What is a foundation or core portfolio. The simplest way to think about the core is to compare it to friendships.

In life, we meet many people—some are fair-weather friends, they come and go. But a few are all-weather friends—the ones who stay dependable, stable, and supportive through every situation.

A core portfolio is exactly like all-weather friends. It consists of the ‘all-weather’ businesses that remain consistent across market cycles. And like friendships, there is only one way to assess and identify them, and that is by observing their consistency and performance over long periods of time.

Now that we understand what a core portfolio is, let’s look at why building a core portfolio matters. The core portfolio has clear mandates – to bring stability, and consistent performance.

Markets will keep changing – Sentiments will swing from one extreme to the other, new themes will come and go – but the core gives the investor something solid to rely on.
It also protects the portfolio during market corrections. Of course, nothing is 100% insulated. These businesses usually fall less and recover faster.

Now that we understand what a core portfolio is and why it matters, let’s look at how to construct one.

Constructing a core portfolio begins with identifying businesses that can compound consistently over long periods of time. These are companies capable of consistent growth, maintaining stable margins, efficient capital allocation, and being relevant across different business environments.

My stock-selection process, I call it the Perpetual Ownership framework, can help identify businesses that are suited for a core portfolio. It is designed to highlight companies one can hold for the long term, if not indefinitely. The perpetual ownership framework evaluates businesses under four pillars:

1. Durable Moat: The ability to remain competitive.

2. Long-Term Relevance: Will it still matter 10-15 years from now?

3. Ability to Reinvest: Ability to deploy capital at the current or higher return.

4. Resilience Through Cycles: Ability to withstand shocks without permanent loss of value.

Looking at a set of financial metrics would be a quick way to start identifying such businesses. Such businesses tend to have above industry average metrics. I would look at:

– A decent revenue growth

– Stable margins, reflecting operational discipline.

– Strong and recurring free cash flow.

– High ROE and ROIC, showing efficient value creation.

– Low dependence on outside funding.

– Clean, conservative balance sheets with low leverage,

Efficient working capital.

A well-constructed core portfolio not only offers stability and continuous compounding but also has the potential to generate meaningful alpha simply because it is built around strong businesses.