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I have a peculiar investment strategy for building up my portfolio. I invest in companies that produce what I need.

To illustrate my investment strategy, it works in the following manner:

  • I identify some need, such as need for electricity or need for lithium for batteries of the future electric vehicle I haven't yet purchased.
  • I identify the best company producing what I need. For example, in the case of electricity, it would be a locally operating hydropower company. In the case of lithium, it would be Albemarle or perhaps SQM.
  • I calculate how much of the money could trickle to me back in the form of dividends, should the price of the product increase. An example: if I pay 1.24 euros with 24% value added tax more for a certain amount of electricity, the hydropower company gets 1.00 euros more of which it pays 20% corporate tax, leaving 0.80 euros more. By paying 0.80 euros more dividend, I get 0.596 euros more because of the dividend tax. Thus, I should multiply my "natural ownership" by 1.24/0.596 = 2.0805 times, or approximately by 2. So, what I'm doing here is really a form of differential analysis.
  • I calculate how much of the product I need. For example, let's say I expect I need in the near future 10000 kWh / year of electricity. I multiply the "natural ownership" by 2 due to the aforementioned tax reasons, meaning I buy 20000 kWh / year worth of hydropower due to taxation reasons. I also need about 19 kg of lithium for my future electric car, which should be good for 10 years so I need 1.9 kg / year of lithium, and multiplied by two, 3.8 kg / year of lithium.
  • I then calculate how much of the product such as electricity one share of the company produces. For example, one hydropower company share produces 63.1 kWh / year of power. My taxation-adjusted natural ownership would be 317 shares (of which I currently have 243 so I'm going to slowly increase the ownership -- slowly, because hydropower is currently expensive). Also, Albemarle expects to produce about 50 million kilograms of lithium per year in the form of lithium hydroxide by 2025. Thus, I need 76 billionths of Albemarle, or 8 shares given 105.96 million shares outstanding. Because 8 shares of Albemarle cost next to nothing, I'm about to purchase them tomorrow.
  • Only last, do I calculate how much I need to pay for the company whose stock I'm about to purchase. I estimate whether the cost I need to pay for the given amount of shares seems reasonable.

All of the time, I have more investment ideas than I have funds for investing. Thus, the cost I have to pay for the ideas is ultimately what decides which ideas are worth pursuing and which are not. If pursuing this strategy for long enough time, it's possible to exhaust all investment ideas.

Sometimes, I fail to find a company I can invest into. For example, I have recently started photography, but the imaging products division of Canon is only 25% of the company, so I would need to purchase the rest 75% too, which I don't really need. So, even though I do spend money to purchase photography equipment, I'm not going to purchase photography related stocks because there are none that are purely about photography at least in the stock exchanges I have access to (I don't have access to the Japanese stock exchanges -- Canon would be listed too in a U.S. stock exchange so investing to it could be a possibility).

It helps tremendously in this strategy that my bank has 1% maximum commission for purchasing stocks, i.e. if I buy only 100 EUR, I pay only 1 EUR commission. Also, my spending habits don't change every year, so this strategy gives stocks I can perfectly well own for 10 years or more, meaning the cost per year is 0.1%.

I have tried to find a name for this kind of investment strategy, but I'm not sure if this is my invention or if somebody else does the same thing. The closest I have found is "fundamental indexing", but that's not 100% accurate because fundamental indexing creates a portfolio that is suitable for average consumer, not taking account the investor's personal spending habits. On the other hand, my investment strategy fully takes into account my spending habits.

So, is there an official name for this kind of investment strategy? Is it fundamental indexing?

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    I don't know where you're located or what the typical commission rate is there but here, in the US, a 1% commission is highway robbery. Your belief that dividends offset product consumption and rate hikes is utter nonsense as is this entire approach to investing.
    – Bob Baerker
    Jul 28, 2019 at 22:18
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    "the hydropower company gets 1.00 euros of which it pays 20% corporate tax, leaving 0.80 euros. By paying 0.80 euros dividend" The power company will certainly not be paying a dividend equal to its income... there will be all manner of costs to deduct first.
    – TripeHound
    Jul 29, 2019 at 7:12
  • @TripeHound I agree I wasn't clear enough. I meant that if the company gets 1.00 euros more due to electricity prices increasing, it will either (a) invest the additional money into more capacity, directly benefiting me, or (b) divide the additional money in the form of dividends, directly benefiting me. So, if the company gets let's say 1.50 euros it will have to pay perhaps 0.50 euros of salary. If the company gets 1.50 euros + 1.00 euros = 2.50 euros, it will still have to pay about 0.50 euros of salary. So, what I'm doing here is differential analysis.
    – juhist
    Jul 29, 2019 at 13:25
  • @BobBaerker My idea is to own the entire supply chain. I.e. I own forest directly to create more wood by growth, I own forest harvesting equipment manufacturers to provide the equipment to harvest the forest, I own companies to create wood products (pulp, papers, etc) from raw wood. About the only risk I can't eliminate is that companies have to pay salaries, but hey, I get a salary too (from a different field than forestry), so I guess earning a salary myself could partially offset the risk of increasing salaries.
    – juhist
    Jul 29, 2019 at 13:48
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    @juhist You are treating all costs as fixed, but many costs are variable. For example, if the company has to hire an additional employee to meet the increased demand, they will now be paying more than 0.50 euros of salary. Say you could find your perfect photography company, and you order 10 euro of film. The company will have to purchase the paper and chemicals to make that film, which will ultimately be consumed by you and then gone forever. The number you're actually looking for there is the profit margin, which is money left over after all fixed AND variable costs.
    – user3067860
    Jul 29, 2019 at 13:48

3 Answers 3

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Your investments are an attempt at hedging your consumer price risks. You are trying to choose stocks that will help fund your planned consumption, such that if the prices of your favorite products spike, your investment returns will roughly compensate. If you plan to consume N widgets per year, you are buying up-front your own "little factory" (small share of a big factory) that can produce those N widgets per year.

