THE PORTFOLIO

By Charlie Cameron, Western Wisconsin Investor’s Club

BIG PICTUREWe want returns but no risk. This is impossible. A portfolio mitigates risk.

Shopping for Stocks is like shopping for clothing, you have wardrobe (portfolio) considerations.

PORTFOLIO AND BETTER INVESTING PRINCIPLES

Goal is a 15% Annual Portfolio Return over a market cycle (bust to boom)

Return comes from stock price appreciation and dividends Dividends are reinvested Buy quality growth companies You will have an under-performer for every over-performer; the

rest will perform as predicted Diversify to improve returns and reduce risk

RISK AND RETURNS (1981 TO 2008)

Type Avg. Returns Avg. Risk Premium Standard Deviation

(%) (%) (% Volatility)

Small Company Stocks 21 17 42

S&P 500 12 8 21

Corporate Bonds 7 3 7

Government Bonds 6 2 9

T-Bills 4 0 3

MANAGING RISK & RETURNS WITH DIVERSIFICATION AND TIMING

Sector

Size

Location

TimingReducing Risk &

Maxing Returns

MANAGING RISK & RETURNS – DIVERSIFY COMPANY LOCATIONS

Sector

Size

Location

TimingReducing Risk &

Maxing Returns

COMPANY LOCATION – FOREIGN OR DOMESTIC

Reduce market risk by owning companies from different locations

Domestic and Foreign Markets can perform differently

Right now, the dollar is strong and companies doing business in the US benefit from excellent FOREX rates; this will not last forever

Diversify portfolio between Domestic and Foreign Companies

National & Foreign

Location

MANAGING RISK & RETURNS – DIVERSIFY BUSINESS SECTORS

Sector

Size

Location

TimingReducing Risk &

Maxing Returns

BUSINESS SECTORS

Reduce risk by owning companies from several different business sectors

Balance portfolio allocation between business sectors

Which sector is not represented or under-weight in the portfolio?

Where is this sector at in the market cycle?

Is this sector overvalued or undervalued (sector P/E)?

Business SectorConsumer DiscretionaryConsumer StaplesEnergyFinancialsHealth CareIndustrialsMaterialsTechnologyTelecommunicationsUtilities

Sector

CLUB’S PORTFOLIO - SECTOR ALLOCATION

Consumer DiscretionaryConsumer StaplesEnergyFinancialsHealth CareIndustrialsMaterialsTechnologyTelecommunicationsUtilities

• Industrials and Consumer Defensive are overweight. With the sale of ISRG (12.2%), healthcare is now 4.8%

Sector

MANAGING RISK & RETURNS – DIVERSIFY COMPANY SIZES

Sector

Size

Location

TimingReducing Risk &

Maxing Returns

COMPANY SIZE – SMALL, MEDIUM, LARGE

Reduce risk and improve returns by owning companies of different sizes

Large companies have lower risk but slower growth

Small companies have higher risk but grow faster

Better Investing Model Allocation ->>>>

Company Size(annual sales -billions)

Large (> 5) Medium (.5 to 5) Small (< .5)

Portfolio Target Allocation

25% 50% 25%

% Annual Growth Needed to Cover Risk

5 to 7% 7 to 12% > 12%

Size

CLUB’S PORTFOLIO – COMPANY SIZE ALLOCATION

• Very few small companies are represented in the Clubs portfolio, this could hurt long term returns.

Size

MANAGING RISK & RETURNS –TIMING

Sector

Size

Location

TimingReducing Risk &

Maxing Returns

MACRO PICTURE - TIMING THE MARKET

Market timing is not promoted by BI

Its very difficult to time the market, and…

Quality growth companies will grow regardless of the market cycle

They don’t drop as far in a down market

They are the first to recover

They go higher in the next market cycle

Timing

MACRO PICTURE - TIMING THE MARKET

Growth Stocks (left) versus Cyclical Stocks (right)

Timing

MICRO PICTURE - TIMING ENTRY POINTS

Take advantage of market and stock volatility when entering a position or building a position.

Top Graph

EW (grey), Biotech Sector (purple), S&P 500 (green)

Bottom Graph

RSI (indicates overbought and oversold)

So What?

Will biotech continue to outperform the market? Where is energy now?

Point out the entry points for EW?

Timing

IMPROVING AN EXISTING PORTFOLIO?

Sector

Size

Location

TimingReducing

Risk & Maxing Returns

Determine Current Allocation Select a Target Allocation (company size/sectors) Where do you fall short (size/sectors)? Have a pounce list ready at all times Sell all the shares of poor performers Pare down overweight holdings of good

performers to get target allocation Buy more shares of existing companies, if they are

in the buy range, and needed for proper allocation Always be looking for better replacement stocks of

your existing holdings – you want best in class