ITA Wealth Management

The following information is a great follow-up to my prior post on the advantages of passive portfolio investing.  Think about the following three questions and see if you can come close to the correct answers.  Here goes.

1. What percentage of stocks beat their benchmark index over their lifetime?  Lifetime defined as 1983-2006.

2. What percentage of stocks have a negative return over their lifetime?

3. What percentage of stocks lose essentially all of their value?

Below are the findings of Eric Crittenden and Cole Wilcox of BlackStar Funds.

In answering question #1, what percentage of stocks in the Russell 3000 beat that benchmark, did you write down 64%? Wow!  Sixty-four percent or the majority of the stocks in the Russell 3000 were not able to outperform the index.

The answer to question #1 likely prepares you a bit for the second question. What percentage of stocks have a negative return over the period studied?  If you answered 39%, you were correct.  Nearly 2 out of ever 5 stocks is a bad investment.  Amazing.

And now for the third question.  Over the twenty-three year period, what percentage of the stocks in the Russell 3000 essentially lost all their value?  Try 18.5% or nearly one out of every five stocks was a poor investment.

Below I provide a link to the paper.  Note that 25% of the stocks in the Russell 3000 account for all of the market gains.

Go to this link and look for “The Capitalism Distribution” research paper.  Click on the link at the right.  Here you will find more information including some revealing graphs.  Take special note of the fat tails in the graphs.  If you are a stock picker, do it with the utmost care.

Lowell Herr

Photograph:  Hand carved automobiles by Howard at the Ringling Bros. Museum in Sarasoto, FL.

In the following “movie” one finds a portfolio made up of “Creme List” stocks.  Of the stocks I track, these fifteen companies are at the top of the list as of 12/3/08.  Most of these stock have a low correlation with the S&P 500 and that is part of the reason why the diversification metric exceeds 40%.

In the Stein - DeMuth book, “Yes, You Can Supercharge Your Portfolio!“ is a discussion of using individual stocks to increase return while reducing risk.  Nevertheless, Stein & DeMuth highly recommend the core of the portfolio contain index investments.  That is the whole concept behind what I call the Mosaic Portfolio approach.  In the larger portfolios tracked over on the Premium side of this blog, stocks are used to supplement the basic index or core holdings of the portfolio.

Lowell Herr

Photograph:  Budapest, Hungary

Premium Content users will be interested in the latest list of the “Top Ten” stocks based on 10/13/2008 data.  Here is my current ranking.

• CSCO
• FAST
• EXPD
• PAYX
• PG
• MSFT
• MMM
• QSII
• WAG
• CTSH

Comparing this list with those of past weeks, you will note that the market volatility has not altered the list all that much.

This is only a list of interest and you should do your own analysis.  The “Creme List” spreadsheet is also available for downloading.

Lowell Herr

Premium Content Clients:

The “Creme & Sour” lists are now available for the week of 9/26/08.  The “Top Ten” should be available early next week.

Lowell Herr

As we come nearer the weekend, it is time to run through all the portfolios to see how well they are performing with respect to their benchmarks.  Don’t expect much and here is the reason.  Since January 20, 2001 through September 10, 2008, the SPY (S&P 500 ETF) gained a paltry 3.5%.  That is not the annual gain.  That is the total gain over nearly eight years or well below 1% per year.  This is one of the worst eight-year market records in decades.

Portfolios launched this year had a significant headwind to buck.  Most of the seven portfolios tracked on this blog are defeating their benchmark, but the absolute numbers are not great.  This is to be expected considering the miserable market over the last eight years.

The “Creme & Sour” lists will be posted this weekend as well as a list of the “Top Ten Stocks.”

Asset allocation still works and the variety of portfolios demonstrate this.  If other readers find asset allocation works, I would like to hear from you in the comments section of this blog.

Lowell Herr

Portfolio reviews, “Creme & Sour” lists, and “Top Ten Stocks” will be available via Primium Content.

Look for changes tomorrow when the “Top Ten Stocks” and “Creme List” are posted over on Premium Content.  Yesterday’s market drop had a major impact on the Point & Figure (PnF) graphs as many stocks I classified as Bull rotated to Bull-O.  To define these terms, go to a PnF graph for Paychex (PAYX). Note the red line has a negative or “Bear” slope.  Then move to the far right column and you will see it populated with X’s.  I code such a graph as “Bear-X” and then give it a quantitative rating.

Now move on and type in the ticker, JNJ.  When I looked at this graph, the blue line has a positive slope and there are X’s in the right-hand column.  I call this a “Bull” PnF graph and the best one can find.  If the graph is blue or has a positive slope and O’s are in the right-hand column, the stock is coded as Bull-O.  This means the overall ranking is positive, but the price is beginning to drop.  I would rather see a Bear-X than a Bull-O graph.  A Bear-X is a stock with a red or negative slope for the graph, but X’s in the right-hand column.

Getting back to the “Creme List” of stocks, I went through the 140 plus stocks I track and checked every stock that had a PnF rating of “Bull.”  Most of those stocks, due to the major downward move in the market, turned from “Bull” to “Bull-O.”  When this happens, it shakes up the ranking system and that is why I expect to see changes this week in the “Creme List” and “Top Ten Stocks.”

These lists should be published sometime tomorrow over on Premium Content.

Lowell Herr

Photograph:  National Air & Space Museum

The “Top Ten Stocks” for the week of August 29th and access to the “Creme & Sour” lists are available through Premium Content.  There are several changes this week included a new stock that leaped to the top of the list.

Now that August is nearly over, MVO data and portfolio updates will begin to show up over the next ten days.  In addition, look for a new Power Point presentation on Asset Allocation.  This is presentation I will be giving at a Blue Plate Special on September 4th.

Premium Content available for $6.99 per month.

Lowell Herr

Photograph:  Northern edge of Kauai, Hawaii