Compared to direct hedging with commodity futures, stock-based hedging is more risky because various other factors also affect stock returns. In particular, if the price of the consumer product rises because the costs of its inputs (raw materials/labor) rise, then the company's profits, stock price, and dividend may not increase at all.

That said, it seems possibly rational to tilt your investments slightly to the extent your planned future expenditures are weighted differently from the average consumer. A big example could be owning more real estate stocks (REITs) if you don't own a home, as a hedge against unexpectedly large increases in future housing costs (rents).

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    On the other hand, if a company you buy from does poorly and goes out of business, you are punished two-fold. You can no longer buy your favorite product and your lose out on your investment.
    – Philipp
    Jul 29, 2019 at 12:21
  • @Philipp That's true. So, some common sense is a good idea when pursuing this strategy. Even though I drink craft beers from small companies, I actually own shares of a big brewery. I decided that a big brewery is a safer investment than a small brewery (most of which are so small that they are not in the stock exchange at all).
    – juhist
    Jul 29, 2019 at 13:29
  • Oh, and another example about common sense: my portfolio has significantly less Tesla stocks than the amount needed to produce one Tesla car in 10 years. I decided it makes sense to put a "cap" on the amount invested in such a highly risky company. I complement Tesla by owning shares of Toyota, a far less risky company.
    – juhist
    Jul 29, 2019 at 13:37
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    @Philipp Not necessarily. Companies generally fail from a loss of demand, not supply. The product still exists (even in abundance) but is considered obsolete or no longer fashionable. So there's a decent chance you no longer want it anyway. Or, if you happen to still like Beanie Babies or whatever, you can get as many as you want secondhand for the proverbial dime a dozen.
    – nanoman
    Jul 29, 2019 at 17:40
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I would call that strategy "waste of time":

  • Your individual purchase decisions are not meaningful for the bottom line of the company.

  • A single individual (you) simply isn't representative enough of the market as a whole.

  • As the Canon example shows, how a company behaves depends of a lot more than consumer products, and many of those factors are difficult to predict (legislative changes, for example). If it were that easy, there would be no secret to stock trading.

With that level of uncertainty, the input data is almost completely unrelated to the companies' results. That means that any stock purchase decision that you make is more or less random.

Your method only takes a lot of more effort to get that randomness than throwing darts to the list of stocks.

The positive parts of your method is that it will focus on big corporations with high capitalization that are usually less risky than, say, startups, and that it looks like you are diversifying your investments which also helps reduce the risks.

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    I think this answer misunderstands the point of the strategy. It's not that the company's stock will do well because OP is purchasing its product, or that OP is representative of other consumers; it's that OP is exposed to a risk (a special future need/desire for the company's product, whose price may increase) and owning shares of the company helps mitigate this risk.
    – nanoman
    Jul 28, 2019 at 22:20
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    The OP recently got into photography. If this had occurred years ago, he could have bought shares in Eastman Kodak (ouch). Or perhaps long before that, companies that made 8 track tapes and VCRs? People should invest in high quality companies that are sector leaders with strong and growing free cash flow, low debt, and good management. Buying them because of some quasi production/consumption correlation in nonsensical.
    – Bob Baerker
    Jul 28, 2019 at 23:40
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    @BobBaerker So a Kodak investment has gone to zero. Guess what? The need for a photographer to spend money on film and developing has also gone to zero. Hedge successful.
    – nanoman
    Jul 29, 2019 at 0:06
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    @BobBaerker Are you seriously saying that a simple fundamental strategy will on average beat the S&P 500? Everyone can see which companies are "leaders with strong and growing free cash flow..." and their stocks have already been bid up. There is no reason to think their risk-adjusted returns going forward will be better than other stocks.
    – nanoman
    Jul 29, 2019 at 0:10
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    @nanoman: You seem to be supposing that the price of the product is directly correlated with the price of the stock. Do you have any basis for this correlation?
    – Matthieu M.
    Jul 29, 2019 at 7:59
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No, it is not even close to index investing. From Investopedia, with my emphasis:

Index investing is a passive strategy that attempts to generate similar returns as a broad market index. Investors use index investing to replicate the performance of a specific index – generally an equity or fixed-income index – by purchasing exchange-traded funds (ETF) that closely track the underlying index.

Since you are actively making decisions on what to buy, this cannot be considered indexing.

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    Agree. There are other passive strategies besides index investing, but the key to a passive strategy is that the choice of strategy uniquely determines the portfolio weighing (down to rounding effects). That's definitely not the case in this question.
    – MSalters
    Jul 29, 2019 at 13:08
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    He's trying to track the Consumer Price index (individualized for his purchasing). So before saying "there's no index" it might be valuable to explain the difference between CPI and equity indexes.
    – Ben Voigt
    Jul 29, 2019 at 13:18
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    While I'm not convinced that what the OP is trying to do is worth the effort, I think "it's not an index because it's not passive" isn't a valid objection. Investing to track an index is only passive when someone else does the tracking for you (and packages their efforts as an ETF). What the OP is trying to do is essentially the same process Vanguard and the like would do in deciding the initial "representative basket" for whatever index they're trying to track. Because no one is already tracking "juhist's CPI", the OP has to do the tracking themselves.
    – TripeHound
    Jul 31, 2019 at 6:37

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