Day: August 28, 2010

Tickers for the Current Portfolio Reshaping

Tickers for the Current Portfolio Reshaping

I haven’t written about my portfolio management methods in a while.? I’ll be writing on this a few more times over the next week or so.? The eighth rule of my investing is:

Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.

First I have to get new ideas.? I have two sources for that:

  • My industry rank study.? Within those industries chosen, I run a screen that uses financial strength, valuation, and growth potential to highlight promising names.? Of the 34 current names in the portfolio, the screen chose 10 of them, out of 79 suggested names.
  • Trolling around on the web and talking to friends.? When I hear a promising idea, I print it out or write it down, and put it in a pile to wait for the next reshaping.? This helps me to forget who suggested it and why, so that I am forced evaluate it independently.? If I don’t fully understand it, I will not know when to buy more or sell it.? That generated 40 additional names.

Anyway, here are the tickers for the?replacement candidates:

ABFS ACM AEP AFL AMGN APA APC APOL ATPG AXS BCE BDX BHI BRY BT CAG CALM CAM CDI CL CLX CNQ CPO CVS DFG DLM DO EGN ENR ESLT FDP FISV FLIR FRX FST FTO GD GLRE GMXR HAL HOGS HRL HSII IP JBL KELYA KEX KFT KHDHF LLL LNC LPX MDT MDU MET MMM MOG/A MOT MRO MUR MWV NBR NEMNLC NOV NVDA OCR OII OSG PCCC PG PRU PXD PXP RAH RDS/A RE REP RIG RNR RTN SJM SPR SU SUN SXT TDW TDY TEG THS TK TLM TMK TMO TRH TRP TSO TTI UNM V VZ WAG WAT WMT WPP WY YUM

I will run my quantitative model on these companies versus the current companies in the portfolio, and kick out companies I now own that score poorly and buy some the score well.? This procedure is not absolute; there are often bits of data? that the quantitative factors ignore.? But when all is said and done, I buy companies that I think are better than those that I am selling.

This also forces me to review the whole portfolio, and be dispassionate about what gets sold.? It also forces me to take things slow, and not make hasty decisions.

What factors exist in my scoring model:

  • Valuation – Earnings, Book, Sales
  • Momentum
  • Earnings Quality
  • Sentiment indicators — neglect, volatility, etc.

I change the weights over time.? I ask myself, “What is working now?” and, “What has or hasn’t been working for too long?”? What working now should get extra weight, while leaning away from ideas that are too popular, and leaning toward those that are unfairly tarred as dead.

But this is only an aid and a guide.? If I put something into the portfolio, it has to pass my qualitative reasoning tests, which admittedly are subjective, but encompass my reasoning as a businessman.

In short, that is what I do.? I hope to give you an update in a few days to explain how this practically worked out in this reshaping.? If you have other tickers that you think I should consider please let me know in the comments, and I will toss them into the mix.? Thanks.

Queasing over Quantitative Easing, Part III

Queasing over Quantitative Easing, Part III

I have a post on the futility of fiscal policy coming, but the hubbub over Jackson Hole has made me alter my publishing schedule.? I want to give one more shot on the idea that the Fed is out of ammunition, and that unorthodox moves are more likely to scare the public than result in increased real GDP.

I am better off than all of my friends, I think.? A common occurrence for me is a friend coming to me and saying, “How can the government borrow so much?? It doesn’t make sense.? Why do they spend money on this and not on me?”? I understand the paradox of thrift, but I don’t agree with it.? One reason is that because it is a paradox, ordinary people will react badly to actions of the government that they can’t do themselves.? Second, when the government or central bank does it, it seems like a form of theft, because no one should get something for nothing, and it degrades the ordinary person’s view of the honesty of the Government or Central Bank.? Third, what the money gets used for is viewed as a waste by some.

This consideration of the basic sense of fairness among average people should not be discounted by policymakers, nor the fear engendered when policymakers take such actions.? It is how average people think.? If you remember my review of the book Priceless, you might realize that people often act out of a sense of fairness, not out of economic interest.? When you think about the Paradox of Thrift through that prism, it is plain why government action doesn’t work — many people do nothing different when the government/central bank is making bold moves, because they are less certain about the future because the powers that be are dishonest in their view.

That said, the main reason I don’t agree with the solution to the paradox of thrift is that the government generally misspends money on cronies or projects of cronies.? It does not build the productive capacity of the economy, but only current consumption.? It does not aid growth.

Monetary Policy Now

Looking over a variety of articles on the options the Federal Reserve has, I would say that they are out of ammo that can do good.? They have plenty of ammo to destroy the economy, but little to build it.? What options does the Fed have left?

  • Lower the Fed funds rate into lower positive territory.
  • Offer language that says that the Fed Funds rate will be low for a long time.
  • Buy more long-dated Treasury bonds.

And the unorthodox options:

  • Lend directly to classes of private borrowers.
  • Create negative interest rates for Fed funds.
  • Debase the currency by expiration dates, lotteries, etc.

I will pick up on this tomorrow, and explain why the options that the Fed has are limited.

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