How to build a winning stock portfolio, and 7 stocks to get you started

Fund manager Tom Vandeventer says it's worth paying up for cloud-based services companies including ServiceNow, Nutanix and Workday.

  • By Michael Brush,
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One of the great things about the investment business is that age discrimination is less prevalent — at least relatively speaking.

At 94 and 87, Charlie Munger and Warren Buffett are still going strong. Investors hang on their every word. In most professions, this duo would be long out to pasture.

Sure, they are great at what they do. But their age helps explain that, because age brings advantages in this business.

At 35, you think you are as smart as you will be at 55 or 65. But there is a tremendous amount of leverage in being an experienced investor,” says Tom Vandeventer, who manages the Tocqueville Opportunity Fund (TOPPX).

Vandeventer, who graduated from the University of Virginia and Columbia Business School in the late 1970s and early 1980s, is a good example. He’s beaten his benchmark by 3.1 percentage points annualized over the past five years, and 2 percentage points over the last decade, according to Morningstar. That’s a big deal in an investing world where 80 of active managers can’t beat the market.

Vandeventer’s analysis was one of the main reasons I suggested Facebook (FB), in a column in 2012 under $25 when very few investors liked the company. The stock recently topped $200.

You don’t have to wait until your 60s to get the advantages that experience brings. Here are three lessons from Vandeventer on how to build a portfolio and maneuver in the stock market, and seven stocks he likes now for the medium term.

1. Put your toe in the water

Vandeventer’s Tocqueville Opportunity Fund (TOPPX) owns a lot of names — about a hundred of them. Most outperforming fund managers I talk with beat their benchmarks with concentrated portfolios. There’s a simple explanation for his broad ownership, and it’s not just diversification: “I like to keep names on the radar screen. There are so many names you have to follow, if they are not on your radar screen, they are off your radar screen.”

In a field where discipline is key, you’d think managers would be able to track names without buying place holders. But this tactic is a lot more common than you might think, among money managers I interview. Once he’s got his toe in the water, he continues reading up on companies. He checks them out at conferences and listens to all the conference calls. “Over time, you develop a continuity about their strategy.”

2. Build positions on pullbacks

“If you consider yourself a long-term strategic investor, your positions build over time because you gain confidence,” says Vandeventer. “When you get these massive pullbacks, that’s when you put your money in.”

This sounds simple and obvious. Everyone’s ready to “buy the dips” when the waters are calm. But it’s a different story when rampant selling hits. A lot of investors panic and sell into weakness, especially when they see no reason for a selloff in a stock.

“When I can’t find the explanation, more often than not I am going to bet that it’s driven by a sentiment trade or a big player with big feet who is stomping on it that day. I always go back to the fundamentals. At the end of the day, the fundamentals are going to win out.”

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The key here is that you have to know the companies. “If you stay on top of your companies, you have opportunities to accumulate some really incredible business franchises at one-off prices.”

A recent example is Sage Therapeutics (SAGE), one of Vandeventer’s favorite biotech names, and his third-largest position as of the most recent filings. The company develops drugs to treat central nervous system disorders including depression, Parkinson’s disease and seizures. During the second week of June, the stock had fallen to the mid-$145 range from $177 in May. “I couldn’t identify a reason, and I added,” Vandeventer says. In part because of positive data from depression drug studies in February, the prospects for this company are clearer today than ever, he believes.

Conversely, he’s not afraid to violate the buy-and-hold mantra and lighten up on strength. “I will trade around my positions if I think something is fairly valued and something else is undervalued. But I won’t sell out the whole position. It’s about allocating assets to the highest-return opportunities.”

3. The concept is key

This lesson goes against conventional wisdom. “The presumption is that everybody in this business is a quantitative genius, and everything can be reduced to net present value,” says Vandeventer. But one of his early mentors told him it’s important to be a “concept” investor. So concepts like disruptiveness, capacity to take market share and overall strategy are a key part of his analysis. “Over time you get to a point where you can recognize when companies are on the cusp of taking off because they provide an innovative solution that is better than anything else.” You won’t learn that from the balance sheet that Buffett is studiously going over.

A lot of Vandeventer’s favorite concept companies are in tech. They offer cloud-based services, which help other companies manage work flow, analyze and store data, move their businesses online, and otherwise “digitize” their businesses. Large tech holdings in this bucket include ServiceNow (NOW), Nutanix (NTNX), Workday (WDAY), Shopify (SHOP), New Relic (NEWR), and Nvidia (NVDA),his largest holding. “These are companies that are doing extraordinarily well. They are in the mainstream of the digital transformation, which is not a cyclical trend,” says Vandeventer.

He’s not too worried about the valuations on these stocks for three reasons.

  • You don’t normally have a lot of choice. “There is a natural tendency for investors to think that they are value-oriented. And they are always looking for a bargain price. I want to buy the disruptive company and the category killer, recognizing that I may have to pay up for that.”
  • Good companies grow into their valuations. “Investors who shy away from high-value companies are not looking at the growth rate and the impact it will have on the valuation a year from now.”
  • These companies have the wind at their backs. Whatever you think of President Donald Trump, capital spending expectations are higher than they’ve been since before the financial crisis, which should help the economy and stocks. “There was an anti-business sentiment in the prior administration. We understand why that happened. It was a reaction to 2008,” says Vandeventer. “But it was handicapping corporate America. We have gone 180 degrees from that.”

Vandeventer cites deregulation, tax cuts and accounting changes such as accelerated depreciation. “This is unleashing capital spending in technology.” Meanwhile, companies have to spend on digitization to stay competitive. “If you have been sitting around waiting to go into the cloud, now is the time because there are a lot of economic and tax incentives.”

Which areas should you avoid? The business-friendly environment in Washington, D.C., favors industrial companies. And a lot of investors like banks because they can benefit from rising interest rates. But Vandeventer thinks the benefits for both of those groups are already priced in. “I continue to believe the greatest opportunities are in software and innovative health care,” he says.

At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested FB in his stock newsletter, Brush Up on Stocks.

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