LEXINGTON, KY. (Mar. 3, 1997)

We spend a lot of time here trying to build the best mousetrap with growth stocks, but occasionally I get what I recognize as the call of Henry David Thoreau in Walden where he argues that "Our life is frittered away by detail.... Simplify, simplify."

Is it possible to simplify and still rack up terrific returns? I think so. And with lots of possibilities getting thrown into the crucible concerning capital gains taxes, here's what I'm concerned about.

What if, as it is starting to look more like a probability than a possibility, we get a reduction in the long-term capital gains rate (I've seen a new rate of anywhere from 15% to 22% bandied about) but no reduction in the short-term capital gains treatment? The active growth-stock screens we follow here would be at an even bigger tax disadvantage than they already are in the difference between the maximum long-term and short-term rates.

One answer to this dilemma may lie in a topic I've addressed in the Dow area recently, the use of margin with the Dow Approach. Of course, investing on margin increases one's risk, but then again, so does investing in more volatile stocks, so it's not necessarily a risk I would dismiss out of hand. The appropriate level of margin borrowing can only be determined by each individual.

With increasing degrees of margin investing, one can approach the same returns (especially after taxes) by using the simple Dow Approach that one can achieve with the more aggressive Growth screens. (Of course the same argument can be made for using margin with the Growth screens, but my topic today started out as "simplicity.")

For example, if margin interest rates are 8% and the Dow Approach returns 23% in its straight pre-tax form, adding different levels of margin can increase the returns this way:

Borrowing an additional 10% yields a return of 24.50%.
Borrowing an additional 20% yields a return of 26.00%.
Borrowing an additional 40% yields a return of 29.00%.
Borrowing an additional 75% yields a return of 34.25%.
Borrowing an additional 100% yields a return of 38.00%.

By the time you account for taxes at a lower rate (assuming you're in a tax bracket where you pay more for short-term gains), and then recapture the tax savings from the margin interest, which is a deductible expense, your returns can be higher using margin and the simple Dow Approach than by using the more aggressive but higher-taxed Growth screens.

Now don't read this incorrectly; I'm certainly not advocating anyone running out and borrowing up to the maximum in order to invest on margin. The risks there are many. I'm just showing the way it can work on paper at different levels. Looking ahead, though, if the tax laws change and you're looking for a simpler way of life (which I admit appeals to me regularly), you might consider the simple Blue Chips and the use of a bit of margin. Your returns and peace of mind may more than justify any potential gains you're passing up by not trading actively.

As always, look at all the possibilities. It's your life and your portfolio. Make them fit together in a balance that works for you. Fool on!

Monthly Growth Screens
     (Jan. 3 to present)
  12.19%  Relative Strength  
   8.62%  Low Price/Sales  
   7.99%  YPEG Potential  
   6.32%  S&P 500 Index  
  -4.55%  Investing for Growth  
 -13.79%  EPS Plus RS  
 -15.30%  Unemotional Growth  
 -17.68%  Formula 90  

Annual Value Screens
     (Jan. 1 to present)
   7.36%  Dogs of the Dow  
   7.30%  Dow Jones Ind Avg  
   4.96%  Beating the S&P  
   2.86%  Unemotional Value  
   2.86%  Beating the Dow  
   2.72%  Dow Combo  
  -0.59%  Foolish Four  

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

Welcome to the Foolish Workshop!

This area was built to give readers a chance to test and develop screening techniques as part of their overall stock research process. Whether you're just branching our from the Foolish Four into Growth stocks for the first time or are a veteran Growth-stock investor, you'll find something here to help your research process go more smoothly.

If nothing else, some of these screens will help you narrow the enormous field of stocks down to a manageable number that you can then research more thoroughly.

What we don't want anyone thinking is that these screens are magic bullets for investing. While some of them have been awesome performers in the past, the back-tested histories of many of them are brief, and we believe prudence in investing is Foolish. So don't assume because our Growth screens only include five stocks that we think you should hold a five-stock portfolio. Not so at all. We advocate a balanced approach where you hold both Growth and Value stocks, approaches which complement each other nicely.

What will you find here?

You'll find a number of features here. Every evening, I'll be writing a report for the Workshop. These reports will cover anything of interest to the area, from a rankings shakeup in one screen to a calculation of a spin-off cost basis another time. Anything relating to our overall mission of making us all better investors is fair game.

Once a month (for now, we hope weekly in the future), I'll post a new workshop database with all of the raw materials necessary to construct the screens we follow and many more. If you're adept at using a spreadsheet, you can pull these data right into your spreadsheet and manipulate them in any way you see fit. The Legend in the database file explains what each number represents.

The Individual Screens

The rest of the files are individual screens. (The top ones are Growth screens and the ones further down the list are Value screens.) Each of the files has three components. First you'll see a list of the top stocks currently meeting the screen's criteria. These are the stocks you'd follow if you started tracking the approach today.

The second section is a performance model for the screen. The Growth screens will be tracked in four ways based on different holding periods: monthly, quarterly, semi-annually, and annually. (The periods for our Growth Screens always extend from the first Friday of the period to the first Friday of the next.) At the beginning of each new holding period, the stocks are assumed to be perfectly balanced. Returns for the Growth Screens only measure capital gains. Trading costs, dividends, and taxes are excluded in the computations.

The Value screens also have this performance model, but it is only computed for an annual holding period. For the Value screens, dividends are added to the returns since they form a vital part of the approaches.

The third section of each screen's file is a step-by-step set of directions explaining how to compute the current rankings on your own. No more having to track down model directions all over the forum. Each screen has its own directions in the same place as the current rankings and performance results.

And finally, if the screen has been back-tested at all, I've included a brief discussion of the historical results for the screening technique. I hope you find the area useful, readable, and enjoyable. Join us on the message boards for more discussion of Foolish Workshop topics.

--Robert Sheard (MF DowMan)