One of the central aspects to Paul vs the Market is the Freedom Portfolio. What is it? Simply put, the Freedom Portfolio represents the majority of the shares of individual companies that I own, and is the main way that I will be measuring my attempt to beat the market. Will the combined return of those companies outperform the S&P 500 (and the index funds that are pegged to it) or not? Every quarter I will be listing the positions that are in the Freedom Portfolio along with a rough estimation of the size of the positions (more on that later).

Where does the name come from? It comes from a video that I made for another post that I wrote about why everybody should be investing. The video is included below for those who missed it in my explanation of what Paul vs the Market is.

If you can’t spare the 80 seconds to watch the video, the answer is simple. The primary reason that I invest is in order to obtain financial freedom. That financial freedom is what the Freedom Portfolio represents, hence the name. Every dollar gained in that portfolio is one step closer to financial freedom and the ability to fully control my own time.

There’s a lot of debate around how many stocks should be in a portfolio. There needs to be enough so that the portfolio is adequately diversified, but having too many makes it harder to outperform the market. I’ve found the ideal number for myself is around 25, with no fewer than 15 and no more than 30. Once I get above 30, I find it hard to keep track of everything I own and stay up to date with it. Below 15 makes me feel like I am getting close to being non-diversified.

You may have noticed above that I said that the Freedom Portfolio represents “the majority” of individual stocks that I own and not “the entirety”. Why? What am I hiding? Nothing nefarious at all. I’m simply trying to be as honest and transparent as possible. I do own some shares of companies that aren’t publicly traded that I don’t really consider as part of my overall investment strategy for a few reasons. However, they are still shares of individual companies and I thought it was worth mentioning.

Furthermore, I think it’s very important to point out that the Freedom Portfolio represents less than half of my overall retirement funds. The rest are invested in low fee Vanguard index funds. This is an important point that shouldn’t be glossed over. I believe I can beat the market, but I also believe in hedging my bets and diversifying with index funds…. just in case I’m wrong.

Lastly, I mentioned earlier that I would be providing a “rough estimation of the size of the positions” for the Freedom Portfolio. I’ll be doing this largely as a mental exercise for myself. As I’ve mentioned before, I try not to get too tied up into the short term movements in the stock of companies that I own. I’m less interested in month-to-month performance than I am year-to-year performance and I don’t want to sweat whether a particular company is 2% of my portfolio or 3%. I’ve found that when I look at my portfolio, I tend to separate my positions into 4 tiers depending on how much exposure I want to a given company. Those tiers go from the monsters that I am supremely confident in to the smaller positions that I consider much riskier, yet still worth owning. As a result, I figured instead of providing specific numbers on what percent of my portfolio these companies represent, I would break them down into those same tiers that I use for myself.

Also, I really just wanted an excuse to geek out and come up with some cool names for the tiers that I’ll be using.

Babylon 5: 10% or Greater

The Babylon Project was our last, best hope for peace. It failed. But, in the Year 2018, it became something greater: our last, best hope… for market outperformance.

Babylon 5 is an amazing show. If you haven’t seen it, then I highly recommend it. Yes, the special effects are pretty dated and cheesy looking now, but they were state of the art for the time and I challenge anybody to name a show that had a greater 4 season arc of continuous storytelling the way the first four seasons of Babylon 5 did. It’s easily one of my favorite shows of all time.

It’s also the name of the eponymous space station central to the show. At 5 miles long and two million, five-hundred thousand tons of spinning metal, it’s a behemoth and the largest “vessel” (if you can call a space station a vessel). “Babylon 5” is how I will refer to the largest positions in my portfolio: those that are 10% or larger. It’s rarified air, by virtue of being such large percentages. As of this writing, only two companies qualify and that hasn’t changed much over the past few years I have been tracking my portfolio.

To some extent, positions don’t achieve the Babylon 5 level without growing into it by greatly outperforming the market. It should be no surprise that my two Babylon 5 companies are also my two top performers. However, in order to stay at the Babylon 5 level and not get pared down, I still have to have a very strong conviction in the company. I wouldn’t be able to sleep well at night if a significant chunk of my retirement money was in a company I thought was likely to drop 50% or more. Likewise, I wouldn’t want my money to be wasting away in a sub-par investment if I thought there were better opportunities elsewhere.

So while it almost certainly takes a certain amount of outperformance in the past to make a position Babylon 5 level, that’s not all it is. The Babylon 5 level stocks represent the companies that I am the most confident in going forward.

