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Gary Simms' Portfolio Management workshop.

Mark Robertson's "When is it Time to Sell" workshop.

You've Bought Some Stocks ... What Now?

Wrong question. You should have a clearly defined plan of what your portfolio should be BEFORE you buy the first stock.

If you don't know where you are going, how do you know when you get there? :-)

Click here for a discussion of BetterInvesting Portfolio Design.

Click here for an explanation of commonly used NAIC portfolio management terms

Overview of Portfolio Management

The philosophy of a BetterInvestor is to buy a quality growth stock when it is priced to add to your desired rate of return and hold that stock forever or until: 1. you want or need the money, 2. the quality deteriorates, 3. the potential return deteriorates.

Deal with Quality First - Defense -Weeding

Defense and offense are discussed in the ToolKit 5 manual by Ellis Trab which is available for free download by clicking here.

Let's define Quality as Growth + Efficiency

Consider quality over three time periods, past, present, and future.

We historically screen stocks for the growth component of quality by looking for upward trending, smooth, parallel lines in section one of the SSG and for the efficiency component by monitoring pre-tax profit margin trends in section 2a.

Before we purchase the stock we affirm the historical quality (growth & efficiency) are still in place, and project the future anticipated quality on the righ side of the SSG's visual analysis.

To monitor the stock's quality you simple verify that each quarter the actual results are meeting or exceeding your expectations.

Betternvesting's "Rule of Five" reminds us that one in every five stocks we purchase using our BetterInvesting techniques will have unanticipated problems with its fundamentals and need to be replaced.

The PERT Report is NAIC's main form for monitoring a portfolio. It has two main sections. The left side monitors quality (growth rates & pre-tax profit margin) while the right side monitors value for your buy - hold- sell indicators.

You may also do this via any of the several other NAIC forms such as the SSG, PERT Worksheet A, PERT Worksheet A's graph, or ToolKit 5's defense and offense reports.

Short term quality issues like slowing sales, pre-tax profit, or EPS growth rates or declining pre-tax profit margins should be investigated.

Stocks with long term serious quality issues should be sold outright and replaced.

Holding a stock with a serious quality problem will prevent you from being in a quality stock whose fundamentals and price are advancing thus costing you that stock's price appreciation.

Anyone want to explain it?

Evaluate Portfolio Value Next - Offense - Feeding & Pruning

Anyone want to explain it?

Once we found a quality stock in sections one & two we proceeded to access its risk and reward if we were to purchase it at its current price.

This is the same process used now that we have confirmed the current quality is meeting our expectations.

Since our company is a living, breathing critter, we'll have to adjust the five points of judgment each quarter as new operating results are released.

We'd expect higher values for the estimated five year EPS value from section one since we still need to be estimating a full five years in the future and we expect a higher low forecast eps from our trailing twelve months eps data because we have a growth company that is meeting our expectations.

P/E's may or may not have to be adjusted, but the five year projected high and low price will almost certainly increase. This is one idea people have a hard time of grasping.

We initially calculate a five year high price and people want to sell the stock when this price is reached. What we forget is that this forecast high price changes each quarter and if our expectations are being met, with continually go up. We keep raising the expected price so that it is a moving target for five years in the future from now.

Feeding

Section 3, 4, & 5 thus produce three conclusions. We satisified our quality concerns before we reached this section so we are only dealing with valuation questions.

We generate the familar set of value indicator from the back of the SSG.

B.U.R.T

• B — Buy Zone
• U — Upside/Downside Ratio 3:1 or more
• R — Relative Value 85% - 110%
• T — Total Return adding to the portfolio's desired rate of return (15%)

These are the familar buy signals we used in the original purchase of the stock.

Pruning - Offense

In our original purchase we did not consider the stock a candidate for purchase if the valuation indicators were in the 'hold' or 'sell' zones. We don't consider the stock for purchase here either if it is in the 'hold' or 'sell' zones.

Since we own the stock now we'll have an addition consideration that we did not have before we bought the stock.

Whereas we were only concerned with a purchase decision when we didn't own the stock, we now have to further consider our position in a stock when our valuation indicators point to a 'sell'.

Consider this scenario.

You are looking to buy a car. You've selected a model that can be purchased most any day for $20,000. A salesperson offers to sell you the car for $20,000. It isn't a bargin, but it is a fair deal. If he offered you the same car for $25,000 you'd most likely laugh and graciously decline the offer. If he offered you the car for $15,000 you might snap it up as a bargin.

This is what we do with sections 3, 4, & 5 of the SSG. Look for bargins to buy!

Consider this scenario.

You bought the car! You own it. It is still worth $20,000. A fellow comes along and offers you $15,000 for your car. Do you sell? Hopefully not. What about a $20,000 offer? or a $25,000 offer? or a $30,000 offer? How about $30,000 for your $20,000 car AND you can turn right around and buy another car of equal or greater quality for $20,000?! You would have a nice car and and extra $10,000!

This is similar to what happens when we own a stock whose valuation indicator go into the 'sell' zone.

When the stock becomes so overvalued that there is little five year price appreciation left you may wish to replace it with a stock of equal or greater value and greater potential return.

In essence this is similar to the reason you need to sell stocks with fundamental flaws in the previous quality sections.

There you missed price appreciation because the stock had failed to meet you expectations. You lost money because you were in a stock with little price appreciation when you could have been in another stock with good quality and price appreciation.

Here the price has gotten way ahead of the fundamentals and it will take time for the fundamentals to catch up. You could replace this stock, capture the excess profits, and invest in another stock of equal or greater value whose price is in line with or behind its fundamentals. You'd have lost money because you were in a stock whose price was too high and going nowhere when you could have locked in the excess profit and moved to another stock with price appreciation potential.

To put this in perspective consider three levels of stock investing. Each has a higher level of expected return.

Level 1 Total Stock Market Index Fund - Historical return 10.5%

Level 2 NAIC methodology selecting stocks and only using defensive portfolio management. Higher than total stock market, Level 1 Use PAR rather than Total Return for anticipated return.

Level 3 NAIC methodology selecting stocks and using both defense and offensive portfolio management. Higher than Level 2. Use Total Return for anticipated return.

Topic Outline

Perhaps the best way to approach this would be to develop an outline for Portfolio Management. Anyone want to propose something?

Portfolio Design - Write out your philosopy, methods, & growth and diversification goals.

Planting - Researching, comparing, and purchasing stocks.

Weeding - Defense - Monitor the quality (growth + efficiency)

Feeding - Adding to positions of stock with continued good quality whose anticipated return will add to the portfolio's desired rate of return.

Pruning - Offense - Monitor for grossly overvalued stocks that could be replaced with stock of equal or higher value and better return potential.

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