What is Birthday Investing?

Rome wasn’t built in a day

That’s why you need a long term investing strategy. Two words. Birthday Investing.

It’s something I wish I knew about when I started investing–actually I did know! I created this system and it’s what I’ve been using for my entire investing career which has beaten the S&P 500 over 7+ years. Birthday Investing begins the very first time you are able to invest all the way through judgment day.  It is a more powerful way to invest compared to baseless indexing because it adapts to changing risk and reward dynamics based on your age.  It is also easy to implement and pilot as you age.  Lastly it is flexible and is good for people who are looking for a bit more than average from their portfolio.  

Why I hate Indexing

First, I will cover why I don’t like indexing.  To start, most people refer to indexing as investing in an S&P 500 index.  While it is true that for pure beginners this is a decent method, it is far from optimal, and you can gain so much by just adding in a tiny bit more effort by using the Birthday Investing method.  Next, why do people invest in the S&P 500?  Is it to bet on America?  That would be strange because the S&P is not representative of the US economy. It only includes large businesses that are publicly traded.  That’s quite an arbitrary list.  For example we are missing huge companies such as Cargill or Koch Industries, both of which have revenues over 100b per year.  For reference, that is higher than companies such as Pfizer, Disney, and Procter & Gamble.  Next, we are missing small companies.  Some say that the backbone of the US is built on small businesses, but we have none of that in the S&P 500.  Go outside (touch grass), how many types of stores and businesses are there that are not publicly traded?  If you define a big business as having over 500 employees, they comprise just 0.1% of businesses in America.  In terms of employment, small businesses employ around 47.1% of the workforce (SBA, US Census Bureau).  Considering that not all big businesses are publicly traded, it is again not very representative of the US economy.  Enough with the sentimental BS, let me show you a simpler reason why I don’t like investing into the S&P 500.

In business, the first thing you learn is ‘buy low sell high.’  A supermarket buys in bulk for cheap from a supplier and then sells the items at high retail prices.  Same is said for stocks.  Buying the S&P is buying high.  Every time a company enters the S&P 500, their price typically goes up because they get added to everyone’s portfolio who blindly invested into the index.  Nothing about the core business changes when it enters the S&P.  If we assume ownership of a stock is ownership in a business (it is…), then we still own the same company whether it is added to the index or not. The company itself is the same as it was the second before minus the passage of time.  However, their price is now more expensive because of this.  Why would you buy high?  Lastly, buying the S&P 500 runs into the issue of fighting ignorance with ignorance.  Most people cannot name all companies in the index let alone even 50 companies.  Why are you putting money in something you don’t know about?  Because they think blind diversity is the solution…

Let’s say you have a 50k portfolio.  Now I know that the index is weighted by market cap, but for simplicity’s sake let’s say that it is equally weighted.  That means you have $100 invested in 500 different companies.  Would you ever do that without knowing what each company was?  We spend more time analyzing when buying $100 shoes than we did in dumping our hard earned cash into an index.  

Diversification

Okay, enough bashing.  The S&P 500 is nice because you get a diversified portfolio, but there are some studies out there that say you get 90% of the benefits of diversification by removing non-systematic risk from holding around 10-15 diverse stocks.   Essentially, there are diminishing returns from adding on more companies.  Not to mention if you truly wanted to diversify, you would do it across asset classes such as real estate, bonds, or even crypto, not just adding on different companies–but you never hear of people saying “invest in the S&P 500, corporate and government bonds, crypto, art, and real estate” all together.

Lastly, there is no one size fits all investing solution.  People regurgitate index investing every time anyone asks for investment advice as if it fits everyone’s preferences. People have different risk tolerances and investment horizons.  Would a doctor recommend the same health regimen to a 20 year old as he would an 80 year old? What about two 20 year olds but one can’t walk while the other can? Likely not.  Same goes for investing.  When you are young, you are able to afford high risk investments.  If you completely yolo’d one year of savings and you lost it all, you only lost 1 year of your life.  Had you doubled it, you would gain the equivalent of 7 years of investing in the S&P 500.  If triple, you would save 12 years.  That’s some massive asymmetry right there.  Obviously if you were 60 years old, you wouldn’t yolo your portfolio anymore because you would risk 40 years of investing and saving for a potential gain of 7.

