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Author: TMFSchool Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 89  
Subject: Re: strategies Date: 7/8/2008 4:40 PM
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Allow me to present The Pragmatic Portfolio (a work in progress):

Investing Style
The Pragmatic Portfolio takes its name from the rich history of the "Pragmatists," whose early practitioners emphasized practicality over aestheticism. It's not for nothing that Philosopher Francis Bacon inspired the Pragmatists, and it is he who Foolishly coined the phrase, "Knowledge is power." (We nearly went with "The Bacon Portfolio," but thought the name lacked sizzle. Ba dum dum.)

In strategic terms, The Pragmatic Portfolio is a practical solution to building wealth: A portfolio grounded in proven long-term investment strategies, unswayed by market whims, yet nimble enough to capitalize on anomalies and opportunities.

In keeping with the spirit of the movement, the core of the Pragmatic Portfolio consists of established investments in a variety of asset classes: A diversified mix of large-, mid-, small-cap, and international companies -- a verifiably winning long-term asset allocation mix.

In short, we let common sense rule our money management decisions.

Injecting Art Into Science
Around the edges The Pragmatic Portfolio will diverge from the philosophical movement's more hard-line, literal thinkers. We believe there is a certain amount of art involved in investing; that creative thinking is essential in equity analysis and can be a catalyst for great investment ideas.

As a later sect of Pragmatists said: "Truth is not ready-made, but jointly we and reality 'make' truth." Yeah, we had to read that twice, too, but we interpreted it to mean that the market's landscape is not entirely static or fixed and therefore open to exploration, interpretation and investing opportunity. Roughly 20% of the Pragmatic Portfolio assets will be devoted to exploring such opportunities. We will mainly be focusing on the very best companies capitalizing on consumer-related trends (e.g. retail, home, technology, etc.).

Asset Mix
The Pragmatic Portfolio is a bona-fide portfolio and not a bunch of showy spaghetti-against-the-wall picks. Its collection of investment work best as a unit -- baskets of individual stocks that offer exposure to both the most essential investing categories (e.g. stalwart blue chips; international intrigue) as well as more exciting areas (e.g. blossoming consumer brands; robots and rocket boots).

The investing mix is nimble enough to capitalize on market inefficiencies and consumer trends yet grounded enough to maintain a minimum level of stability.

The Pragmatic Portfolio has five layers, each of which will be built using the "Buy the Basket" investing method (e.g. buy the top players (emphasis on the plural) in each category):

• Basket 1: Large-cap U.S. stocks and dividend payers -- established, steady growers -- to form a solid long-term foundation.

• Basket 2: International investments (including ETFs for broader exposure to certain foreign markets) to protect against at-home economic slumps.

• Basket 3: Small- and Mid-cap companies exhibiting the "best-of-breed" characteristics (an established business model, impressive management, a sustainable long-term competitive advantage) for growth potential.

• Basket 4: "Wild Card" investments (unconstrained by market cap, industry, geography or investing style) designed to capitalize on special situations, such as pricing anomalies, market inefficiencies and consumer-related trends.

At first blush the Pragmatic Portfolio may appear to be fairly concentrated in a limited number of investments. As discussed in the "Risks" section, the holdings in each will be further diversified via investments in broad market/sector ETFs.

In other words, we hire the soloist and the choir -- the best standouts in each basket as well as a broad supporting cast to balance out any rocky performances.

Asset Allocation/Expected Returns
Once all assets are invested, the breakdown will hew towards the following mix.

Investment Type Allocation Proxy Index Return*
Large Cap U.S. Stocks 40% S&P 500 7%
International 20% MSCI 10%
Small-Cap/Mid-Cap 20% Russell 2000 9%
Wildcard 20% N/A N/A
*Expected 20-year average annual return. Forward-looking statement based on, um, my first crack at this.

Returns will be measured against those of the corresponding indexes (where appropriate). Our goal is to outperform by a minimum of 2% the historical weighted average of the indexes over a 20-year period.

Risks
By design, the Pragmatic Portfolio is built to mitigate long-term exposure to risk simply by the nature of how the assets are deployed. The four investment baskets expose shareholders to different facets of the universe of investments -- all of which historically tend not to move in tandem.

Investments in ETFs (which offer diversification within a concentrated category) alongside our individual equities will further reduce the Pragmatic Portfolio's risk profile.

We are long-term investors with a minimum time horizon of two years. We're patient enough to wait for the right time to make a commitment and level-headed enough to know when our original investment thesis no longer holds water and it's time to sell.

After all, anything less simply wouldn't be pragmatic.
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