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Assuming there may be interest in this real-life saga of portfolio management as well as a portfolio that does not apply “conventional wisdom”, here is how I have managed mine since “MY END OF APRIL REPORT” Post #2752 dated 4/30/00 to the Portfolio Management message board. Acquainting yourself with it will bring you up-to-speed and allow me to start at that point. Thank you.

To clarify my above remark about “conventional wisdom”, I view it as applying investment and risk management techniques that focus on playing the averages. These include broad diversification, mutual funds as primary investment vehicles, asset allocation, etc. However, as a consequence of embracing a very large number and variety of holdings and then accepting the collective results they generate, by their very nature these are average-seeking strategies and thus self-limiting -- i.e. they can beget little more and often less than average yield performance. The benchmark against which this performance often is judged is the S&P 500 Index, and for which the average annualized total return over the past five years is approximately 26%.

Instead, I prefer a focused approach such as mine that has produced annual returns of 68.7% in 1996, 72.8% in 1997, 57.6% in 1998 and 92.9% in 1999 to build a portfolio that today is worth 20.94 times its original 1992 value – and without adding any additional dollars to this IRA in the meantime.

For example, let's assume an investor had built a $100,000 portfolio going into 1996. At 26% it would have been worth about $252,000 by the end of 1999 using “conventional wisdom”. However, using the figures I achieved with a focused strategy it would have been be worth about $886,000 by the end of 1999. Now back to the saga.

Rather than remain 100% invested as had been true since 1992, after the mid-April stock market freefall I placed 20% of my portfolio in a Bond Fund for reasons covered in Post #2752. Otherwise, my strategy remained exactly the same as before – BUY&HOLD investing in blue chip alpha gorilla tech stocks and (as downside risk protection because of my age and the size to which this nest egg has grown) applying automatic bail-out points that I normally set at 80% of each stock's most recent 52-week closing high.

Appreciate that all of my stocks sold at those bail-out points In April's freefall. Nothing like that ever had happened before. In fact, it was rare for even one of my stocks to sell per year for this reason. And then it happened again in May! So, after achieving a euphoric YTD yield of 36.4% on 3/27/00, just two months later I ended the month of May back at Ground Zero with a 0% YTD yield.

My consolation prize was that the Nasdaq was down for the year much more than I was – to -16.4%! Similarly, the DJIA was down (-8.5%) and the S&P 500 Index was down (-3.3%). So I would imagine that many investors were far worse off than I was at that point in time. I can thank my automatic bail-out points for having flawlessly provided downside risk protection and that cushion.

However, hindsight tells me that I should have exercised more patience rather than quickly diving back in at what I thought was the bottom and at what appeared to be bargain-basement prices each time. And had I been a fortuneteller with an unerring crystal ball, I might have gotten out and into money market funds on 3/27! But a good short-term market timer I never have claimed to be -- and from what I hear, they are about as rare as hen's teeth. Be that as it may, rather than grumble and fret over what might have been, it was time to learn from these lessons and chart a revised course. Here is the one I have chosen.

In late May I again modified my investment strategy to coincide more appropriately with (1) my age of 71, (2) a sizeable IRA nest egg and -- MOST IMPORTANT -- (3) market conditions that years of experience tell me are appreciably different than those more tranquil up-trending ones investors enjoyed for almost a decade. Like the Dodge truck ads warn, "The rules have changed".

By early June my revisions were in place. The stock segment of my portfolio continues to be comprised of blue chip alpha gorilla tech stocks in which I believe for BUY&HOLD. Within Tier #1 below, each stock began as about 14% of the grand total value of all stocks -- 6% in Tier #2, and 3% in Tier #3.

18% - TIER #2 - TXN, HWP, IRF

Viewed as a whole, I have re-launched this IRA portfolio into the mainstream as:

60% - BUY&HOLD of the above 12 blue chip tech stocks
20% - Bond Fund – 7.22% current yield
20% - Money Market Fund -- 6.43% current yield
Nil% - Money Market -- 5.87% current yield

For comparative purposes, on 6/30/00 the dollar amount of this portfolio's 60% commitment to stocks is slightly larger than the IRA amount I had in stocks when fully invested just one year ago. Therefore, it remains sizeable enough to have a major (and I anticipate positive) impact on this portfolio's market value in 3-5 years and beyond.

Dollars in the Bond Fund and the Money Market Fund are available the next business day (with no transaction fees) after giving instructions to sell any part of them. I conveniently can do this and any trades via the Internet or by telephone 24 hours/day and seven days/week -- or by a visit or telephone call to my discount broker's nearby office.

In accordance with my preferences and objectives, these two funds are not influenced appreciably by stock market gyrations. Furthermore, they are ample in size to carry us through a prolonged bear market period if it occurs, and to supplement our other income for many years of a lifestyle comparable to the one we presently enjoy. This arrangement also translates into not having to cash stocks at depressed market values during a bear market environment to provide income for current needs. The package as a whole provides what I view as appropriate risk management, and its stock facet imposes NO STRATEGIC LIMITATIONS on me continuing to seek exceptional BUY&HOLD yields.

I have designed my portfolio to function with minimal attention. This includes allowing these blue chip alpha gorilla tech stocks to perform unfettered (no more automatic bail-out points, for example) as pure BUY&HOLD commitments.

