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Unemotional Growth
Unemotional Growth is a completely mechanical screen I developed as a complement
to one of the several popular Dow Dividend Approach variations. Putting a
Dow and Growth component together is one way of building a powerful and diverse
portfolio.
How Does It Work?
Like my older Investing For Growth model, the Unemotional Growth approach
begins with Value Line Investment Survey's rankings. On page 27 of Value
Line's weekly Summary & Index, you'll find a list of the 100 stocks Value
Line ranks the best for Timeliness. We start with those 100.
With that list in hand, get the current copy of Investor's Business Daily
and write down the EPS (earnings per share) and RS (relative strength) rankings
for each stock. Sort the list by EPS ranking, highest to lowest. Break ties
with the RS ranking.
Buy the top stocks on the list (as many stocks as you would like for the
growth portion of your portfolio) and update monthly or quarterly. Updating
monthly improves the performance of the model a few percentage points per
year, but it also increases the number of trades, so determine how often
you can update your portfolio based upon what you pay in commissions and
how large your portfolio is.
This model departs from my earlier model (IFG) in that I rebalance the holdings
every period (whether that's quarterly or monthly) so that each stock begins
the new period with an equal dollar amount. By not re-balancing in IFG, the
portfolio was left open to a single stock or industry growing to a large
proportion and dominating the portfolio. When the hot stock eventually collapses
(remember Micron Technology, Iomega and America Online in the past year or
two), it's such a large percentage of the total that it drags the entire
portfolio down dramatically. By spreading out those winnings on the way up,
you may sacrifice a few points of compounded growth as it goes up, but when
it comes down, you'll have spread those gains out among all the stocks and
those points may well be "saved" when the hot stock falls down.
How often you re-balance your portfolio is again a function of portfolio
size and trading costs. Ideally you would re-balance the weighting of all
positions every time you replace old stocks with new ones, but a compromise
is possible to keep trading costs lower. You may find that updating the holdings
monthly and re-balancing all the positions quarterly works for you.
How Well Does it Work?
We now have just over ten years of data for the UG approach, beginning with
August of 1986. Ideally we'd like many more years but since the model is
tied to Investor's Business Daily's rankings, we're limited by that publication's
history. The newspaper only began publication in 1984, so at most we can
add another two years to the history if and when we find a complete newspaper
archive. Suffice it to say that we recognize the limitations of only having
a decade of data, but we'll have to live with it for this screen.
From 1987 through 1996 (ten years), the Unemotional Growth five-stock model
had a compound annual growth rate of 41.80%. The ten-stock model had a growth
rate of 31.63%. (Results exclude dividends, taxes, and trading costs.) Compare
these returns to those of Investing For Growth over the same period
(approximately 22% per year).
To report these returns like mutual fund companies would, here are the returns
over the last 3, 5, and 10 years for the five-stock model:
3 Years 44.3%
5 Years 41.3%
10 Years 41.8%
And finally, here are the year-by-year returns for the five-stock model:
1987 21.32%
1988 6.25%
1989 86.53%
1990 -3.06%
1991 150.23%
1992 38.44%
1993 35.52%
1994 4.14%
1995 53.43%
1996 87.95%
Instructions to generate current rankings:
1. Start with the list of 100 Timely Stocks from page 27 of the Value Line
Investment Survey (excluding any stocks on foreign exchanges.
2. Look up the EPS and RS rankings for each of the stocks.
3. Take the five stocks with the highest EPS rankings, using the higher RS
score to settle any ties for the final position.
4. Update the first Friday of each month. (We're tracking this screen for
a quarterly, semi-annual, and annual holding period as well.)
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