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StockCentral :: Community
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Join in on the discussion with other like-minded investors in our community forums. Learn about the fundamental investing methodology and participate in educational workshops in the Investing forums, stay up-to-date on StockCentral news and make suggestions to the StockCentral team in Central Square, and discuss your favorite stock or recent market news in our A-Z ticker-based forums.
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Doug Gerlach
Cambridge, MA
http://www.iclub.com/
President, ICLUBcentral
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| 03/02/2007 1:01 PM |
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By now, you've considered the offensive and defensive elements of your portfolio, identifying potentially overvalued stocks as well as stocks of low-quality or troubled companies. Our next step is to review your companies to determine if they're still suitable for a growth stock portfolio:
6. Identify stocks with unacceptable expected future performance.
In general, we want to look for stocks that will generate a 15% compound annual total return over the years for your overall portfolio. If achieved, this would represent a doubling of your portfolio every five years, much more than you could earn in a savings account or by investing in bonds. And this also is a significant edge over the overall market -- the S&P 500 has earned an annual average returns in the 10-12% range over the long-term.
While every company in your portfolio may not earn 15% a year for you, it's important to track how your portfolio and each company in it is contributing to that goal. On Toolkit's Portfolio Report Card, the Overview screen provides the dollar-weighted average Total Return for the entire portfolio right at the top of the screen. This gives you an indication of how well your portfolio might perform in the future from their current prices. It's based on your stock studies, though, so you need to make sure that all studies are using current data and prices and that your projections are still reasonable.
On this Overview screen, you can click the "Tot Return" column heading in the Holdings section to sort the stocks in ascending or descending order. This will help you pinpoint the companies that aren't likely to deliver acceptable returns in the future.
You probably won't be surprised by the companies that you see at the bottom of the list with low total returns -- these could well be the overvalued companies that you identified a few days ago.
The companies at the top of the list, particularly those with total returns greater than 30%, should be eyed with suspicion, since this may be an indication that you've been too optimistic in your analysis (a 30% total return each year is hard to sustain over five years). As I mentioned in Day #5, you want to make sure that your expectations for these companies are in line with recent events; if the price and PE ratios have fallen as a result of some fundamental trouble, these stocks may not live up to their pasts.
I want you also to pay attention to those stocks that haven't been highlighted in your review of low-quality companies or overvalued stocks, stocks with total returns in the 10-15% range. It could be that these stocks have performed fairly well for you already and have somewhat diminished total return prospects for the future but still warrant holding. Stock prices move in spurts, and the total increase in price for a stock in a year could come in just a few days; if you're lucky enough to buy a stock right before it increases in price a few percent (this never happens to me, but I've heard that it does happen to some lucky investors!), you might not see much price movement for another year or so.
But it could also be that you're holding on to mediocre companies, and these average performers are a threat to your overall return. You may be familiar with Garrison Keillor's description of Lake Wobegon, where "all the women are strong, all the men are good-looking, and all the children are above average." In the same way, investors tend to look at their portfolio holdings and evaluate them as being "above average," when in fact some are likely to be below average.
This is a human tendency, and psychologists even call it the "Lake Wobegon effect," where people are inclined to overestimate their achievements and capabilities in relation to others. By reviewing the total return expectations for your holdings, you can identify those stocks that are less likely to be strong performers in the future - and take action to remove or replace them.
Doug |
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Posting from ICLUBcentral world headquarters in the Harvard Square's historic College House, Cambridge, MA
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Ray Marchand
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| 03/04/2007 1:55 PM |
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Hi,
This is from TK5 Handbook;
'You are looking for a return on your portfolio of at least
15%, compounded annual return, in order to double
your money every five years. This does not mean that
every stock has to produce a 15% return; it means that
the average of your portfolio must do so. You will find
most of the larger, more mature companies will give you
a lower return on your investment because their growth
rates have slowed. You can balance these lower risk
investments with stocks having a return in excess of 20%."
This suggests a possible different approach that looking for 15% for eack stock in the portfolio.
Ray Marchand
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Gene Rooks
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| 03/04/2007 5:00 PM |
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Hi, Ray. That concept isn't
particularly new, to have a few steady but lower gainers for the stability and
dividends they provide, along with the jazzier, smaller growing companies.
Diversify, Diversify, Diversify. It will be interesting with
this past weeks fallout to see which ones come back the
fastest. Gene Rooks
Gene Rooks
generooks@cfl.rr.com |
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Joe Craig
Ellicott City, MD
StockCentral Administrator
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| 03/04/2007 11:39 PM |
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| If you're aiming at a 15% return, don't forget that every company that returns 10% must be matched by another that returns 20%! |
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Joe |
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Rajiv Roy
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| 03/06/2007 10:31 PM |
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| Unless ofcourse they are dollar weighted differently. I know you meant to say that. ;) |
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Rajiv
www.stockfundas.com
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Doug Gerlach
Cambridge, MA
http://www.iclub.com/
President, ICLUBcentral
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| 03/07/2007 11:09 PM |
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Posted By Ray Marchand on 03/04/2007 1:55 PM
This suggests a possible different approach that looking for 15% for eack stock in the portfolio.
Yes, I intended to convey that when I wrote "In general, we want to look for stocks that will generate a 15% compound annual total return over the years for your overall portfolio" and "While every company in your portfolio may not earn 15% a year for you, it's important to track how your portfolio and each company in it is contributing to that goal" (emphasis added).
In Investor's Toolkit 5, you must consciously make the decision in the Portfolio Alerts screen about which stocks will not contribute 15% total return to your overall portfolio. I think the rationale for this is that it's too easy for investors to "make allowances" for stocks they own, and the next thing they know, their entire portfolio is made up of lower-performing stocks!
Doug |
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Posting from ICLUBcentral world headquarters in the Harvard Square's historic College House, Cambridge, MA
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Raimundo Alconchel
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| 07/04/2007 1:45 PM |
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Doug:
Where can I find the missing days? I have days 1-3-5 and 6 only
Thanks a lot.
alconrap |
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Joe Craig
Ellicott City, MD
StockCentral Administrator
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| 07/04/2007 2:39 PM |
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| If you click on Topics you'll sort the threads by topic title. You'll find days 1-7 all there. There are only 7 days. I guess that days 8-10 involved a vacation in the Cayman Islands or something ... |
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Joe |
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