Managing a P - BetterInvesting · 2 To manage a portfolio, you need targets for the portfolio. BetterInvesting, from its inception, has

Managing a Portfolio the BetterInvesting Way

Ken Kavula MidMichigan Chapter

2

To manage a portfolio, you need targets for the portfolio. BetterInvesting, from its inception, has

3

Bull's-eyes need to be set for:

• SALES

• FINANCIAL STABILITY/STRENGTH

• DIVERSITY BY SECTOR/SIZE

• NUMBER OF COMPANIES

• SIZE OF HOLDINGS

• POTENTIAL AVERAGE RETURN

4

Let’s start with a short math lesson in

weighted averaging.

Here’s an example:

33.0% ABT SSG shows 15.7% PAR

42.3% MSFT SSG shows 17.8% PAR

24.7% FDS SSG shows 16.2% PAR

TO FIND THE POTENTIAL AVERAGE RETURN

(PAR) FOR THE ENTIRE PORTFOLIO YOU

WOULDN’T JUST ADD THE THREE PAR

VALUES AND DIVIDE BY THREE UNLESS YOU

HAD EQUAL HOLDINGS OF EACH STOCK.

5

Instead, you would want a weighted average which

takes into account the different sizes of the holdings.

33.0% ABT SSG shows 15.7% PAR

42.3% MSFT SSG shows 17.8% PAR

24.7% FDS SSG shows 16.2% PAR

(33.0*15.7 + 42.3*17.8 + 24.7*16.2) = 1671.18

Divide this value by 100 and you have a weighted

average for the PAR for the

ENTIRE PORTFOLIO: 16.7%.

6

When we’re assessing many

of our targets, we will want to

use weighted averages!

Many of the goals intertwine

and support each other and a

good portfolio manager pays

attention to all of the guidelines.

7

Let’s start with a target for

PAR.

15%

Most BI

investors have

heard of this

target.

8

BEAT THE

MARKET BY 5

POINTS

I suggest we update the target and try to beat the market

by 5 points on a consistent basis.

9

Next in my mind comes DIVERSITY by sector and by

size of the company.

I think there are six sectors where you can find

growth:

CONSUMER DEFENSIVE

CONSUMER CYCLICAL

HEALTHCARE

INFORMATION TECHNOLOGY

INDUSTRIALS

FINANCIALS

Sometimes you can find growth in:

ENERGY, TELECOMMUNICATIONS,

MATERIALS, UTILITIES

10

A good portfolio probably has stocks from at

least four of the growth sectors. You do NOT

need a stock from every sector to have a well-

diversified portfolio!

And that leads us

to how many

stocks do we

need? ?

11

What’s your club’s (or your)

most precious commodity?

12

The standard answer is 16 plus or minus four

……… but the number of stocks you (or your

club) own is really a function of time.

THIS IS IMPORTANT!

It takes as much time to follow a stock that represents .6% of

your portfolio as it does to follow a stock that represents

18.7 %.

13

Can I gauge when a holding is too small to

matter or, on the other end, when a holding

begins to overpower the portfolio?

Here’s a little more math.:

Divide 100 by the number of stocks you have in

your portfolio.

Let’s say you have a 14 stock portfolio. The

“number” is around 7.

14

7

Seven percent represents an average holding

for this 14 stock portfolio .

15

When a holding gets

smaller than half of

your “number” it’s

getting too small to

matter.

When a holding gets

larger than twice your

number you should pay

attention and as it

approaches three times

your number it might

represent too large a

portion of your

holdings.

16

Let’s finish the topic

of diversity.

COMPANY SIZE MATTERS

TYPICAL SALES GROWTH

LARGE LESS THAN 7%

MEDIUM BETWEEN 7 AND 12 %

SMALL GREATER THAN 12%

17

We also define company size by dollar amount

of sales:

LARGE MORE THAN $10 BILLION

MEDIUM BETWEEN $1 B AND $10B

SMALL LESS THAN $1 BILLION

Let’s pull some of this together :

WE CHANT

“EARNINGS FOLLOW SALES AND STOCK

PRICE FOLLOWS EARNINGS”

18

Since stock price

ultimately comes from

sales growth, if we have

too many large

companies in our

portfolio, hitting PAR

targets will be difficult.

We would be lucky to

perform at 7-9% PAR!

19

20

We also want a collection of companies that

exhibit strong finances.

Value Line, Morningstar, Manifest Investing and

S&P all rank financial strength.

21

Mid-Michigan Model Investment Club (MMMC)

FORMED FEBRUARY, 200325 MEMBERS

EDUCATIONAL COMPONENT TO EVERY MEETINGUSES INDUSTRY STUDIES TO CHOOSE THE BEST

ALL MEMBERS BELONG TO BICLUB HAS A MANIFEST INVESTING SUBSCRIPTION$50 MINIMUM CAPITAL CONTRIBUTION MONTHLY

OLDER MEMBERS MAKING REGULAR WITHDRAWELS

22

23

24

George Nicholson told us many years ago that

a sales growth rate of 11.5% to 12.5% for the

entire portfolio would result in returns that

should beat the average market by at least five

points.

The rest of the growth to meet the average 15%

return year over year comes from dividends

and P/E expansion.

25

Our “number” is

about 8.

26

WE SELL WHEN:

WE NEED THE MONEY

TO MAKE THE PORTFOLIO BETTER

WE USE OUR DASHBOARD TO MANAGE OUR

PORTFOLIO AND TRY TO AVOID OVER-

MANAGING. WE BELIEVE IN TAKING ACTION

SLOWLY AND METHODICALLY.

27

What do you think this club might do when it

meets this coming Monday?

28

29

24stocks

4“number”

39.7%In 4 stocks

6%MIPAR

30

31

32

LONG TERM GOALS (1-2 YEARS)

Tech Issue

Number of Stocks

Size Issue

Low PAR and Sales

SHORTER TERM GOALS (Now to a Year)

Slowly and methodically decide what to pare

NO MORE TECH for the moment

Find small stocks for potential investment

Add to very small holdings that you want to keep

33

Thanks for listening … hope to see some of you at BINC in

May, 2017!