Introducing the Workshop Portfolio
It seems increasingly silly to regard the Foolish Four as something special just because it was the first mechanical strategy developed by the Foolish community. The Foolish Four belongs in a diversified portfolio of mechanical strategies that is designed to, hopefully, weather market storms a bit better than any single strategy would. The community is invited to help develop such a model portfolio.
By Ann Coleman (TMF AnnC)
October 19, 2000
Welcome to Workshop Thursday. We've been running joint columns in the Foolish Four and Workshop areas for the last few weeks, and today it should become obvious why. We are going to expand the Foolish Four Portfolio and make it a true Mechanical Investing portfolio by adding several strategies developed in the Workshop.
The work done by the Workshop community far exceeds the testing and research that went into the original Beating the Dow or the Foolish Four. So, it seems increasingly silly to regard the Foolish Four as something special just because it was the first mechanical strategy we developed. Next year's real-money portfolio will include at least three or four Workshop strategies in addition to the Foolish Four.
Here's the fun part. You get to pick them. The Workshop has always been community-driven. The Fool's role has been to provide support, a few ideas, and a place to share information. The result has been a vibrant community that leads rather than follows, exactly what The Motley Fool hopes to accomplish.
Now, setting up a real-money Workshop portfolio is a bit dangerous, precisely because such portfolios have been known to attract folks looking for something to follow. That's fine. We can't all be chiefs. But those of you who read this column on a regular basis should be prepared for a lot of redundancy, as we constantly preach the necessity of understanding the strategies, preparing for volatility, thinking for one's self, and taking full responsibility for one's own investing decisions. I'm getting rather tired of typing the same words over and over again myself, but the message is important.
This is all experimental stuff. Not only are the strategies not "proven," there is some reason to fear that if they work well enough to generate a lot of outside interest, they could stop working. Hopefully the volatility that most of these strategies experience will discourage that. The community seems to feel that the brain trust that has developed over the past few years has a good chance of staying ahead of any copycats -- there are many, many new strategies in development. But, that means the old idea of checking on your portfolio once a year is dead, if it was ever alive. Workshop investing means keeping up with the latest thinking.
Back to the portfolio. Moe Chernick (MoeBruin), who has had a lot of experience running real-money portfolios, will be point man for designing our community portfolio. The first thing we are going to address is strategy diversification. A single, four-stock strategy just can't do that.
I want to keep the portfolio small to maximize its teaching value. That way, it will be relevant to the largest number of investors, plus it's far more challenging to design for efficiency than to be able to have everything you want. On the other hand, we do want a portfolio that is large enough to provide diversity. It would be nice to avoid some of the pain we've experienced this year, which has been most unkind to the single-minded Foolish Four.
Our Related Links box above will guide you to three articles that address the problem of designing a diversified portfolio. The idea is that, rather than diversifying in terms of stocks or industries, in the Workshop we diversify by using strategies that look for different types of stocks. For example, the Foolish Four and the Keystone strategies target large-cap stocks, while the Relative Strength strategies are free to chose stocks of any size and frequently pick relatively small companies.
The first challenge is to decide how many strategies one needs for effective diversification. That will entail a discussion of complementary strategies -- growth versus value (the Foolish Four will fill that role), versus momentum. But, we won't need to decide on the exact strategies just yet. A broad outline will do to set the wheels in motion.
For the record, the real-money Workshop portfolio will be in an Individual Retirement Account. (Speaking of retirement, have you heard about the Fool's Roadmap to Retirement Online Seminar?) I will be setting up the account at Brown & Co. (Five-dollar trades, yeah!) This isn't an endorsement of Brown, by the way. I already have an account there, and I find their portfolio software somewhat clunky, but the advantage of low commissions when a portfolio is relatively small can't be underestimated. I'm targeting $5,000 per strategy, or approximately $1,000 per stock, the same amount I started the Foolish Four with. Hopefully, we will have a bit better luck with a more diversified portfolio.
Moe will be asking for community input on the design of the portfolio on the Foolish Workshop discussion board. I hope you will share your thoughts there. I think that we will all learn a lot from the process. I know I will.
Fool on and prosper!
