Taking the Plunge

by Jim Stevens ([email protected])

Burlington, VT (Sept. 28, 1998) -- Today it's Workshop 101 -- How to get started investing in a Foolish Workshop model. Workshop addicts and mechanical investing veterans may want to grab the remote and change the channel, a trip back to basics is today's topic.

Jeremy Siegel, the author of Stocks for the Long Run: A Guide to Selecting Markets for Long-Term Growth, says his work has shown that since 1926, a diversified portfolio of stocks beats out the returns of all other asset classes. Further down the totem pole of consequence, his research also showed that September has been the worst month for stocks and Monday the worst day of the week.

Does that really matter? Nah, but since tomorrow is the day after the worst day of the week and almost the end of the worst month, one will at least feel like they have some great karma if they start this Tuesday.

So what does it take for Johnny Mechanic to get going? First off, he has to have made it through the elementary grades of the Fool's School, which will mean among other things that he's gotten rid of high-interest debt, became comfortable with market risk and volatility, and has a long-term view of his investments. Maybe the Workshop historical returns have perked his interest, so with a bit of capital to get started he's ready to give it a crack. Just remember folks, Johnny Mechanic is also Johnny Hypothetical, your investment decisions are completely your own!

Let's assume that he's already done his reading, evaluated the pros and cons of the various models and made his choice. For the sake of this example, we'll say he's got a hankering for mid- and large-cap growth stocks with stellar earnings growth and top 10 percentile price momentum, the Formula90 five stock approach.

If it's not already there, Johnny needs to put the portion of his money that he wants to invest in this model into a deep discount brokerage account. I say "the portion" because a total portfolio in a five stock approach isn't diversified enough. More stocks -- ten to twenty total -- or maybe some additional retirement funds like a 401(k) index fund are needed to spread out exposure to meltdowns in individual stocks.

Okay, now Johnny heads for the library and gets the latest "Summary & Index" of the ValueLine investment survey. On his way in he picks up a copy of Investor's Business Daily. He takes a seat and turns to page 27 of the ValueLine. For each U.S. stock listed there, he looks up its EPS and RS ranking in the IBD. He writes down all the stocks where both of these rankings are greater than or equal to 90 (see if you can guess where the moniker for the screen came from). Of those he's written down, the five Johnny will buy are the ones with the highest RS rank.

Next, Johnny needs to beat feet to a phone or computer, dial up his broker and get the current price quotes for these five stocks. He'll do a little quick math: he'll divide his investment total by five and subtract what he'll pay per trade, and divide that one at a time by the share prices of his companies. Johnny needs to place five buy orders for the number of shares he'll come up with for each stock. Then Johnny can sit back and wait 366 days, and repeat.

Although the Formula90 stocks are listed each week here on in the Workshop, it's a great idea to run this or any other screen on your own if you're putting real money in it. It gets you familiar with the "mechanics" so you can do it single-handedly, and it serves to cross-check the posted rankings, which are done by completely human Fools -- or would that be completely Foolish humans?

Fool on!

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

What Happened to Robert Sheard?