Enterprise: 6-10%

Investing: the market challenge. These are the voyages of Paul Vs The Market. Its continuing mission: to explore strange new trends, to seek out new industries and new companies, to boldly go where no index fund has gone before.

I’ve been a huge Trekkie for most of my life. It started by watching The Next Generation as a kid and peaked with Deep Space Nine (in my opinion the best Star Trek series) as a young adult. While I still enjoy the new reboot movies, I never got around to finishing Enterprise or Discovery. Regardless, I still count myself as a big Star Trek fan and can still spout of plenty of useless trivia or random quotes. Maybe that’s why whenever I think of the ideal spaceship, my mind immediately goes to Starfleet’s flagship: the Galaxy Class USS Enterprise (NCC-1701-D).

According to Memory Alpha, the Enterprise-D is 641 meters long. While that’s significantly smaller than Babylon 5, it’s absolutely nothing to sneeze at. The same is true of the companies at this level. For some of these companies, I am just as confident in them as their Babylon 5 brethren, it’s just that they haven’t performed quite as well. Others have the past performance, but just haven’t been held for quite as long. Companies in this range are ones that I have very high confidence in and typically are ones that I have held for many years and plan to hold for many more.

So what separates the Enterprises from the Babylon 5s? Typically Enterprise level positions have something about them that make me just a little nervous or some potential weakness that has me worried. Those concerns are dwarfed by the potential that I see in the companies, but they’re large enough to convince me to keep them to under double digit percentages of my portfolio.

Serenity: 2-6%

The professionals said there was no way to beat the market, and we choked ’em with those words. We’ve done the impossible, and that makes us mighty.

In terms of greatness per episode, it’s hard to beat Joss Whedon’s criminally short-lived Firefly. Even I have to admit that my beloved Babylon 5 and Deep Space Nine had some clunker episodes. Pretty much every episode of Firefly is gold, though, almost certainly by virtue of there being only 14 episodes. I’m eternally grateful that they were able to make a pretty good movie after the TV show was canceled to wrap up some loose ends.

According to the Firefly and Serenity wiki, Serenity is 82 meters long. That’s considerably smaller than the Enterprise, and that’s not the only difference. Where everything about the Enterprise is clean and pristine and almost too perfect, Serenity is the opposite. It’s dirty and a mess. It feels lived in and real in a way that the Enterprise sometimes does not. In short: it’s scrappy. In some ways, that’s how I see many of the companies in this range. Many of them have warts or flaws that make them less than perfect. However, they all have strengths that shine through and potential that I think is worth taking a chance on.

From a practical sense, I see companies in this range as being a little riskier than my larger positions. I still believe in every single one of them and hope they will all be market beaters over the next 5+ years, but I know that there’s a good chance that some of them might turn out like a leaf on the wind and disappoint (too soon?).

Millennium Falcon: 0-2%

Hokey options and penny stocks are no match for a good company in your portfolio, kid.

Is there anybody who doesn’t know the fastest hunk of junk in the galaxy that made the Kessel Run in less than 12 parsecs? According to Wookiepedia, the Millennium Falcon is roughly 34 meters in length, which makes it the smallest ship in our portfolio fleet. Size isn’t everything, though, as any occupant of the second death star can tell you. Even the smallest ship can capitalize on a rival’s weakness and turn the tide of a battle. “Millenium Falcon” is the term that I will use for companies which represent 2% or less of my portfolio.

It’s hard not to think of the Millenium Falcon and not think of Han Solo. And when I think of Han Solo, I think of a risk-taker. You have to be a risk-taker when working as a smuggler in a universe controlled by the Empire and working with people like Jabba the Hutt. So it’s appropriate that the Millennium Falcon represent the companies that are the smallest percentage of my portfolio because those companies are largely what I view as the riskiest ones.

Risk can take many forms. For some of these positions, they are small companies trying to disrupt big industries and competing against much larger competitors. Maybe it’s a fast growing company that is dominating its niche but is priced to perfection and could crash at the slightest hint of a slowdown in growth. Or maybe it’s a large behemoth where the risk isn’t that it the price drops precipitously, but rather that its future growth is below average for the market.

Whatever the concern might be, these are the companies that I have decided to consciously limit my exposure to. I still think every single one has potential, or else I wouldn’t own it, but they also have enough pitfalls in their path to success that I find myself agreeing with Han and saying: “Never tell me the odds”.

Questions?

Questions? Comments? Criticisms? Suggestions? I welcome all! Hit me up in the comment section, over email or on twitter. Looking forward to hearing from you!