My Favorite Model

by David Forrest ([email protected])

Sacramento, CA. (Oct. 23, 1998) -- Since starting in the Workshop two months ago, I've received a lot of mail asking me what my favorite screen is. People ask, "What screen do you put your money in?" Well, truth be told, I don't put all of my money in any one screen. I use many of the screens as starting points to find great stocks. In e-mail, I always tell people that the Fool can't give personalized advice and I refrain from advising on any one screen. That said, I do have a favorite screen, and I'd like to publicly share what it is and why I like it so much.

Many folks who read the Workshop and participate on the message boards subscribe to the notion that they shouldn't second-guess the screens, as the screens are unemotional vehicles for their investment dollars. The idea is to follow the screen in total without picking and choosing from it so that you will get the total benefit of the screen. Taking a look at this year's screens, how ugly would it look if you decided to not include Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> for some reason? Keeping with the spirit of following the models exactly and not selectively choosing from among the screens, my favorite Workshop model is the Keystone approach.

For the many new readers that we get each week, let me explain what the Keystone screen is. Keystone stocks are chosen from Value Line's database of stocks. We screen Value Line for every stock ranked either 1 or 2 for timeliness. This generally yields about 400 stocks. Then we filter out any foreign companies. From there, we select the 30 companies with the largest market capitalizations. Finally, we sort these 30 stocks by 26-week total return. The Keystone approach has you choosing the top 5 or 10 stocks for your portfolio and holding them for a year.

So far this year, the Keystone approach has yielded more than 31% while the Standard & Poor's 500 Index is up just 11.3%. For the years 1986-1997, the approach has yielded 28% annually, versus an S&P 500 that's yielded 15.17% per year, with dividends reinvested at money market rates. Efforts will be made in the future to backtest this model even further. The last 12 years have been excellent ones for the stock market, and it will be interesting to see how Keystone does in bad markets.

Still, the returns have almost doubled a great market for more than a decade. If Keystone were a mutual fund, it'd be screaming at you in every television commercial about how incredible it's fund manager is! Well, the cool thing about the Workshop, and the Fool, is that you're your own fund manager, you get to work with low-cost discount brokers, and you get revel in your own successes without relying on the heavy-handed advice of a full-commission broker.

The thing I like most about Keystone is not the returns. I know that seems hard to believe, but it's not the best thing to me. The thing I love about the approach is that it uses the 30 largest capitalized stocks ranked 1 or 2 in Value Line. These are large-cap, multi-billion dollar companies for the most part. I believe that one of the keys to the success of the model is the fact that people generally don't get hammered by a large-cap imploding and losing most of its value.

I hope that this column answers a lot of the questions you've had these past few months. I also hope that it acts as a short primer for the new readers in our band of merry Fools. Finally, as much as I like Keystone, I must admit that I'm excited about the Spark5 and hope to do some solid backtesting soon.

Have a great weekend,
Bogey

[NOTE -- Today's Value Line download seems corrupted. It doesn't list a ranking for Lucent or CVS, both timeliness ranked at #1 last week. It also has Nautica listed as a #1 though it fell out of the #1 ranks a few weeks back. So, it's suspect. Value Line said they would get back to me today with some answers. We'll have it updated by Monday morning.]

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