My 3 Biggest Stock Holdings

By Markets Fool.com

Image source: Getty Images.

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In 2011, I spent four weeks studying the investment philosophy of Motley Fool co-founder David Gardner. The end product was a three-part series on how he came to be the successful investor he is today. Five years later, one lesson sticks out more than the rest:

Don't sell your winners; buy more of them!

It's a counter-intuitive approach. It feels wrong to pay $200 for a stock that was just $100 a few months ago. It attacks our anchoring bias. But lo and behold, when practiced correctly, it can produce outstanding results.

It explains how my own personal portfolio has become dominated by just a few companies: Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG), and Facebook (NASDAQ: FB).

Stock

Total Return

Return vs. S&P 500 (percentage points)

Percent of Portfolio

Amazon

318%

+227 percentage points

20.7%

Alphabet

150%

+75 percentage points

12.3%

Facebook

48%

+36 percentage points

11.6%

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Data source: Motley Fool Scorecard.

These three alone account for 45% of my real-life holdings. Many people would be uncomfortable with such an approach. For those people, a more diversified portfolio is a better strategy.

But I genuinely sleep well at night with my money allocated as such. Here are the big three reasons I consider each of these investments to be worthy of such allocations.

Management with skin -- and soul -- in the game

Renowned trader and thinker Nassim Taleb's best-seller Antifragile is a great read. One point he hammers home is the need for "skin in the game" in today's society.

Taleb references a time when bridge architects were forced to live underneath their designs. Although it may be apocryphal, it highlights the value of ensuring that those designing something (the architect) have the same down-side exposure to risk as those using something (people going over the bridge). Interests are aligned.

Management at all three of these companies have significant skin in the game -- but they take it a step further: They are led by founder CEOs. These individuals often come to see their enterprises as a literal extension of themselves, and therefore have their "soul in the game."

Company

Founder/CEO

% of Shares Owned by Insiders

Value of Those Shares

Amazon

Jeff Bezos

17.7%

$64.6 billion

Alphabet

Larry Page

95% of Class B Shares

$38.3 billion

Facebook

Mark Zuckerberg

85.5% of Class B Shares

$67.7 billion

Data source: SEC filings.

Those are big numbers to swallow, but the takeaway is the same: By investing in these companies, you are investing in individuals who have much more skin in the game than you do.

Huge moats

Looking back on the returns of all of my investments, no variable has been more impactful than the strength of a company's sustainable competitive advantages -- or its moat.

Amazon's bread and butter is e-commerce. It would be almost impossible to catch the company in providing the same customer service (two-day delivery, anyone?) for online shopping. The multibillion-dollar network of Amazon fulfillment centers throughout the United States is unmatched, and a competitor would have to be willing to operate in the red for years -- or even decades -- to even put a dent in Amazon's moat.

Alphabet's moat comes in the form of its dominant search engine: Google. But the company actually has seven products with over one billion users: the core search engine, Google Maps, Android, Chrome, YouTube, Gmail, and Google Play Store. What really matters -- financially -- is that this dominance leads to a trove of data that's incredibly valuable to advertisers. No one, other than Facebook, has anywhere near the same level of data.

This brings us to the social networking giant. Facebook, too, benefits from the gobs of data it can use to entice advertisers. But the company's key moat is in the form of the network effect. With every user who joins Facebook -- or Instagram, or WhatsApp -- other non-users have motivation to join. It's a virtuous cycle that continues to allow Facebook to grow its active user base.

Optionality

Here's the secret sauce that can really juice returns for investors: None of these companies is resting on its laurels. All three are taking lots of small bets that could eventually help grow their influence...and their bottom lines.

Google renamed itself Alphabet in order to promote the "Other Bets" the company was taking, like self-driving cars, Google Glass, and Nest. Facebook, in addition to its acquisitions, has seen its Messenger platform boom. The company continues to tinker with ways to fulfill its mission -- "to connect the world." This includes providing unmanned, solar-powered airplanes that can beam down internet to remote areas of the world.

Still, no company is a better example of optionality than Amazon. What started out as an online bookstore, and then moved to all things e-commerce, now focuses on areas as divergent as cloud hosting (Amazon Web Services) and original video content.

The world is changing at an accelerated pace, and companies with optionality built into their DNA have the mobility to adjust.

Finding your next big winner

Every investor has his or her own way of finding the right stocks. Following the three criteria above, I believe, is a great place to start on your search for the next market-beater.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Brian Stoffel owns shares of Alphabet (A and C shares), Amazon.com, and Facebook. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon.com, and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.