A Successful Portfolio:
So many decisions, so little guidance
It is our observation that few, if any, of the popular portfolio management
methods seem to hold up over a long period of time. Market timing, in
particular, is acknowledged to be extremely difficult and those that seem to
be good at it may be just lucky, and usually for only a short period of time.
We have never considered ourselves to be lucky and certainly would not feel
comfortable promoting an investment strategy based on the "dart board" or the
craps table. Here are a few of the basics of the 2 for 1 portfolio
management procedure.
- We believe in laddering, which is akin to the idea of dollar cost
averaging. As long as our goal is simply to beat the market, and if we
acknowledge that the market goes up and down, there is no good or bad time in
the market cycle to buy or sell stocks. For the long term, a regular,
methodical investor can be expect to outperform the sporadic and
compulsive speculator most of the time.
- Companies have "life cycles". It is assumed that a company's
management will split a stock only during an "upbeat" cycle. The
Ikenberry/Rankine study showed that the positive effect of 2 for 1 splits
lasts for up to three years. Over the long term, owning our selected stocks
for two to three years will prove to be the best policy.
- Thirty is a good number. Not only does this happen to be the number of
stocks in the Dow Jones Industrial average, it is also the number of months in
2 1/2 years. Our portfolio consists of 30 stocks, no more, no less. We buy
one stock every month, selected using the criteria discussed above. We also
sell, every month, the stock that has been owned for 2 1/2 years. We may also
sell portions of the holdings in other stocks to balance the portfolio and/or
provide the capital to make the next month's purchase.
A prudent person looking into subscribing to 2 for 1 would suggest that
it is very easy to concoct successful portfolios using hindsight. We would
agree and, for that reason, were rigorous in the methodology used for our stock selections. We ran five complete tests, picking one stock per month starting
with stocks that split in January 1990. Each of the five tests used a
different set of screens, but each was consistent from start to finish. It was
tempting to deviate from the methodology because we could see that we were
missing the "high fliers" such as Cisco Systems that has split several times
since 1990. Most of the work was done using only the ticker symbols for the
stocks and, in the vast majority of cases, we had never heard of the companies
and had no reason to be prejudiced for or against any one particular stock
over another. Of the five tests, three "beat the market" and, of course, the
portfolio eventually purchased for a "real test" is based on the most
successful of the five tests.
It did become clear, as our "experiment" developed, that we were inadvertently
selecting a strong group of consistent base hitters, with very few home run
hitters in the bunch. Mr. Neil Macneale Sr. and your editor used to watch the
Cincinnati Reds play at Crosley Field and we remember Mr. Macneale's constant
exhortations for the batter up to just tap a little blooper into short right
field instead of trying to knock the cover off the ball. Of course we wanted
to see the likes of Ted Kluszewski blast one of his 400+ foot home runs,
which was much more exciting. Over the years we have learned to respect the
wisdom of Mr. Macneale Sr's approach, not only in baseball, but for numerous
pursuits in business and life in general. The enclosed portfolio contains few,
if any, of the "home run" stocks that you read about in the financial press.
If our stocks get exciting after we buy them that's OK, but we have found it's
better to look for the consistent base hitters.
In considering who might be interested in a 2 for 1 newsletter, we have
essentially targeted people "just like us". A person interested in this
type of investing will be a long term investor saving for retirement, a
college fund, or simply steady capital accumulation. If you are a "trader" or
like to "play the market", this newsletter will probably not interest you. We
purposely used our own IRA account as the model portfolio because it will
accurately reflect transaction costs and dividend reinvestment gain while
avoiding the complication of dealing with taxes. Most investment advisers and
mutual funds measure their success in this manner and what could be simpler
than having an actual statement for a real account to keep track of our
progress. It should be noted that the real portfolio was purchased all at one
time in July 1996. This portfolio is an accurate reflection of the stocks
in a "test" portfolio developed using the methods described above, going
back to 1990. The number of shares purchased for each company was determined
by taking a round number (say 25 instead of 27) closest to what would
produce the proper weighting of the real portfolio compared to the test
portfolio at that time.
Why would an investor, who thinks all of the above makes sense, want to
subscribe to a newsletter that does what any reasonably competent person
could do on their own. As stated above, we believe our audience is going to
be people who are a lot like us. People a lot like us will believe that the
stock market, over the long term, will provide the highest return on their
investment, but they would also like to do just a little better than the
market average. They will be interested in maximizing their investment
dollar without devoting hours and hours to studying the small print in the
Wall Street Journal. They will be interested in extremely low transaction
costs. They will be interested in a reasonable, regular, understandable, and
successful buy and sell program that costs only $20.00 per month. If you are
such a person, take a moment to
subscribe
and your 2 for 1 newsletter will
begin arriving next month.
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