.
I was having a discussion with a friend recently about the future of cars and how every manufacturer is developing electric cars. We were discussing which car manufacturer to invest in, and the usual suspects came up.
Tesla – leader in battery technology and high end electric vehicles.
Toyota and Honda – the Prius and Insight have been institutions in this space.
Nissan and Chevy – the leaf and Bolt go head to head with Tesla but at a lower price point.
When I see situations like this where you want to pick a stock I think,
What is the underlying technology that enables each and every company. If we assume electric vehicles will be the norm in the future, how can I invest in the ecosystem as oppose to pick one particular company to beat everyone else.
One of my professors said this to me.
“All boats rise in the tide”
What he was saying is that it’s more important to be in the right industry or market, than being the best in your industry. He was talking about entrepreneurship but a parallel can be drawn for investing.
If we assume that battery technology is going to enable electric cars, do we invest in battery companies? You could but you would end up in the same situation as above, trying to pick the companies who battery technology will beat everyone else’s.
Instead I try to find something that goes into every car battery. What I came across was two metals, cobalt and lithium. The question then becomes how do I invest in these elements. You could invest in mining companies that specialize in their metals, but then you would be back again at square one picking out stocks.
As we discussed earlier, ETF are a collection of stocks. What if there was a Cobalt or Lithium ETF that contained various companies that specialize in mining these metals. A quick search online shows that there is no Cobalt ETF but there is one for lithium.
LIT – replicates the Solactive Global Litium Index
This ETF has returned 66% over the past year. (As of January 2018)
If you compare the year over year performance of this ETF to the car companies above you will see that the growth has been very stable and much higher than any of these car companies. Furthermore, as car companies enter into the electric car space, the need for lithium increases.
This is just one example of how investing in an ecosystem or technology can be a way to get “in” on a stock while diversifying your risk. We don’t care who makes the best electric car, we just care if electric cars are the way of the future.
This technique also applies to things like the following:
Bitcoin and crypto currencies. Why take the risk of Bitcoin. Invest in the Blockchain or the ecosystem that makes crypto currencies work.
Samsung versus Apple. Why choose. Find component manufacturers that supply both these companies. Qualcomm, analog devices, Freescale come to mind.
Marijuana – there seems to be a new company every week that is starting up trying to capitalize on the legalization of marijuana in Canada. Think of what all these companies require to be successful. Maybe investing in fertilizer or planting supplies is the right move. Or one level deeper all fertilizers contain nitrogen, phosphorus, and potassium. Maybe investing in these chemicals is a good choice.
Hopefully, this gives you some ideas if you decide you want to take a little more risk in your portfolio.
Thanks for reading and please comment with any questions.
Henry Bill 
👌🏻👌🏻👌🏻
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