Thursday, February 12, 1998
The Daily Workshop
Report
by Robert Sheard
(TMF Sheard)
LEXINGTON, KY. (Feb. 12, 1998) -- A number of readers are asking about the Keystone Dozen strategy, so let me reprise the theory here and update the model portfolio I've been following for it.
The basic Keystone Approach is a large-cap growth-stock approach that combines the Value Line Timeliness rankings and 26-week total returns (relative strength) to select a group of stocks (5, 10, 15, whatever the investor wishes). The stocks are held for one year.
Over the twelve-year history for the approach, the higher-ranked stocks (based on relative strength), have consistently performed better than those stocks further down the rankings. (For example, the entire 30-stock field has averaged a 20.5% annual return since January of 1986, still better than the S&P 500's return of 17.2%. But the top ten stocks have averaged 25.4% and the top five have averaged 28.6%.)
The Keystone Dozen is a modification on this basic approach whereby the investor selects one stock each month from the current rankings instead of selecting the entire portfolio at one time. The theory is that as the rankings shift with time, choosing the highest ranking stock one doesn't already own increases the odds of selecting a larger proportion of star performers. Selecting an entire group at one time means dipping further down the rankings in terms of quality.
So the first year, one would park the bulk of the portfolio into S&P 500 Depository Receipts <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SPY)") else Response.Write("(AMEX: SPY)") end if %>, a.k.a. Spyders, while waiting for each new month to begin. After the first year, you will own twelve different stocks, each chosen in a different month. Then as each stock becomes a year old, you would replace it if necessary with a stock from the current rankings for that month.
The total trades per year would be 24. You have a new window each month to add new cash, if you're saving regularly. Theoretically, the returns should average better than with the traditional Keystone approach because you're always choosing a top-ranked stock. (Incidentally, the top Keystone stock since 1986 has averaged 36% a year.) Plus, for those of us who like a little more activity, we get to make a trade every month without boosting out total trading costs for the year.
I started a hypothetical model for this approach with $12,000 in Monopoly money and will add a new stock on the last day of every month (using the closing prices). The first purchase on 12/31/97 was Fifth Third Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FITB)") else Response.Write("(Nasdaq: FITB)") end if %>. At the end of January, I added Schering-Plough <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %>. The rest of the money sits in the Spyder.
As of today (with prices late in the trading session), here's how the portfolio stands:
Shares Stock Price Value
12 FITB $ 79.56 $ 954.75
14 SGP $ 74.13 $ 1,037.75
103 SPY $102.75 $10,583.25
Cash $ 10.00
Total $12,585.75
Return 4.88%
For most of the first year, this approach is likely to mimic the S&P 500 since the bulk of the funds are in the Spyder, but after a full twelve-stock portfolio is established, we'll get a better sense of how well this portfolio will stack up against a straight Keystone approach. I may be able to recreate what the twelve stocks would have been last year (I don't know if I have all of the data to do so). If I can, we can back into what the twelve-stock portfolio would have looked like going into this year, which will be a more fruitful group to watch than the initial year's process of setting up the portfolio. Stay tuned and I'll keep you posted. Fool on!
[Want to be the first Fool on your block to get a copy of Robert Sheard's forthcoming book? Click here to pre-order your copy of The Unemotional Investor.]