When to Sell: A Workshop with Ellis Traub
Session 6
The Tools we Have to Work With
Although all of the previous sessions were as applicable to those who do their investment tasks by hand as they are those who use the latest devices, we suggest that the ultimate way to turn this simple task from drudgery to fun is by making use of all the technology we have at our disposal.
There are those who have yet to upgrade from Version 4 of the Toolkit to Version 5. I strongly recommend that those folks bite the bullet and upgrade! The portfolio management features of that program take a completely new approach to the issue and relieve you of a great deal of the work. From the beginning, NAIC/BI investors have been taught the forms and not the concepts, which is a shame. For the concepts are simple, the forms are not.
Take $tock 4 introduced a means of implementing the concepts when we select and buy a stock, without concern about the Stock Selection Guide (SSG) form. Almost instantaneous results allowed the user to analyze the various characteristics of a potential investment on a scale of one to ten making it intuitive and well within the ability of anyone to determine the quality of an investment candidate. And the simple expedient of seeing whether a price was above or below a “buy price” made buy/sell decisions simple. This was the first attempt to make use of the power of computers to implement the concepts without having to wade through the complexities of the printed form.
Toolkit 5
Now, with Toolkit 5, we’ve applied the same simplicity to the job of managing your portfolio. The PERT form is available as a printed by-product; but is not necessary for doing the work. And we go directly to the concepts described in the earlier sessions.
For those with the program, I strongly recommend that you read pages 163 through 192 in your Toolkit 5 manual (which you’ll find on your desktop in .pdf format). These pages go into detail about the process the software’s designed to take us through; and the logic and concepts behind it are described in simple enough terms to make sense to the newest newbie.
Essentially there are only three steps involved in implementing our defensive and offensive strategies:
1. Set schedules and thresolds
By setting the number of days after the close of a company’s books for the quarter and fiscal year after which we want to be prompted to check for new data and perform our defensive strategy, we eliminate the need to even schedule our individual stocks in a datebook. Similarly, by setting our thresholds beyond which a stock’s return and risk may require our attention, we will be prompted to perform our offensive tasks.
2. Monitor the Portfolio Report Card
When we launch our Toolkit, we'll be able to see immediately if any stocks in any of our portfolios need defensive or offensive attention and a double-click will take us to the place to handle it. The portfolios in red are those needing attention.
3. Respond to Alerts
When you click on any portfolio displayed in red, you will be taken to an Overview page which gives us an excellent look at our portfolio’s aggregate performance. In the upper left corner of that screen, we will click on the “Alerts” button to bring up the Alerts page.
Only the stocks needing our attention will be displayed on the Alerts page; and what needs to be done will be made obvious. We will then follow a simple procedure to perform what amounts to “triage” on the stocks to put them in order where we can handle the worst offenders first.
When we have completed the simple procedures, we will not be reminded again until the next time new data becomes available that might change the status of our holdings. Again, for those who have Toolkit 5, I would urge you to read carefully the pages between 163 and 192 in your “Desktop Toolkit 5 Manual.”
Take $tock 4
For those who have Take $tock 4 (desktop version and not the on-line version…yet), there is an even simpler process for our defensive and offensive tasks. And it’s nearly as much fun as an arcade game!
To perform our defensive tasks, we don’t even have to bother about our time schedule. All we have to do is this:
1. Click on the “Maintenance” button to display our Maintenance screen.
2. Sort by Quality (greens to the top)
3. Click on “Select All”
4. Click on “Update”
What will happen next can be fun! Where, in other programs, we would have to inspect each SSG to see if the Quality issues had deteriorated, in this program, we simply watch as, one by one—perhaps one every second, more or less, depending upon the quality of our Internet connection—the little red “x”s will disappear, signifying that Take $tock has imported the data and has completed a new stock study, applying the necessary judgment, and drawing a conclusion about both the Quality and Price issues.
We’re looking for a change in color in the Quality column. So, should any of our Greens turn yellow or red, or any of our Yellows turn red, we know right away that there has been some change for the worse in the Quality of the stock. We then need only open that company and see whether the change was significant enough to warrant our selling it.
We may perform our offensive task right from the home screen (again, assuming we are using the desktop version in advanced mode).
- Click on the “M” (Mood) button in the “Companies at a Glance,” until we bring all the red arrows to the top. These will be all the companies selling at a high PE, ranked in order of Historical Value Ratio (Relative Value). Assuming we have only Green or Yellow companies in our portfolio, click on the first green Quality Indicator in the “Q” column. This will immediately display the results for that company. At that point:
- Click on Screen 5 in the Navigational map in the lower left of the illustration above (Screen 6 in the ICLUBcentral version of Take $tock) to reveal the Return screen.
- Check the Return to see if it is adequate for our needs. We may also click on Screen 6 (or 7, in the ICLUBcentral version) to look at the Risk Index to see if it is too high (or the Upside Downside Ratio too low). If our Return is too low or the Risk too high (you be the judge),
- Click on the Judgment button at the bottom right of the Navigational map, if either of these is the case, as it is here, to bring up our Judgment screens.
- Increase your Earnings Growth estimate to a reasonable value (in the case shown here, perhaps, 26—half of the difference between our original estimate and the Default value of 31.5).
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Click on the Historical PE tab to find the Current PE.
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Click on the Forecast PE tab to increase our estimate of our forecast PE
In this case, with a current PE of 42.2, we might estimate it at 33 (again, half way between our earlier estimate and the current value).
- Look again at your Return and Risk screens. If the values have returned to acceptable values, we may go on to the next stock and do nothing. If the new values for Return and Risk are still inadequate, we may return to the Companies at a Glance, click on the “Q” button to bring the companies with the highest Quality Index to the top and, starting with the first company whose Buy price has a green indicator, look for a suitable replacement.
That’s all there is to that. You can dig as deeply as you want for enough information to satisfy you as to the quality and value of your selection using the tools available in the software.
This ends the When to Sell workshop. As I have been all week long, I’m happy to respond to any questions or comments that these sessions may have raised. I hope this has helped some who have come this far with me to view the Portfolio Management tasks as well worth the little trouble they might involve and not nearly so intimidating or onerous as they might have appeared before. (Doing this workshop has certainly made me get back on the ball!)