A Successful Portfolio:
So many decisions, so little guidance
It is our observation that few, if any, of the popular portfolio management methods seem to hold up over a long period of time. Market timing, in particular, is acknowledged to be extremely difficult and those that seem to be good at it may be just lucky, and usually for only a short period of time. I have never considered myself to be lucky and certainly would not feel comfortable promoting an investment strategy based on the “dart board” or the craps table. Here are the basics of the 2 for 1 portfolio management procedure.
I believe in laddering, which is akin to the idea of dollar cost averaging. As long as the goal is simply to beat the market, and if one acknowledges that the market goes up and down, there is no good or bad time in the market cycle to buy or sell stocks. For the long term, a regular, methodical investor can be expect to outperform the sporadic and compulsive speculator most of the time.
Companies have “life cycles”. It is assumed that a company’s management will split a stock only during an “upbeat” cycle. The Ikenberry/Rankine study showed that the positive effect of 2 for 1 splits lasts for up to three years. Over the long term, owning selected stocks for two to three years will prove to be the best policy.
Thirty is a good number. Not only does this happen to be the number of stocks in the Dow Jones Industrial average (good diversity), it is also the number of months in 2 1/2 years. The 2 for 1 portfolio consists of 30 stocks, no more, no less. One stock is bought every month, selected using the criteria discussed above. One stock is also sold every month; the stock that has been owned for 2 1/2 years. Portions of the positions in other stocks may be sold from time to time to balance the portfolio and/or provide the capital to make the next month’s purchase.
A prudent person looking into subscribing to 2 for 1 would suggest that it is very easy to concoct successful portfolios using hindsight. I would agree and, for that reason, was rigorous in the methodology used for our stock selections. I ran five complete tests, picking one stock per month starting with stocks that split in January 1990. Each of the five tests used a different set of screens, but each was consistent from start to finish. It was tempting to deviate from the methodology because I could see that the “high fliers” were missing from the list, such as Cisco Systems, a stock split several times in the early 1990’s. Most of the work was done using only the ticker symbols for the stocks and, in the vast majority of cases, I had never heard of the companies and had no reason to be prejudiced for or against any one particular stock over another. Of the five tests, three “beat the market” and, of course, the stocks eventually purchased for a “real test” were based on the most successful of the five test portfolios.
It did become clear, as the “experiment” developed, that I was inadvertently selecting a strong group of consistent base hitters, with very few home run hitters in the bunch. Mr. Neil Macneale Sr. and your’s truly used to watch the Cincinnati Reds play at Crosley Field and I remember my Dad’s constant exhortations for the batter up to just tap a little blooper into short right field instead of trying to knock the cover off the ball. Of course I wanted to see the likes of Ted Kluszewski blast one of his 400+ foot home runs, which was much more exciting. Over the years I came to respect the wisdom of Dad’s approach, not only in baseball, but for numerous other pursuits in business and life in general. The 2 for 1 portfolio contains few, if any, of the “home run” stocks that you read about in the financial press. If our stocks get exciting after we buy them that’s OK, but I have found it’s better to look for the consistent base hitters.
In considering who might be interested in a 2 for 1 newsletter, I have essentially targeted people “just like me”. A person interested in this type of investing will be a long term investor saving for retirement, a college fund, or simply steady capital accumulation. If you are a “trader” or like to “play the market”, this newsletter will probably not interest you. I purposely use my own IRA account as the model portfolio because it will accurately reflect transaction costs and dividend reinvestments while avoiding the complication of dealing with taxes. Few investment advisers or mutual funds measure their success in this manner but what could be simpler than having an actual statement for a real account to keep track of our progress. It should be noted that the real portfolio was purchased all at one time at the end of July 1996. This real portfolio was an accurate reflection of the stocks in a “test” portfolio developed using the methods described above, going back to 1990. The number of shares purchased for each company was determined by taking a round number (say 30 instead of 32) closest to what would produce the proper weighting of the real portfolio compared to the test portfolio at that time.
Why would an investor, who thinks all of the above makes sense, want to subscribe to a newsletter that does what any reasonably competent person could do on their own. As stated above, I believe the subscribers to 2 for 1 are going to be people who are a lot like me. People a lot like me will believe that the stock market, over the long term, will provide the highest return on their investment, but they would also like to do just a little better than the market average. They will be interested in maximizing their investment dollar without devoting hours and hours to studying the small print in the Wall Street Journal. They will be interested in extremely low transaction costs. They will be interested in a reasonable, regular, understandable, and successful buy and sell program that costs only $20.00 per month. If you are such a person, take a moment to subscribe and you will gain immediate access to the latest issues of 2 for 1.