Fool.com: A Monthly Keystone (Workshop) August 13, 1998

A Monthly Keystone

by Robert Sheard
(TMF Sheard)

LEXINGTON, KY. (August 13, 1998) -- A number of readers have wondered about the progress of our various relative strength models if they were updated more frequently than once a year. While I don't have any data to test previous years with monthly updates, I can look at least at this year's performance with the caveat that it may or may not be representative of a longer-term history.

Today I'll focus on the five-stock Keystone model. In this test I took the top five stocks at the close on the final trading day each month and then assumed a complete re-balancing every month. In reality, you may well leave a stock alone if it remains in the portfolio for more than one month, but for the sake of a consistent test with other models we've examined, I assumed complete re-weighting at the beginning of each month, just as I did with the Unemotional Growth model.

 
           January 
  -10.37%  Coca-Cola Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCE)") else Response.Write("(NYSE: CCE)") end if %> 
   18.45%  Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> 
    0.59%  Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> 
    5.56%  AirTouch Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATI)") else Response.Write("(NYSE: ATI)") end if %> 
   18.68%  EMC Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EMC)") else Response.Write("(NYSE: EMC)") end if %> 
  
    6.58%  Total Return 
  
           February 
    5.09%  Schering-Plough <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %> 
    2.42%  AirTouch Communications 
   10.70%  Cendant Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %> 
    8.26%  Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> 
   14.40%  The Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> 
  
    8.17%  Total Return 
  
           March 
   12.85%  Pfizer 
    7.40%  Schering-Plough 
    0.70%  The Gap 
   -3.13%  Dell Computer 
    5.67%  Cendant Corp. 
  
    4.70%  Total Return 
  
           April 
   -1.91%  Schering-Plough 
    3.61%  Tele-Communications, Inc. 'A' <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCOMA)") else Response.Write("(Nasdaq: TCOMA)") end if %> 
   14.14%  Pfizer 
   -2.74%  Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %> 
    0.00%  Tyco Int'l <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TYC)") else Response.Write("(NYSE: TYC)") end if %> 
  
    2.62%  Total Return 
  
           May 
    3.90%  America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> 
   -8.06%  Pfizer 
    2.09%  Dell Computer 
   12.22%  Equitable Cos. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EQ)") else Response.Write("(NYSE: EQ)") end if %> 
    9.02%  Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> 
  
    3.83%  Total Return 
  
          June 
   27.23%  America Online 
   12.59%  Dell Computer 
   12.02%  Tele-Communications, Inc. 'A' 
    3.52%  Pfizer 
   14.12%  The Gap 
  
   13.90%  Total Return 
  
           July 
   10.38%  America Online 
   17.04%  Dell Computer 
    9.34%  EMC Corp. 
   -3.25%  The Gap 
    1.61%  Microsoft Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> 
  
    7.02%  Total Return 
  
           August (through the 12th) 
   -6.36%  America Online 
   -0.98%  Dell Computer 
   -6.12%  Warner-Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %> 
    7.91%  EMC Corp. 
   -4.33%  Equitable Cos. 
  
   -1.98%  Total Return

The year-to-date compounded return, then, is a very impressive 53.67%. Annualizing that figure would give us a return of 102.02%.

There are some drawbacks, however, in addition to the uncertainty about whether this terrific return would be sustained long-term. For one, the number of trades jumps dramatically. So far, eighteen stocks would have been replaced, even without any position re-weighting. That means 36 trades so far, or a pace that would require more than 60 trades for a full year. At the deepest of discount brokers, that would run approximately $300, still affordable for many investors but a cost to consider. Also, don't forget that each trade gives up an eighth or a quarter to the spread. That's typically more expensive than the commission itself.

The second drawback, of course, is that the vast majority of holdings will be short-term. That means gains will be taxed at one's ordinary income tax rate rather than the capital gains rate of 20%. The higher one gets in the tax bracket tables, the more expensive that bite becomes. Short-term federal rates can go as high as 39.6%.

I don't have enough history doing this to give it a full endorsement yet, but it's hard to complain with a 54% return in a year when the Standard & Poor's 500 Index is only up 12%. It's something I certainly intend to keep watching. In tomorrow's report, I'll run the same numbers for the IBD Relative Strength model.

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

[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]