Monday, April 13, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (April 13, 1998)

A number of readers have asked why I'm tracking the Unemotional Growth model with an annual holding period in the official Workshop area. Am I changing my endorsement from the original monthly cycle to a longer one?

Not at all. In fact, as I stated at the outset this year, I fully expect the annual Unemotional Growth screen to lag significantly behind the other Workshop screens and the monthly variation. We're following it on a yearly cycle, however, simply to keep the comparisons in our eight Workshop models on the same footing. And true to form, the annual UG model is struggling to keep pace with the Standard & Poor's 500 Index and the much stronger annual models based on Relative Strength.

But as you can see from the Unemotional Growth history file, which I updated today to include the returns through the March cycle, the monthly cycle is doing just fine in 1998, up nearly 29% so far for the year. (The ten-stock version is up 22%.) And since 1987, the five-stock model, updated once a month, has an annualized return of 39.6% (before trading costs and taxes).

So why would the different cycles make such a difference? Unemotional Growth is undeniably an earnings momentum model, setting its laser sights on those stocks that are currently blowing the top off of earnings growth. Over a long period of time, as Jim O'Shaughnessy points out in his book What Works on Wall Street, the market is efficient enough that using earnings growth on an annual cycle doesn't work well at all. The earnings gains are factored in quickly enough that there's no advantage gleaned in screening for the large earnings gains.

But the market's not efficient enough to prevent such a screen from working on a more aggressive cycle, like a month or a quarter. Letting Value Line define the field of candidates to the 100 best prospects and then filtering out all but the stocks with the highest earnings growth right now has been a successful way to invest in an aggressive model for at least the last dozen years.

Do I worry about the limited nature of the back-test (since 1987)? Of course. But there's some consolation in the fact that the primary screen (Value Line's timeliness ranking) has a 32-year-old real time history. It's only the final overlay of the Unemotional Growth filter that has a limited history.

For obvious tax reasons, this approach is one that's best served in a tax-deferred or tax-free account, but if you're looking for a very aggressive screen to complement your other strategies, putting the UG arrow in your quiver is something to consider. Be warned, though, that it requires a cast-iron constitution. Just look at the monthly returns in 1997 if you need evidence of what this approach can do to your mind. Long term, it's been awesome, but only for someone who's stronger than this bronco's will. Fool on!

Check out the latest file updates for the Workshop:
New Rankings | 1998 Returns | New Database

[Robert Sheard is the author of the forthcoming book, The Unemotional Investor, due out from Simon & Schuster on May 12. To pre-order your copy, please visit Amazon.com, where it's available at a discounted price.]