Should we really be buying shares of companies we love?

Before we begin: Yes, I am cherry-picking stocks that sucked but are household names. I’m trying to prove a point. (The point is that stock picking is incredibly hard).

Additionally, this is not to be taken as any commentary on the companies that were chosen to be compared to the S&P 500. They were simply chosen due to the general awareness of their brands.

Maybe you have heard someone mention buying shares in companies that you love. While this is not a terrible notion, you should be wary of building your portfolio around this idea.

Remember, tons of money is spent by some of the smartest minds trying to pick the winners. I say this not to discourage people from investing but ultimately convince people that their time is likely spent better elsewhere.

Low-cost index ETFs can offer total market exposure for everyone and are usually very cheap!

Anyway, I wanted to review some classic stocks that have overwhelmingly underperformed the S&P 500 over some time.

You may be familiar with many of these names. Some might even surprise you.

We’ll use Starbucks, Coca-Cola, Peloton, and Disney. The green line is the SPDR S&P 500 ETF, which tracks the index. 

I generated this chart from Barchart which shows the performance of each company going back ten years.

It might be a little surprising that each of these well-established companies underperformed relative to the index over the past 10 years.

Peloton was one of the most hyped stocks of all time. Everyone loved the company; they loved their bikes and the workout routines that came with their subscriptions. Then someone realized that they had essentially stuck an iPad on a stationary bike and the stock returned to earth.

Peloton shareholders now need a multi-bagger return to get back to breakeven if they bought it when it went public. It is a tough look for even the most patient investors with the longest time horizon.

Take this all with a grain of salt. But before you go on to claim you’re the next Warren Buffett and start picking individual stocks, be aware of the potential consequences.

We just reviewed some household names and brands that you see everywhere that all underperformed the index by a large margin over a 10-year time frame.

Now, this is not to say you shouldn’t ever buy single names. Investing can be fun; you may have a hunch or want to increase your exposure to an up-and-coming name out there.

When it comes to individual stocks, we always warn clients of the concentration risk they may bring to someone’s financial situation. However, having what we refer to as an opportunity portfolio can allow people to gain a sense of individuality when it comes to their investments. Generally speaking, we encourage people to cap these portfolios at 5-10% of their investable net worth.

Opportunity portfolios are a great way to set expectations, gain exposure to stocks you may like, cap your downside, and mitigate concentration risk.

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Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!