Here are 8 principles one can follow while designing a portfolio of individual stocks.

Long Indefinite-term investments

The best businesses aren’t just compounding machines, they produce compounding machines. Such businesses 1) clearly articulate their mission, 2) are decades away from achieving that vision, and 3) have the necessary ingredients in fulfilling their destiny. Square works on enabling finance for everyone. Tesla works on accelerating the advent of sustainable energy. These timeless mission-driven businesses must be held for indefinitely-long time periods.

Un Accretively-correlated investments

Traditional risk management emphasizes capital allocation across uncorrelated assets. However, a more efficient portfolio design is one where the constituents accrue value to each other. This makes the portfolio resemble a mega-corporation (a holding company) of successful corporations. Find companies that “pair well” together i.e. one doing well creates conditions for one or more of the others to do well. Netflix and Disney both do well when users move from cable tv to subscription services. Slack, Atlassian, Fastly & MongoDB are deeply integrated & drive the adoption of each other.

Contrarian Non-consensus investments

Contreity lies on a spectrum. The more contrarian you are, the more you risk being wrong, but the larger your upside. On this risk-reward tradeoff, there lies a “non-consensus” sweet spot. It isn’t a contrarian position to believe that electric vehicles would be the future, but not everyone believes in Tesla. It isn’t a contrarian position to believe that people can afford multiple subscription services, but not everyone believes that Netflix and Disney can thrive together.

Stay with Define the zeitgeist

The best companies are the fashion icons (“trailblazers”) of their industries. Netflix reinvented their brand in India by leveraging another popular video streaming service, YouTube, showing consumers why they needed another service. Square demonstrated what is possible when the worlds of consumer and business finance collide. Tesla made electric cars boring but still cooler than gasoline cars. Instagram is how the world expresses itself.

Hidden Deeply misunderstood moats

It is extremely rare to come across a business with a moat only visible to a few. They are discovered soon enough and the advantage goes away. What is more beneficial is to find businesses whose moats are visible in plain sight, just very deeply misunderstood. It was clear that Tesla made great electric cars, but why couldn’t the German incumbents make better ones? Because right from the start, Tesla was not just building a car, but also making 1) car buying a delightful experience (disrupting car dealerships), 2) a supercharger network, 3) long-lasting, fast-charging, affordable batteries, 4) modern software for cars.

Strong, ambitious & committed management leaders

A strong management is what drives a business to fulfill its destiny. However, too many cooks spoil the broth. One must identify leaders who exhibit utmost levels of consistency, rigor, tenacity and ambition. Jack Dorsey, Elon Musk, Mark Zuckerberg, Jeff Bezos and Daniel Ek are some of the highest integrity individuals on Earth. Their thinking translates almost perfectly to where their businesses will go next.

Technology at the periphery core

Companies with technology in their DNA have an unfair advantage in today’s world. This means the more software engineers employed and the more managed software per employee (in any org be it sales/operations/marketing) used, the more competitive the business. Technology can’t be outsourced.

Highly diversified focussed businesses

It is better for a business to go after a singular mission/problem statement with a huge TAM rather than going after disjoint albeit uncorrelated missions. This helps forge all employees into a cult. Everyone at Facebook enables the world to be more open and connected. Everyone at Disney enables adults to relive their childhood. Everyone at Netflix enables members moments of escape from their day to day.

Note: Please read my financial planning article as well as I am a strong advocate of passive index investing over active stock picking!