Birthday Investing  

Knowing what we just covered led me to the development of the Birthday Portfolio.  The rules are as follows:

  1. Start investing
  2. Start your Birthday Portfolio based on your age and risk tolerance (lower number of stocks = riskier):
    • 25 or younger: Pick 1-10 stocks
    • 25 or older: 1 to 10 + your age – 25
    • These stocks must be thoroughly vetted with the intention of holding forever.  Allocate based on confidence levels in each security
  3. Every year, add 1 stock to the portfolio (could be your birthday, could be the start of the year, doesn’t matter)
  4. Every time you add money into your portfolio, rebalance your portfolio as you go.
  5. Re-evaluate every 5-10 years (optional)

If you start investing at 20, you would have a well thought out portfolio consisting of around 50 stocks when you are 65.  At the start of the portfolio, you have the chance to greatly accelerate your investments from the potential of tremendous and volatile growth.  As you get older and older, your risk is reduced due to the benefits of diversification.  That’s it.  It’s that simple, but you still have to be careful though.  

How to build the portfolio

Now, you might ask why only add 1 company per year to the portfolio?  Well, when picking stocks, I want you to pick stocks with the utmost scrutiny.  That means you should spend time to find that one stock every year.  This gives enough time for even the casual investor to see something cross his mind and also gives the more advanced investor time to find out all the ins and outs of a company before pulling the trigger.

How do we pick the stocks? To do that, we will use what is called the coffee can approach, which is essentially just buy and hold investing.  Not sure where this originated, but I first heard this after reading the book 100 Baggers by Chris Mayer.  For all the youngsters out there who don’t know what a coffee can is, essentially back in the day before my time and my parent’s time, people would store valuables in a coffee can and then bury it for safekeeping. We will do this same approach with stocks. We must be willing to buy them with the intention of holding forever.

To achieve this, we must pick companies that will exist throughout our entire lifetime.  Now, no one can predict the future.  AOL and Blockbuster were both behemoths that went bankrupt.  IBM used to be a powerhouse but is now barely even a player.  However, even a company that declined so much such as IBM still netted a 63 bagger–yielding a 7.15% return over the past 60 years.  As long as the company still exists, you will make money.  Had you done that with Coca Cola, you would have a 1000 bagger over 60 years with a 12.35% return.  I won’t even mention how good Berkshire Hathaway would have done because that wouldn’t be fair.  What I’m trying to say is you need to pick a company that will exist throughout your lifetime.  Is that going to be Facebook? Is that going to be Google? Apple? Exxon? Well, that will be for you to decide.  Essentially pick some companies, evaluate how likely they will exist over your lifetime and then add it to the portfolio.  It’s not magic, it’s just buy and hold investing.  Now for the important part.  Please for the love of Steve Jobs please please please pick companies in different sectors.  I know we all have biases towards certain sectors and that is fine.  However, you need at least some portion of your portfolio involved in different industries to get the same diversification benefits of reducing non-systematic risk that something like the S&P 500 has.  Of course this is again based on your risk tolerance. You don’t have to do it.  

That’s the basics.  It didn’t take long to actually explain it because the method is simple.  Now what if we want to still dive deeper?

Example Execution of Birthday Investing

How do we weight the portfolio?  Any way you want.  When you start out, you will have 1-10 stocks.  Let’s say you have 3.  If you have a favorite, maybe weight it at 50%, your second favorite at 30%, and then the third at 20%.  During the year you find a stock that you truly love and then when you add it to your portfolio, maybe change the weighting to 35, 20, 15 for the first 3 and then add in the 4th at 30% over time.  To do this, we would either sell some of our existing holdings and buy the new one, or we can slowly invest into the new company over time with our savings from our paycheck.  I used the second method because it avoids taxable events.  As new paychecks come in, maybe I distribute it something like 15, 10, 5% in the old companies and then 70% of my cash influx into the new company until I reach my desired portfolio balance during the year.

