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4 Basic Approaches to BetterInvesting Portfolio Management

All views are compatible with one another. Having two views is sometimes helpful. It's like looking at an object with two eyeballs - you get better depth perception than with either eye alone.

So What are We Trying to Do?

The following is an overview of the process discribed in detail in the ToolKit 5 manual which can be downloaded by clicking here.

We need to do three things.

1. Make sure that the quality we found and forecast comes into being by making sure that the actual results are meeting or exceeding our expecations.

2. Check for grossly overvalued situations where the stock's price has gotten so far ahead of its fundamentals we should consider replacing that stock with another of equal or better quality and more potential return to capture these excess profits.

3. Check our guidelines for diversification to make sure one stock is not occupying too large a dollar percentage of our portfolio.

Click here for a longer version.

How do we acutally do these things?

Phil Keating School of Portfolio Management

with additions by Cy Lynch

Phil Keating is a professional investment advisor and a founder and Honorary Chairman of the NAIC Computer Group.

1. Planning – Set your goals in writing.

2. Planting – Pick your stocks using the SSG and SCG.

3. Weeding (or Defense) - Monitor the stock's fundamentals and get rid of the losers.

4. Feeding – Buy more quality stocks when they are priced to add to the desired return of your portfolio.

5. Pruning (or Offense) – trimming back grossly overgrown stocks.

A more indepth article by Phil Keating can be found at the Better Investing web site:

http://www.better-investing.org/articles/bi/42/523

Ellis Traub School of Portfolio Management

Ellis Traub is the author of NAIC ToolKit, NAIC Take Stock, the book by the same name, and a lifetime member of NAIC. He is a highly sought after speaker on NAIC investing principles.

Defense - Used by Ellis Traub in NAIC ToolKit 5 & his book, Take $tock, to denote monitoring a stock's quality. Quality is the rate & consistency of growth for sales & EPS and the efficiency of an even or upward trend in pre-tax profit margin.

Offense - Used by Ellis Traub in NAIC ToolKit 5 & his book, Take $tock, to denote monitoring a stock's price for grossly overvalued situations where it might be advantageous to consider replacing the grossly overvalued stock with one of equal or better quality, but better expected return to maximize portfolio return.

See the TooKit 5.0 manual for an expanded discussion by Ellis. You can download it from this page by clicking here.

You can download a demo of ToolKit 5 from I Club Central. The file is about 41 megs so it may take a while.

http://www.iclub.com/products/tk5.asp

Look to the right side of the page toward the bottom and click on "Download Demo." You can save this or open it which will install it on your computer. Once installed the manual will be available to you either from you desktop or from the Window's "Start" menu.

The Defense/Offense school of portfolio management is also discussed in Ellis' book, Take $tock available at Amazon.com.

Rich Beaubien SSG School of Portfolio Management

Rich uses a defense/offense type of portfolio management, but he advocates primarily using the Stock Selection Guide to implement his method. He accomplishes the same thing at the others schools do, but with fewer forms. Fewer forms means less to learn and less confusion.

His complete presentation can be found at I Club Central as a Adobe PDF file of his PowerPoint presentation by clicking here.

Rich advocates using the SSG to track your stock's growth vs. the growth expectations you had (on your SSG) for the stock when you purchased it. He recommends keeping two separate SSGs. The first you update each quarter with trailing twelve month data for sales, pre-tax profit, and EPS. You goal is to have the values on or above your projection lines indicating your estimates are being met. The second SSG is a current SSG with current data, judgment, and price. It is used for current purchase decisions and valuation information.  (Using the Alt+Y functionality in Toolkit it's possible to accomplish this using a single SSG.)

Mark Robertson is managing partner of Manifest Investing, LLC and former Senior Contributing Editor of NAIC's Better Investing magazine. Mark is also President of the Challenge Club, an on online club that practices portfolio management with these simple methods. It meets the first Thursday of each month in the NAIC's Compuserve Forum at 9:01 pm EST. All interested parties are welcome to observe, ask questions, and participate.

RQR - Robertson Quality Rating - A metric developed by Mr. Robertson designed to reduce quality down to a single value. It consists of four equally weighted parts. 25 points are possible in each of four categories. The four categories, taken from the Value Line stock report are Financial Strength, EPS Predictability, Projected Sales Growth Relative to Peers, and Net Profit Margins Relative to Peers. A total score of 100 is possible with the top 20% of stocks having a rating of 65 or better, the next lower 20% are between 65 and 55, and the lowest 20% is under 35.

RPAR - Robertson Projected Average Return - Similar to NAIC ToolKit's Projected Average Return but calculated using Value Line's analyst judgment rather than your own.

While practicing both defense and offense portfolio management, Mark simplifies portfolio management down to its two esential elements: quality & expected returns. Once stocks are choosen with the SSG, quality is monitored with the RQR metric and overvalued situations are dealt with replacing low RPAR stocks with stocks with equal or greater quality and higher RPAR. It greatly simplifies the portfolio management process and maximizes investment return.

http://www.better-investing.org/articles/web/4677