While there is no set formula Mr. Pile uses when choosing stocks, the first screen is always done at the fundamental level. For a company to even make it onto Nate’s list for consideration, it must have a compelling long-term growth story (i.e. no companies with “fad products” need apply), it must be financially sound, and its management team must have a clear and sensible business plan against which investors can measure the company’s progress over the years. When looking at a company from this standpoint, Pile always asks himself a question he first saw posed several years ago in a book on Warren Buffet’s investment philosophy: namely “if the stock market closed for five years and we could not trade the stock again until the market re-opened, would we be still be happy with our purchase?” If the answer is “yes,” then there is a chance the stock will make it into the newsletter.
Once the stock has cleared this “compelling story” hurdle, the next thing Nate usually asks himself is “what are the chances of Wall Street becoming enamored of the story?” Over the years, Mr. Pile has come to accept that fact that it is the large institutions (mutual funds, pension funds, etc.) that ultimately move stocks, not retail investors… and thus it is important to avoid stocks that may prove to be unattractive to institutional investors. Of course, the biggest hurdle many of these large investors face when they want to establish a position in a company is liquidity, and as a result, Nate now tends to only recommend companies that have market capitalizations of at least $250 million.
Finally, if the stock has managed to make it through those first two screens, Mr. Pile then looks at how it is acting in the marketplace. Because past experiences have convinced him that it is usually smarter to buy companies that are being bought – rather than sold – by the large institutions on Wall Street, Nate rarely, if ever, initiates coverage on a stock that is in a downtrend. While he used to pride himself on being a staunch contrarian, one of the most valuable lessons Mr. Pile has learned over the years is that our job as individual investors is to take advantage of trends in the stock market rather than betting against them simply to prove “what independent thinkers we are.” Yes, contrarianism still plays a role in Nate’s investment strategy from time to time, but experience has taught him that it is only wise to don that hat when the market has reached extreme levels on the upside or the downside – the rest of the time, it is more important to remember “the trend is our friend” and position oneself accordingly.
While there are admittedly a number of stocks that pass muster when measured against the above criteria, Mr. Pile is also a very strong believer that a portfolio of 15-25 stocks represents more than enough diversification for most individual investors. Not only would more stocks result in overdiversification (which would, in turn, begin to drag down performance without doing much to reduce risk), most investors do not have the time (nor the desire!) to keep track of more than 25 stocks. Consequently, many stocks that are otherwise “qualified” do not make it into the newsletter unless/until Mr. Pile decides to drop coverage of an older stock in order to replace it with a newer one.
Once a stock has made it into the newsletter, Nate tends to add to (or subtract from) existing positions based on a combination of changing fundamentals at the company and his own analysis of how the stock is behaving. As hinted at above, he has become much more willing to “buy strength” and “sell weakness” over the years and, as a result, he spends a lot of time looking at stock charts over everything from two-day to ten-year time periods in an effort to better understand what is going on in the marketplace. Not only does this exercise help us recognize trading patterns in individual stocks, it helps fill in the big picture about the health of the overall market as well.
By incorporating all of the above into his investment philosophy, the newsletter has managed to find (and, perhaps more importantly, hold on to) some wonderful stocks that have seriously outperformed the market over time. However, though Mr. Pile is very pleased with the returns he has generated for his subscribers over the years, he also believes there is always more to learn. Nate looks forward to further refining his approach to investing and sharing it with his subscribers in the years ahead!