Investing For Growth
Investing For Growth
by Robert Sheard (MF DowMan) LEXINGTON, Ky. (Apr. 1): A mixed day greeted the first day of this final week for the current IFG holdings. As you know, with this Friday's updated list, we'll be making our quarterly adjustment to the model holdings. If Friday's list remains unchanged from this week's list, 7 of the current 10 holdings will be replaced, retaining only Tellabs, Oracle, and Computer Associates.
There was only a bit of light news for the IFG holdings today, with ADC Telecom announcing the completion of its acquisition of Information Transmission Systems, Computer Sciences acquiring Planmetrics, and potential IFG stock Medtronic signing an agreement to acquire AneuRx. Medtronic also introduced new pacing leads for its implantable medical devices, which will allow the new devices to last longer, extending the time between replacement surgery for patients with pacemakers.
With the light news, however, I want to take the chance to explain for new readers the IFG variation I'm currently tracking in the IFG folder (Let's Talk Investment Approaches Section of our message boards).
The main criticism of the original IFG approach is that it's a little slow in dumping a winning stock once the great run is over and the inevitable downhill run begins. The two classic cases were U.S. Surgical in 1992 and Micron Technology last year (which incidentally, is *still* in the model portfolio, falling off the cliff from $95 all the way down to where it rests today in the low $30s).
Since part of the model was intended to be based on momentum, the fact that such awful momentum in these two stocks wasn't acted upon by the model brings up a legitimate potential weakness (although I'm a little hesitant to call a system with annual returns of 26% weak). Nonetheless, I may have hit upon a way to improve the model's sensitivity to momentum in my variation based on Relative Strength.
Instead of using the Value Line Industry Ranking as the final ordering screen in the approach, in this variation, I replaced that screen with the Relative Strength rating from Investor's Business Daily, a measure which tells us how any stock is doing relative to the entire market.
The method remains simple and straightforward. Take all of the stocks which meet the IFG High Growth and Timeliness criteria, then rank them by Relative Strength and buy the top-ranked stocks. You may either continue the traditional quarterly holding period if you like, or if you want to follow it more closely, update your holdings as often as once a month if warranted. (Just be sure you always account for commissions and make sure you keep them under control. Trading just for the sake of trading can cost you more than holding on sometimes.)
I believe this approach will eliminate the model's tendency to hold on to a stock far too long after the ascent has finished. Unfortunately, I only have the six weeks' worth of data I've recently begun collecting to go on. I'm still looking for sources of old Relative Strength rankings so I can test this historically, but in the meantime, join us in the IFG folder for discussions of this and other Foolish variations to the original approach. Oh yeah. . . how did it do today. Not too badly. . . up 1.87%. That's a 4.95% gain since we started following it versus a gain in the S&P 500 of 0.89%. Stay tuned for more updates.
Transmitted: 4/1/96 | ||||||||
INVESTING FOR GROWTH (4/1/96) | ||||||||
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