Wednesday, June 03, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (June 3, 1998) -- Congratulations; you've been appointed the new manager of your company's pension plan and you have to look after the portfolio that's going to set you and your colleagues up on Easy Street one day. You're nervous about choosing stocks and want some help, yet this is only one of your duties at work and you have to trim your research time drastically.

One place to turn might be a combination of screens (high-yield value and growth, but let's focus today on one over-simplified example. Let's say that you're going to take the $100,000 that comes into your pension plan every month and buy whatever the top twenty Keystone stocks are (in equal-dollar amounts). Period. Basically you're running a miniature mutual fund with inflows only once a month.

How would you have done so far this year? (All of this is just an elaborate way to set up the different results for each month's starting date in 1998.)

Let's look at the easy alternative first. You could plow the entire amount in to the Standard & Poor's 500 Index each month and forget about picking individual stocks. Doing so would mean you would beat four out of five professional managers over the long haul. You'd probably never lose your job this way, either.

Here's how your monthly savings would have done in the S&P 500 this year. The returns represent the gains since that month's new deposit of another $100,000, through late this afternoon.

January +12.6%
February +11.4%
March +4.1%
April -0.8%
May -1.7%
June +0.2%

The $600,000 your firm has deposited so far this year would be worth $625,800 today. That represents an annualized pace of 21.3%. (That means if your gains continue to grow at this rate, your total time-weighted return for the year would be 21.3%.)

But you want to beat the market, not just accept its considerable favors. Compare the index returns to a program where you have simply grabbed the top twenty Keystone stocks every month, regardless of what's already in the portfolio. (Instead of a Dozens approach, you're buying twenty stocks every month, allowing duplicates.)

January +18.3%
February +14.9%
March +7.7%
April +1.9%
May +2.0%
June +0.7%

So far, the Keystone 20 have out-performed the S&P 500 Index in every monthly group (the recent monthly groups are awfully young, of course), and, in fact, in the two periods where the market index is showing a loss, Keystone 20 has recorded a gain.

The same $600,000 invested in the somewhat tame Keystone 20 has grown to $645,500 today. Where the S&P 500 Index is on a pace to achieve a 21.3% annual return, the rate so far for the Keystone model represented here is 39.6%.

This year is the first test I've made of the Keystone stocks with starting points other than in January, but I don't expect we'll see any serious signs that a seasonal factor is in play. The approach takes the largest stocks ranked highly by Value Line (a ranking system that has beaten the market in real time since 1965) and then applies a proven test to the remaining group of thirty stocks (relative strength, or the total return over the past 26 weeks).

But even if one simply bought the whole group of thirty, the returns surpass the S&P 500 Index. Such a plan this year would have turned the $600,000 into $642,000. That only lowers the annualized rate so far in 1998 to 36.2%, still significantly ahead of the index alternative.

The point of all this, of course, is that Keystone is a very stable approach as far as growth stocks go, having consistently outperformed the S&P 500 since 1986. And as for timing, I don't believe it's going to matter one bit over the long run when one begins with this approach, either. It's simply a matter of starting and staying invested, adding new money whenever possible.

I've long held the belief that we don't have to employ complicated investment strategies if we're willing to stick with a discipline. Keystone may not be the most exciting alternative we have, but it's a pretty fair alternative to the frenetic activity that often passes for top-flight investing today among the Wise. Fool on!

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

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