Thursday, April 23, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (April 23, 1998) -- One of my goals in the Workshop columns of late has been to explore ways of maximizing returns, minimizing risk per position, and allowing for regular investment of new money without exploding one's trading costs. Sounds difficult, but it's not, really. We've discussed a number of alternatives in recent weeks -- perhaps chief among these are the Dozens methods (buying one stock each month using the current rankings each month).

Another variation on the Dozens theory (if you want more than twelve stocks in your portfolio but also want to reduce the level of maintenance) could be to adopt a twenty-stock portfolio, staggering the purchase of these twenty stocks into quarterly groups. As with the Dozens approaches, you'd simply buy the five top-ranked stocks your didn't already own each quarter.

Since the Relative Strength models are doing so well again in 1998 (they soared in 1997), let's walk through the approach as it might have been used so far in 1998:

At the beginning of the year, the top five stocks for the 26-week total return screen were:

Best Buy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> +94.6%
Safeskin <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFSK)") else Response.Write("(Nasdaq: SFSK)") end if %> +34.8%
ICN Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ICN)") else Response.Write("(NYSE: ICN)") end if %> +46.7%
United Stationers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USTR)") else Response.Write("(Nasdaq: USTR)") end if %> +33.0%
VWR Scientific <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VWRX)") else Response.Write("(Nasdaq: VWRX)") end if %> +22.8%

The entire group is averaging a gain currently of 46.4%. If our mythical "Quarters" investor had begun the year with $10,000 in these five stocks, today they'd be worth $14,638.

At the end of March, Best Buy still topped the list, so it would be skipped since it was already a part of the portfolio. The next five stocks were all new, however. In the 23 days since then, we've seen little overall growth, but three weeks out of fifty-two doesn't mean much.

Ethan Allen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ETH)") else Response.Write("(NYSE: ETH)") end if %> -11.7%
Whole Food Markets <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WFMI)") else Response.Write("(Nasdaq: WFMI)") end if %> -10.8%
America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> +4.9%
Lowe's Cos. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOW)") else Response.Write("(NYSE: LOW)") end if %> -0.3%
Capital One Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COF)") else Response.Write("(NYSE: COF)") end if %> +27.2%

This second group of five is up 1.9% so far, thanks entirely to Capital One! A second $10,000 invested in these five stocks would be worth $10,187 today.

Altogether then, a $20,000 investment is now worth $24,825. The annualized growth rate is a whopping 208.1% (versus the Standard & Poor's 500 Index's 59.3% annualized rate so far in 1998). This is the equivalent of a year-to-date return of 41.7% (versus 15.5% for the index).

The theory here is much like the dozens approach except you're grouping your approaches into batches of fives instead of an individual stock each month. You're always picking from high in the current rankings, getting you the returns associated with a concentrated portfolio, but you get plenty of diversity so that you're not taking on the risk of a very concentrated portfolio, and you get the same tax treatment as buying twenty stocks at one time and holding them a year -- a cap of 28% -- and you can add new money quarterly as one group is updated.

It's not necessary to choose all twenty stocks using the same screen. You can blend different strategies if you want a mixture of large and small caps, growth and value stocks. The real point is that there's no one ideal way to manage your portfolio strategies. Play with the possibilities to find a strategy you can stick with in good times and bad, and that matches your needs for activity versus cost control.

Several readers asked if I had a reference for the study on Relative Strength tests and holding periods, and thanks to a quick-and-ready Fool reader, I can give you that reference today. The article, penned by a duo from U.C.L.A., appears in the March, 1993 issue of the Journal of Finance. Fool on!

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

[Robert Sheard is the author of The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and soon at your local bookseller.]