The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (July 14, 1997)  Last week, one of my Foolish Four columns was devoted to the double-edged sword of a portfolio so concentrated that as much as 40% of the total value is invested in a single stock. When that stock soars, it lifts the entire portfolio. When it plunges, there's not much the other stocks can do to overcome the lagging stock.

A similar question was asked this weekend regarding the Sheard Blue Chip Fund, my personal large-cap stock strategy. I was asked if I'd sell one of the stocks if the news looked bad or if the stock started plunging. And while I won't say "never," my initial reaction is that I wouldn't sell the stock.

There are a couple of reasons for that "loyalty." The first reason is the most nebulous. I'm the type of investor who doesn't spend a tremendous amount of time reading every news story on every stock I watch the minute it hits the newswire in an attempt to finesse my strategy. I prefer making decisions a little more slowly and would undoubtedly be the world's worst short-term trader. So by the time "bad news" hits the market and I've had the chance to deliberate for myself about the possible ramifications, the "news" is going to already be reflected in the stock price, so any action at that point on my part is a bit late.

A more important and tangible reason, however, is my views on risk management. The reason I choose to hold fifteen stocks is that it spreads the risk of an individual stock's cratering across enough positions that it doesn't devastate the portfolio. With fifteen stocks, that is, each one only represents 6.67% of the portfolio at the beginning of the year. So if one cuts sliced in half (a serious loss for a large-cap like these), the collapse in that stock only accounts for a 3.3% loss to the overall portfolio. To me, that's not a large enough risk from a single stock falling apart to justify worrying about micro-managing my holdings.

If my fundamental research is at all worthwhile, the number of occasions where I'll have a stock collapse like that should be limited, and I hope, be far outnumbered by the number of stocks for which I've analyzed the situation correctly. I don't aim to be perfect, but I aim to be right more often than not, and by spreading the risk across fifteen holdings, I am comfortable with the balance of risk and trading costs I'm able to achieve. (With my Blue Chip approach, total trading costs for the whole year are only a couple hundred dollars, well within a reasonable range for most investors. For smaller investors, a ten-stock version is a fine option. Even a five-stock Dow Approach is a good starting point very first steps into the market, but I think it should only be a launching point, not a final resting point for most investors.)

Monthly Growth Screens
(Jan. 3 to present)
45.71%  Relative Strength  
22.77%  S&P 500 Index  
14.66%  Unemotional Growth  
13.16%  Low Price/Sales  
12.63%  Investing for Growth  
1.48%  EPS Plus RS  
0.32%  YPEG Potential  
-12.45%  Formula 90  

Annual Value Screens
(Jan. 1 to present)
22.87%  Dow Jones Ind Avg  
18.78%  Beating the S&P  
16.76%  Dogs of the Dow  
15.76%  Unemotional Value  
15.76%  Beating the Dow  
12.98%  Dow Combo  
3.27%  Foolish Four