Composition of a Stock Market Portfolio

How to compose a portfolio ?

First of all, you should not buy only good stocks. You need to buy stocks that have different characteristics and that move in different directions to hedge your risks.

You also need to buy stocks from different companies, both large and small:

Large stocks: classic SRD stocks.
Mid caps: those that do not fit into the previous category, admitted to the SRD and listed on the stock exchange.
Small stocks: those that are not listed on a continuous basis.

It is also important to avoid holding shares in companies that all belong to the same sector or have similar activities.

Different types of companies should also be considered:

State-owned companies: to be avoided.
Family-owned companies: dynamic, stable, and with a growth vocation. They are interesting.
Growth stocks: companies that grow faster than the economy, i.e. whose Turnover grows faster than GDP. These are the most interesting stocks.
Defensive stocks: stocks that are more stable in periods of decline, but that grow less in periods of growth.
Yielding stocks: stocks with a good yield, and rather defensive.
Cyclical stocks: the most interesting for real stock market investors. They are very much linked to the moods of the economy and allow you to gain (or lose) a lot.
Special situations: companies targeted by takeovers, for example.

Investor Styles

Growth Style: As the name suggests, this management style focuses on growth. The aim is to identify companies that seem to be in a position to benefit the most from the economic situation of the next few years. In this context, we will obviously select stocks generally classified as growth stocks, but we will not, on the contrary, exclude cyclical stocks if the next two or three years seem favourable for their activity. Stocks that appear capable of achieving annual growth in turnover of at least 5% and earnings per share of at least 10% will be considered. On this occasion, we will look at another element, too often neglected by those who have the religion of net income, which is their capacity to generate cash flow (remember that cash flow corresponds to the sum of net income and depreciation and provisions. A top-down approach is used with this style, i.e. we start broadly and end by selecting a few companies.
Value style: On the contrary, it is about identifying undervalued stocks. This requires an in-depth financial study. The bottom-up style is more suitable for this style.

Logically, it follows that value management in principle does less well than the market in periods of strong growth, but should do better in periods of decline. It is therefore in the interest of an individual to take more inspiration from the growth style when the market is rising, and more from the value style when times get tough.

We can add the GARP style, which consists in mixing these two styles. It consists of looking at undervalued growth stocks.

To find them, we sift through the PEG. PEG stands for Price Earning Growth. To obtain it, we start with the PER, the well-known price/earnings ratio that gives an idea of the price of a share at a given moment: we then compare the price to the estimated earnings per share for the current year or the following year. Secondly, we take a more forward-looking view, using an estimate of medium-term earnings growth over a period of three to five years at most: we divide the P/E by this estimate and obtain the PEG, a figure that is all the more interesting the smaller it is.

Composition of a Stock Market Portfolio

Investor Styles

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