In regard to the pros and cons of using bail-out points, appreciate that in PAST years when one of my blue chip tech stocks dropped to its bail-out point and sold, it typically was because something had gone awry with the company itself and/or the market's perception of it. But when the market AS A WHOLE is fluctuating violently (as it has been doing recently) and causes these stocks to all suddenly plummet SIMULTANEOUSLY and automatically sell, to me it seems ever so obvious that in this kind of erratic ambiance I now must adapt to and deal with a market of a different ilk.

For example, beginning in April of 2000 I found that volatility and roller coaster market conditions made it one continual time-consuming pain in the butt scramble and guessing game as to (1) if and when I should re-buy, (2) what new base price to use and (3) what percentage to apply to it when calculating new bail-out points because (4) each stock usually was so far below its 52-week high that using it as the base was impractical.

For many years up until recent chaotic months, automatic bail-out points worked well as my downside risk protection. However, I have concluded that for me this tool does not adapt well to the erratic conditions that have prevailed this year. Like I said earlier, the rules have changed and I shall bend to this new ambiance -- and for me this includes (at least in the foreseeable future) no longer using automatic bail-out points.

With this portfolio now set on autopilot, my on-going function is to track performance and provide oversight to ensure that each stock is continuing to be a strong performer as well as a viable major contender in the rapidly expanding tech-oriented future I envision. My tasks also include research to create a list of potential replacements if one or more of mine go sour. I find that managing about 12 stocks is a reasonable number and coincides with a philosophy of keeping my investment strategies simple and straightforward.

Let's close with a few comparative facts as we move into the second half of 2000.

Last year my YTD yield only was 1.1% on 6/1 and moved up to 16.8% by 6/30. This year on the stock portion of my portfolio it was 3.7% on 6/1 and moved up to 11.1% by 6/30. These YTD results are not appreciably different -- but does this mean (as occurred for me in 1999) that I can anticipate approaching another 92.9% yield for the year 2000? Only in my wildest dreams! Any reasonable percent above the S&P 500 Index will please me. On the other hand, I do live in the Land of Oz, the Wizard, Dorothy and Toto where magical things have been known to happen.

Here is an interesting “what if” scenario which supports a BUY&HOLD strategy. On 6/30 of this year, what would my YTD yield be if on 1/1/00 I had exactly the same stocks with exactly the same number of shares as I have today AND HAD PRACTICED PURE BUY&HOLD (i.e. no bail-out points)? The answer is 29.3%! Instead, you can see that my YTD yield on 6/30/00 was 11.1%.

This difference in results demonstrates that one had better be a very astute short-term market timer or immensely clairvoyant (and I claim neither) when using bail-out points in volatile markets situations like those of recent months. Hindsight tells me that rather than my use of bail-out points being the key problem, it instead was me arriving at what turned out to be flawed conclusions about if and when to buy back in, what the new bail out points should be and whether or not the market had bottomed. Live and learn -- and then adapt, accordingly!

Compared to the beginning of this year, I notice that as of 6/30/00 the DJIA is DOWN – (-9.1%), the NASDAQ is DOWN – (-2.5%), and the S&P 500 is DOWN – (-1.0%). So measured against these benchmarks, I suppose it is fair to conclude that my YTD yield of being UP 11.1% may not be too shabby, after all.

Questions are welcomed and constructive criticism is appreciated. That's how we learn.


P.S. What is a “blue chip alpha gorilla tech stock”? For my purposes this term describes a tech stock that on a worldwide scale is a dominant player in its field of expertise and one that has a lengthy track record of exceptional performance and growth. Rather obvious examples are EMC, INTC, CSCO, SUNW, ORCL, TXN, NOK, MSFT, etc. By the way, I also refer to a few of mine as alpha chimpanzees.

I would estimate that for me there are fewer than 20 companies that presently would qualify as “blue chip alpha gorilla tech stocks". For example, many of these highly successful “kings of their hill” are in the Motley Fool NOW 50 INDEX -- a good place to begin identifying and learning more about them. You will discover that 9 of my 12 are listed there -- and those 9 make up 88% of the total cost basis of my 12 stocks. I was invested in most of them long before that listing was developed, however.

Based upon a portfolio performance study I made, I discovered that my 1999 yield of 92.9% would have been about 20 points higher if I had NOT also indulged in some other well-known tech stocks that, at least relatively speaking, still are newcomers and wannabees. So I divested myself of them. I called them my “yo-yo” stocks because their market prices tended to fluctuate widely rather than climb steadily. It is possible that in time some of them may become eligible for my replacement list in case one or more of the dozen I hold goes sour. Like I mentioned in my report, I find that managing about 12 stocks is a reasonable number and coincides with a philosophy of keeping one's investment strategy simple, uncluttered, straightforward – and very profitable.

They say the only difference between men and boys is the price of their toys. For example, as a boy the first major “toy” I purchased with money I earned was a used bicycle for $12. This month a 2001 Yukon XL “toy” will be built for us by GMC to my “all the bells and whistles” specifications. My point is that, in addition to a home that is paid for and no credit card or other debt, we now can pay cash for and enjoy amenities like this vehicle plus many other pleasures such as carefree one-month road adventures (our 19th will occur this fall) – and with special thanks to a personally conceived and managed highly focused strategy of investing since 1992.

There simply is no way that an average-seeking “conventional wisdom” approach to investing could have played such an appreciable role in helping to set this up in that time frame. I wish you the same peace of mind and pleasures from your investment results.
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