An Overview of Portfolio Management Introduction

Welcome to our seminar in portfolio management (PM).

When asked me to do a seminar on PM I began to think of all of the presentations I’d seen at the various events. I’ve seen many great presentations on specific topics like PERT Worksheet A, PERT Report, .PMG, & when to sell, etc.

What I’ve never really seen is an overview of NAIC PM so that’s what I decided to do here, review “the big picture.”

The following is my own interpretation of NAIC methodology. No stock mentioned in this presentation should be construed as a recommendation to purchase. Please use your own judgment.

I have been influenced by many different individuals. I’ll try to credit them where I remember, but if I forget and leave some out, I do thank them and I apologize. I have used a few graphics from Ellis Traub’s 1999 online PM tutorial and wish to credit him for those. I believe Phil Keating originated the Weeding-Feeding method of PM and Cy Lynch expanded it to Planting-Weeding-Feeding-Pruning. Ellis Traub recommends the football analogy of PM with Defense and Offense. I like the Phil Keating-Cy Lynch gardening analogy as well as the Ellis Traub defense-offense football analogy of PM. They fit together very nicely and having two different views of the same process is helpful. It’s akin to viewing a situation with both eyes rather than just one.

Cy’s article can be found at: http://www.better-investing.org/articles/bits/119/937

 Ellis’s online PM tutorial can be found at: http://old.better-investing.org/educate/portmgt/pm2.html

I’ve added one more step to the gardening analogy so I have five parts to my “big picture” of PM

     1.  Planning – set your goals in writing

     2. Planting – pick your stocks Weeding or Defense - get rid of the losers

     3. Feeding – take care of the healthy and care for the sick

     4. Pruning or Offense – trimming back overgrown stocks

I especially like the gardening analogy because both gardening and stock investing are concerned with growth. (Football fans, however, may prefer Ellis’ analogy of defense and offense.) You have to plan a garden. You have to tend the garden to get good results. You can’t just throw some seeds out and come back in a couple of months and expect to have good results. You have to watch the garden and do routine chores to keep it growing. You have to remove the weeds so they don’t choke out the good plants. If the plants become overgrown, you’ll have to prune them back or thin them out. And you have to keep an eye out for new improved hybrids that offer superior growth. Just like you do with a portfolio.

So what’s your big picture of portfolio management? How and why does it differ from mine?

In the next post we’ll look at planning a NAIC type portfolio. Questions? Comments? Ask them here on the new CompuServe Forum.

I’m going to include a short biography of the individuals mentioned in this article as an introduction to folks unfamiliar with them.

Phil Keating – Honorary Chairperson, NAIC Computer Group. Author of the monthly Value Line screen in NAIC’s BITS online magazine.

Cy Lynch – Cy received his law degree from the . He was active with the NAIC Chapter and served as its vice president of education. In 1998 he received NAIC's O'Hara Award in recognition of his service to the Atlanta Chapter, and he is a recipient of the Investment Education Institute's Distinguished Service Award in Investment Education

Ellis Traub – Ellis is chairman of Inve$tWare Corporation, developer of NAIC's Investor's Toolkit software, and a frequent teacher and speaker on investing using NAIC principles and respected contributor on NAIC's I-Club-List and NAIC CompuServe Forum

Dan Hess - Dan is an individual investor, lives in and serves as a director on the Central North Carolina Chapter. Dan is a long-time resident and respected contributor on NAIC's I-Club-List and NAIC CompuServe Forum.

Jim Thomas - Jim is an individual investor and NAIC member from . One of his hobbies is developing Excel spreadsheet-based tools to facilitate his NAIC stock studies. He is a and respected contributor on NAIC's I-Club-List and NAIC CompuServe Forum.

Rich Beaubien - Rich has been an NAIC member since the late 1980s, and charter member of the NAIC Massachusetts Chapter Computer Group. Past president of the Massachusetts Chapter of the NAIC and a former associate director of the Computer Group, he is currently an adviser to the NAIC Massachusetts Chapter.

Mark Robertson – Senior Contributing Editor Better Investing magazine, Challenge Club moderator on CompuServe Forum, and respected contributor to the I-Club-List and NAIC CompuServe Forum.

