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To manage a portfolio, you need targets for the portfolio. BetterInvesting, from its inception, has
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Bull's-eyes need to be set for:
• SALES
• FINANCIAL STABILITY/STRENGTH
• DIVERSITY BY SECTOR/SIZE
• NUMBER OF COMPANIES
• SIZE OF HOLDINGS
• POTENTIAL AVERAGE RETURN
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Let’s start with a short math lesson in
weighted averaging.
Here’s an example:
33.0% ABT SSG shows 15.7% PAR
42.3% MSFT SSG shows 17.8% PAR
24.7% FDS SSG shows 16.2% PAR
TO FIND THE POTENTIAL AVERAGE RETURN
(PAR) FOR THE ENTIRE PORTFOLIO YOU
WOULDN’T JUST ADD THE THREE PAR
VALUES AND DIVIDE BY THREE UNLESS YOU
HAD EQUAL HOLDINGS OF EACH STOCK.
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Instead, you would want a weighted average which
takes into account the different sizes of the holdings.
33.0% ABT SSG shows 15.7% PAR
42.3% MSFT SSG shows 17.8% PAR
24.7% FDS SSG shows 16.2% PAR
(33.0*15.7 + 42.3*17.8 + 24.7*16.2) = 1671.18
Divide this value by 100 and you have a weighted
average for the PAR for the
ENTIRE PORTFOLIO: 16.7%.
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When we’re assessing many
of our targets, we will want to
use weighted averages!
Many of the goals intertwine
and support each other and a
good portfolio manager pays
attention to all of the guidelines.
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BEAT THE
MARKET BY 5
POINTS
I suggest we update the target and try to beat the market
by 5 points on a consistent basis.
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Next in my mind comes DIVERSITY by sector and by
size of the company.
I think there are six sectors where you can find
growth:
CONSUMER DEFENSIVE
CONSUMER CYCLICAL
HEALTHCARE
INFORMATION TECHNOLOGY
INDUSTRIALS
FINANCIALS
Sometimes you can find growth in:
ENERGY, TELECOMMUNICATIONS,
MATERIALS, UTILITIES
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A good portfolio probably has stocks from at
least four of the growth sectors. You do NOT
need a stock from every sector to have a well-
diversified portfolio!
And that leads us
to how many
stocks do we
need? ?
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The standard answer is 16 plus or minus four
……… but the number of stocks you (or your
club) own is really a function of time.
THIS IS IMPORTANT!
It takes as much time to follow a stock that represents .6% of
your portfolio as it does to follow a stock that represents
18.7 %.
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Can I gauge when a holding is too small to
matter or, on the other end, when a holding
begins to overpower the portfolio?
Here’s a little more math.:
Divide 100 by the number of stocks you have in
your portfolio.
Let’s say you have a 14 stock portfolio. The
“number” is around 7.
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When a holding gets
smaller than half of
your “number” it’s
getting too small to
matter.
When a holding gets
larger than twice your
number you should pay
attention and as it
approaches three times
your number it might
represent too large a
portion of your
holdings.
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Let’s finish the topic
of diversity.
COMPANY SIZE MATTERS
TYPICAL SALES GROWTH
LARGE LESS THAN 7%
MEDIUM BETWEEN 7 AND 12 %
SMALL GREATER THAN 12%
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We also define company size by dollar amount
of sales:
LARGE MORE THAN $10 BILLION
MEDIUM BETWEEN $1 B AND $10B
SMALL LESS THAN $1 BILLION
Let’s pull some of this together :
WE CHANT
“EARNINGS FOLLOW SALES AND STOCK
PRICE FOLLOWS EARNINGS”
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Since stock price
ultimately comes from
sales growth, if we have
too many large
companies in our
portfolio, hitting PAR
targets will be difficult.
We would be lucky to
perform at 7-9% PAR!
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We also want a collection of companies that
exhibit strong finances.
Value Line, Morningstar, Manifest Investing and
S&P all rank financial strength.
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Mid-Michigan Model Investment Club (MMMC)
FORMED FEBRUARY, 200325 MEMBERS
EDUCATIONAL COMPONENT TO EVERY MEETINGUSES INDUSTRY STUDIES TO CHOOSE THE BEST
ALL MEMBERS BELONG TO BICLUB HAS A MANIFEST INVESTING SUBSCRIPTION$50 MINIMUM CAPITAL CONTRIBUTION MONTHLY
OLDER MEMBERS MAKING REGULAR WITHDRAWELS
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George Nicholson told us many years ago that
a sales growth rate of 11.5% to 12.5% for the
entire portfolio would result in returns that
should beat the average market by at least five
points.
The rest of the growth to meet the average 15%
return year over year comes from dividends
and P/E expansion.
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WE SELL WHEN:
WE NEED THE MONEY
TO MAKE THE PORTFOLIO BETTER
WE USE OUR DASHBOARD TO MANAGE OUR
PORTFOLIO AND TRY TO AVOID OVER-
MANAGING. WE BELIEVE IN TAKING ACTION
SLOWLY AND METHODICALLY.
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LONG TERM GOALS (1-2 YEARS)
Tech Issue
Number of Stocks
Size Issue
Low PAR and Sales
SHORTER TERM GOALS (Now to a Year)
Slowly and methodically decide what to pare
NO MORE TECH for the moment
Find small stocks for potential investment
Add to very small holdings that you want to keep