The Daily Workshop
Report
by Robert Sheard
(TMF Sheard)
LEXINGTON, KY. (June 19, 1997) A day or two ago, I ran across a question I've never really discussed in detail before: how exactly do I manage my own portfolio?
And with some trepidation, I'm going to discuss my own portfolio today (with dollar amounts omitted) and explain why I do the things I do. They may not be right for you, so don't read this as a recommendation that you should follow suit.
First a little background on my situation. I'm 37 years old so I have decades ahead of me as an investor (fate willing), so I'm not looking at short-term results primarily. And even though I write about investing as my profession, I have very little time to devote exclusively to stock research, so I crave simplicity.
My portfolio is modest in size and my wife and I are in a middle-of-the-road tax bracket, just to the point where short-term gains look less attractive to me, so I want to hold everything a full year to get the lower tax rates (the bulk of our money is not tax-sheltered). So despite the awesome historical returns of some of the Aggressive Growth screens, I'm not currently using them (although I have in the past) because of my desire for long-term holdings and less portfolio maintenance.
So the alternative I chose was to build a portfolio of 15 stocks from among the largest American companies. I'm not using a completely mechanical screening process, so I can't tell you exactly how you would replicate the order, but some of the elements I include are the obvious ones we talk about throughout the Motley Fool: earnings growth, decent balance sheets, some industry diversification, brand-name equity, and the like.
I also add money to my portfolio monthly, so at the beginning of each annual cycle, I buy a portion on margin (I currently pay 7% for margin interest) roughly equal to what I expect to add to the portfolio throughout the year. Right now, that equates to about 9% or 10% of the portfolio total at the beginning of the cycle. By the end of the year, my monthly contributions have paid off the margin balance and that amount has already been at work for me throughout the year, usually earning significantly more than the small interest charges I pay throughout the year. Dividends are also "reinvested" immediately in some manner, too, in going toward the margin balance.
Then a year later, I choose a new 15, rebalance the portfolio (typically including several of the same stocks) and start over.
As a sample, let me show you a portfolio I helped a friend set up along these lines almost one year ago (end of June 1996). I can't swear to it that he's still holding these 15 stocks, but I certainly hope he is; they've had a very good year with 11 of the 15 matching or beating the S&P 500. I've included a provision in each stock's return for dividends, although the yield this year wasn't very high and it isn't my primary criterion in choosing the 15:
115% Microsoft (MSFT)
100% Intel (INTC)
83% BankAmerica (BAC)
58% Pfizer (PFE)
56% Merck (MRK)
53% Gillette (G)
51% Amer. Int'l Group (AIG)
51% Citicorp (CCI)
47% Coca-Cola (KO)
44% Philip Morris (MO)
34% Johnson & Johnson (JNJ)
27% Home Depot (HD)
9% PepsiCo (PEP)
8% Hewlett-Packard (HWP)
8% McDonald's (MCD)
Total Return 50%
S&P 500 34%
My own group of 15 holdings was updated in April and includes these stocks:
Amer. Int'l Group (AIG)
Citicorp (CCI)
DuPont (DD)
FannieMae (FNM)
Hewlett-Packard (HWP)
Intel (INTC)
Johnson & Johnson (JNJ)
Coca-Cola (KO)
Eli Lilly (LLY)
Merck (MRK)
Microsoft (MSFT)
Pfizer (PFE)
Procter & Gamble (PG)
Travelers Group (TRV)
Wal-Mart (WMT)
If there's sufficient interest, I'll start a new group of 15 at the end of the month to pick up where the original portfolio left off and then track it here informally. In the meantime, there's nothing wrong with "thinking big" (large-cap big) even in a growth-oriented portfolio. Following the path I've chosen for my own portfolio may not score me any triples or ten-baggers in individual stocks overnight, but I'm confident I'll do well consistently with very little hassle and only moderate risk, two factors dear to me. Use this for what it's worth. Fool on!
Monthly Growth Screens (Jan. 3 to present) 35.77% Relative Strength 20.04% S&P 500 Index 16.71% Low Price/Sales 2.76% Investing for Growth 1.49% Unemotional Growth -0.60% YPEG Potential -7.37% EPS Plus RS -17.45% Formula 90 Annual Value Screens (Jan. 1 to present) 20.61% Dow Jones Ind Avg 20.03% Dogs of the Dow 13.33% Beating the S&P 11.25% Unemotional Value 11.25% Beating the Dow 9.57% Dow Combo 4.25% Foolish Four