"I especially like the gardening analogy because both gardening and stock investing are concerned with growth. (Football fans, however, may prefer Ellis’ analogy of defense and offense.) "

Nancy Crays
NAIC Forum - Long term investing made simple
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Nancy

"I especially like the gardening analogy because both gardening and stock investing are concerned with growth. (Football fans, however, may prefer Ellis’ analogy of defense and offense.) "

Now I know why I have so much trouble with the offense and defense analogy - I am not a football fan.  The only football games I like are those which the University of Texas play.  Thus, I never remember which is the offensive or defensive portfolio management.  My husband is the gardener, but I enjoy cooking and eating the fruits of his labor, so I guess I prefer the gardening analogy.  I'm glad you tied the two approaches together.  Maybe it will help me remember which is offense and which is defense

I admit to being a football fan but I also admit to being confused for a long time related to the offensive and defensive designations used by Ellis.  My confusion was finally cleared up when reading how George Nicholson used these terms and their source.  George was a football player for Michigan in addition to being the father of the NAIC methodology.  His football coach impressed upon him that to win you needed both a strong defense and a long scoring play. The defensive side was fulfilled via the Upside Downside ratio to avoid the big losses (opponents scoring points) while the offensive part was fulfilled via the expected doubling in value in 5 years or what we now call the expected total return. 

Thus the defensive part of PM pertains to the early identification of stocks that are not performing as expected and need to be replaced.  i.e. Admit either your or the companies mistakes early before great damage can occur that is like defense since if the other team scores a lot of points it is hard to overcome.)  The offensive part comes in play when one's portfolio based upon one's personal analysis is expected to have a return of less than 15% (not expected to double in 5 years).  Thus this is the "long scoring" play to score points.

I also admit the Weeding and Feeding analogy, I first heard from Phil Keating about 15 years ago, made a lot of sense but I never quite made the direct connection to portfolio management.  

My thanks to Gary for presenting this topic that I consider one of the two most important parts of the NAIC methodology, with the other being the identification of quality growth companies to purchase.   I especially like the broader view Gary takes on PM that causes me to think a little out of the box.  Thus I look  forward to learning from this workshop.

Dan Hess

Nancy wrote:

Maybe it will help me remember which is offense and which is defense.

Gary replied:

Ellis wants to keep portfolio management simple and I agree completely.

Defense - FUNDAMENTALS - Sales, Pre-tax Profit, EPS, and Pre-tax Profit Margin.

Offense - VALUATION - Is the stock overvalued? Can you find a stock of equal or greater quality and greater return potential?

Ellis says Defense is the most important. Watch tose fundamentals.

Dan wrote:

My thanks to Gary for presenting this topic that I consider one of the two most important parts of the NAIC methodology, with the other being the identification of quality growth companies to purchase. 

Gary Replied:

I really only see one part to the process: Buying the highest quality growth companies at a reasonable price. We do that initally throught the SSG and SCG. Later we just monitor that quality. We can use the SSG or the PERT reports, but you're doing the same thing in a different way.

Joe Craig said: There is only one set of data, just different ways to look at it. (with the different forms and graphs.)

I think we should be giving an overview class on the NAIC "Big Picture" right after Ellis Traub's Power Point on "Why Investing Our Way Works."

We shoulld immediately provide an overview of the entire stock selection - monitoring - replacement process. Then we can produce modules to expand on the individual pieces.

And NAIC has. Look at the great classes on the SSG, SCG, PERT,  & Challenger, not to mention BINC classes on quality, evaluting historical growth, and your article's common sense ideas on forecasting realistic future growth.

> While I know I will likely upset JimThomas, Lowell and Rip,  I view portfolio management to be of much greater importance than portfolio tracking. <

I have no problem with that!  The primary purpose of portfolio tracking for most people is to deal with tax issues and for "bragging rights".  Portfolio management (not tracking) is what will produce results in the future.  I think portfolio management should get as much teaching and learning focus as the SSG.

My "issue" about portfolio tracking (specifically with portfolio performance) is that doing it wrong (or not knowing whether you're doing it right or wrong) can be worse than not doing it at all.

Brian Lewis
President, Puget Sound Chapter NAIC
Director, NIA Advisory Board
http://www.nwlink.com/~brianle/