Perhaps in the next year you struggle looking for a stock, but you have one that is decent enough to add but not your favorite.  Maybe you are trying to diversify but are having trouble finding a company you love in a different industry.  In the 5th year maybe do 35, 30, 15, 10 and leaving 10% for the newcomer.  All these numbers are really up to you and it changes based on how much certain companies grow.  Alternatively, you could choose not to add a stock one year or add two in another year based on what you find.  The portfolio allows for that flexibility as long as you keep investing and actually chose good companies.  You can also do a manual rebalance if you really like if one stock really shoots up and takes up the majority of your portfolio.  This happened to me.  Amazon was my largest holding and it appreciated a lot one year.  It probably shifted from 30% to 50% of my portfolio, so I just manually rebalanced it.  

Sample Portfolios

Now what? Well, we have to start building our portfolios. I thought it’d be fun to setup my portfolio and allow everyone to access it.  All you have to do is subscribe to my Patreon for $500.  Just kidding… I don’t believe in selling courses or premium access for almost anything because so much better information is out there for free.  Therefore if you want to know what I invest in, we can do it for free.  I’ll setup my Birthday Portfolio in M1 Finance, which is free for everyone to make an account, but I do hope you sign up with my link so that we both get free money when you do.  I made a win-win-win situation instead of a win lose.  You win because you get a free bonus from signing up and you get to see my portfolio if you wish to.  I win because I get the same referral bonus that you get, and somehow M1 Finance wins because they got a new member, and the house always wins.  So there’s this pie feature in M1 Finance which allows you to share a portfolio.  I actually manage the portfolios of people I know and have constructed different portfolios for each based on varying risk tolerances.  I have set up a few different portfolios and put 10,000 into each.  I will probably give updates to this portfolio every month or every quarter.

  1. Yolo
    • 2017
      • AMZN
      • GOOG
      • META
      • DIS
      • TWTR (RIP)
    • 2018
      • AAPL
    • 2019
      • GS
      • ULTA
      • MTCH
    • 2020
      • AMD
    • 2021
      • FOX
    • 2023
      • BRKB
      • TGT
  2. Moderate
    1. JPM
    2. AMZN
    3. DIS
    4. DLTR
    5. DG
  3. Simple
    1. BRK
  4. Basic B
    1. SBUX
    2. TGT
    3. ULTA
    4. LULU
    5. ETSY
    6. META
    7. PINS
    8. NFLX
    9. CMG

Pros and Cons

Pros: 

  • Risk adjusts as your risk tolerance changes as you age
  • You know what is in your portfolio
  • Simple rules
  • High customization
    • You could never pay capital gains taxes by never selling
    • You can rebalance however you want
    • You can construct your portfolio based on your risk tolerance (concentration, weighting, industry weighting, etc.)
  • If you like investing and want to research companies, you are allowed to and won’t get bored from simple buy and hold

Cons:

  • Need half a brain (need to be honest with yourself and actually follow the rules and have any bit of foresight into the future)
  • Need discipline (will you actually follow this or will you take out 50% of your portfolio in 10 years to yolo into Dogecoin because you got bored)
  • Requires more time than blindly indexing

Summary

Hopefully this gets you started. This method has served me well and will be what I’ll be doing for the foreseeable future. Note that just because you buy with the intention of holding forever, doesn’t mean you can never sell. Things in life/business change.

Disclaimer:
None of this should be construed as tax advice, investment advice, an offer, recommendation, or solicitation to buy or sell any security. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance.

I am not a financial advisor. Everything presented on this website is for entertainment purposes only. You (and only you) are responsible for the financial decisions that you make.

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