Thursday, September 19, 1996
A Growth Model Glossary
by MF DowMan

With the acronym-mania that we get caught up in here in The Fool, several readers asked for a single site with explanations for all three of my growth models. Here's a quick reference guide to them. If you have any questions, please join us in the Investing For Growth folder on our message boards (in the Let's Talk Investment Approaches section).

IFG Classic (IFG) -- This is my first Investing For Growth model, the one with a back-tested annual return of 25%-26% since 1980. To use this method, you simply take the stocks rated #1 for Timeliness from Value Line's High Growth Stocks screen (page 39 of Value Line's Weekly Summary & Index) and then list them by their Industry Rank. (1 is the best for this ranking.) If there are any ties for the final spot, use the 3- to 5-Year Estimated Growth rate to break the tie. If another tie-breaker is needed, use the Past 10-Year Growth Rate. Buy the top ten stocks in equal dollar amounts and update the list 13 weeks later by selling any stocks no longer on the current rankings list and buying the new ones in equal dollar amounts.

IFG with Relative Strength (IFG/RS) -- This is the same approach as the Classic IFG approach except the Value Line Industry Rank is replaced by the Relative Strength (RS) score from Investor's Business Daily. So, take all the #1 stocks from Value Line's High Growth Stock screen and rank them by Relative Strength (from highest to lowest). Break any ties by using the Value Line Industry Rank. This model has also proven to work well on a quarterly rotation, but even slightly better on a monthly rotation. So choose a holding period along that spectrum from 4-13 weeks that fits your investing style and desire to keep commissions low. The other thing to consider is that the model appears to perform better if you periodically re-balance the weightings of all positions so that no one stock grows disproportionately to the rest of the portfolio. Again, re-balance as often as you like, keeping trading costs in mind. If you want fewer than ten stocks, this approach seems a better method than the IFG Classic approach for narrowing the field to five stocks or so.

Unemotional Growth (UG) -- This is my newest model, and from all appearances the best yet, but it only has a performance record since 1992. (I'm soon going to be able to add another 5-6 years of data to that history, but keep this fact in mind when you decide what approach, if any, to use.) With the UG approach, one uses all 100 stocks in Value Line with a Timeliness rank of 1 (this list appears on page 27 of Value Line's Weekly Summary & Index.) With that list of 100 stocks, rank them by their EPS (earnings per share growth) rank from Investor's Business Daily, from highest to lowest. There will be many ties at the top of this list, so break the ties with the RS (relative strength) rank. Then buy the top five or ten (or however many you need to flesh out the growth portion of your portfolio). This approach also works well with both quarterly and monthly holding periods and with periodic re-balancing of all the positions, so choose an appropriate holding period for you to keep commissions under control.

I hope this helps with the multi-model confusion. In addition to these three models of mine, there are two variations on the original IFG approach developed by others. MF Buck (Mike Buckley) has experimented with an IFG approach incorporating the Year-Forward PEG ratio (YPEG) and TGunerman (Todd Gunerman) has developed an approach using Telescan which attempts to mimic Value Line's ranking process. Mike's IFG/YPEG model and Todd's IFG-Scan models are explained in our IFG Statistics Center.

Transmitted: 9/19/96