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You can follow the adventures of the Keystone 100 at: http://www.fool.com/Workshop/WorkshopReturns.htm.
Current Keystone 100 stock selections are:
Value strategies look to buy stocks when they are "undervalued" by the market. Value investors are the guys who talk about investing with a "margin of safety" and low P/E ratios. The Foolish Four is definitely a value strategy. I'm not trying to justify its lack of wonderful performance lately by saying, "Hey, we beat those mutual funds." Our goal is to beat the whole market -- over the long term. But it is instructive to see how other, similar investment strategies have done.
By contrast, growth funds, which look for companies that are growing earnings very rapidly and don't worry so much about the price, did very well, averaging 40% over the last 12 months and 28% over the last three years, well above the S&P 500's return. (Thanks for the data, Morningstar.com.)
Here's a radical idea. If you can't beat them, join them. No, I'm not suggesting that you jump into a growth mutual fund. The problem with mutual funds is that last year's best performers are often next year's worst, and they are subject to changes in management, sales fees, and a slew of government regulations about what they can buy and how much of it they can buy.
I'm not actually suggesting that you do anything. For all I know this will be the year that value investing returns to favor. These two approaches normally swap places every few years and we may be due. But if you are looking to branch out from our value approach, the logical next step is to add a growth strategy, and if you like the mechanical approach, we have a mechanical strategy over in our Workshop area that is geared toward large-cap growth stocks.
It's called Keystone. The original Keystone strategy was developed as a direct analog of the Foolish Four. It started with a universe of 30 large-cap stocks selected by market cap from Value Line's database of the 400 most "timely" stocks. These 30 stocks (because the Dow has 30 companies) were then ranked by total return (price growth) over the past six months, and the top five or ten stocks were selected for the Keystone portfolio.
The brilliant folks in the Workshop have since found that starting with the 100 largest stocks was an even better idea, hence the Keystone 100. (You still only buy the top five or ten stocks -- you just don't limit your choices to the 30 largest companies.)
So the Keystone strategy starts with companies that are highly rated by Value Line, which is analogous to the Dow's vetting procedure which ensures that companies in trouble are not selected for the Dow. But because these are "timely" stocks, we are not locked into selecting from a batch of companies that were great a decade ago but may have gotten into financial trouble as can happen with the Dow -- Keystone doesn't look for bargains or turnarounds, it looks for growth. The strategy then selects the largest of these timely stocks and ranks them by recent price growth.
Since 1986, which is as far back as the data goes at this time, the top five stocks picked by this method have returned an average of 31% per year. That's the average for 12 portfolios per year, one for each month. For portfolios starting the first trading day of the year, the average was 35% per year. Last year (an exceptional year for growth stocks) it returned 131%. (That's right. There's no decimal point missing.) Wow.
So you want to know why we haven't been banging on drums about this one? Well, we only have data back to 1986, which, for folks used to working with 39 years of data, isn't a whole lot. Of course, it gives the Keystone a longer history than most mutual funds, so maybe I'm being too cautious. I've also seen indications that the strategy didn't perform that well in the years prior to 1986. That may simply be because value strategies were more successful in the '70s and '80s -- the Foolish Four's history certainly supports that.
Of course, when/if today's growth stock cycle turns back to value investing, a strategy like the Keystone 100 will be vulnerable. So I am not making a recommendation here, folks, just spreading the word that there are other simple, mechanical strategies at the Fool that have done exceptionally well in recent years.
The Keystone 100 resides in our Foolish Workshop, and that's another reason we haven't been beating the drums about it. The Workshop is the most exciting area of the Fool, in my opinion. But most of the people I send there tend to run right back out screaming. My fault, I suppose. I'm supposed to be in charge of keeping the place picked up and organized. But there is so much going on there that it's hard to do that. (Of course, I use the same excuse about my basement, but no one really buys it.) Braving the Workshop takes dedication and a willingness to feel like a total idiot for a few months until it all starts to make sense.
I will report on the Keystone 100 here occasionally for those of you who are interested. As of Monday, the five-stock version of the Keystone 100 is up 14.78% for the year and the ten-stock version is up 6.33%. The stocks selected on December 31 were:
JDS Uniphase <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDSU)") else Response.Write("(Nasdaq: JDSU)") end if %>
Qualcomm Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCOM)") else Response.Write("(Nasdaq: QCOM)") end if %>
Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>
Network Appliance <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTAP)") else Response.Write("(Nasdaq: NTAP)") end if %>
Siebel Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEBL)") else Response.Write("(Nasdaq: SEBL)") end if %>
Yahoo! Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>
CMGI Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMGI)") else Response.Write("(Nasdaq: CMGI)") end if %>
Nortel Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %>
Gateway Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTW)") else Response.Write("(NYSE: GTW)") end if %>
Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %>
The current selections are listed each week at: http://www.fool.com/Workshop/WorkshopRankings.htm.
Fool on and prosper!