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I've been burning the midnight oil, and here is the rough draft for Part 5, which covers "Buying your first MI screen". Hopefully I can have Part 6, which will cover "Holding your screen and Rebalancing", done just as quick.

As before, look over it and if you have any suggestions or comments please email me. (And thanks to those people who did that for Part 4).

I'll take the next few days and redo the first 4 parts, especially Part 2 on Costs to include Jeffrey Clarke's wonderful Universal Friction Calculator (look for a Workshop article on it soon), and Mark Meyer's excellent Friction math.

Off Topic for a moment.

As some of you may know, The Motley Fool is in the process of starting up an online publisher for investment reports. Mike Sellers' (Sux2BeU) recent RS Report is an example of what they will be offering.

(If you are interested in further info

Apparently someone over there reads our little corner of Fooldom. I've been approached about doing a beginner's guide on mechanical investing, much like this multipart guide, only a bit more stand alone. Further they want it done in time for the roll out on June 10th, or there about. This may not be possible given that the prop shop I work for just booked a movie and I'll be on 7 day workweeks by Monday for the next two months.

While we have had discussions here in the past about what if MI gets too well known? Would it ruin what we do? I feel its inevitable that we'll get some additional exposure. And look at some of the recent newbies here and their contributions. (Clarke and Meyer are excellent examples). I also think even with additional exposure, most people will not have the "intestinal fortitude" to do MI. Short of massive institutional involvement, we should be safe.

I realize that these guides have not been my individual work, but that in quoting others, I feel it's been more a group effort of the people here on the board. I hope no one has objected to my borrowing of their words. Now though with a soapbox report, which will be generating sales, there is the question of how to share the profits.

The report looks to be about 30 to 40 thousand words total, about 75-100 Words pages long with graphs and such. At $24 a copy, that would be about 0.0006 cents a word. So paying everyone for the use of their quoted words would be a problem. Unless you'd like to get a check for 75 cents? <grin>

I am going to try and condense most of the linked quotes, given that the objective is a more stand alone report. There will still be people whose words are so eloquent that I'd hate to not use them. And who I'll be contacting via email for their permission.

What I've come up with, to pay everyone back for their contributions is to donate 10 or 15 percent of the report's return to Peter Kuperman's charity in the name of the MI and FW Board. Would this be acceptable to everyone?

I'd appreciate any comments, emailed or public.
David Trammel aka LAPropDoc

Now back to our regularly scheduled programming :)

Here's the Rough Draft of Part 5
Driving Lessons or How Do You Run One of These Things?
Doc's Unofficial Guide for New Mechanical Investors, Part 5.0

(If you haven't read Parts 1 through 4, please do. You can begin with Part 1 here,

Rites of Passage
As we go through life, many milestones come upon us. Some small, some large. Many come to mind. First step, first day of kindergarten, first best friend. Then as we grow older, others. High School, first gym shower, first job. And of course that all important, first kiss.

The milestones of youth often fade from memory, to be replaced by later ones. Leaving home for the first time, College, first place of our own. First true love, sometimes followed by that second true love, and that third true love…

For many there are more. Marriage and family. The birth of your first child. First home. And for some, the first death of a cherished friend or relative.

Your financial life has its own milestones. First savings account, often just pennies. First paycheck. First real investment. And another for those new to mechanical investing, your first screen. One milestone we all hope will be fruitful and rewarding. Getting ready for that first screen, we harken back to another rite of passage.

Driver's Ed!
Here in the United States, driver's education usually happens in high school. Sophomore year, when you reach that ancient age of sixteen. There is a sense of eagerness in the air. Soon you'll have that license, proof of adulthood. No more Mother driving you to the Mall. Just you behind the wheel, free to explore the world!

In many ways, using the screens is like driving a car. There are a lot of things in common, no matter whether you use an old dependable station wagon like Keystone, Spark or PEG. A sports car like an SOS, Blend or one of the Overlaps. Or strap yourself into a turbocharged road machine like one of our infamous Canary Killers.

So before we look at each screen, their strengths and weaknesses, their CAGRs and GSDs, lets look at how you would run a typical screen. We will cover "Buying the Screen" first in this Part 5, then "Holding and Rebalancing" in Part 6. And hopefully answer many of the frequently asked questions where it comes to running the screens.

Our Driving Student
Back to Adam and his investments, specifically his Long Term Bucket C funds.

3)Bucket C-Long Term Goals (retirement)
Medium Risk: $20K in 401K/Index Fund
High Risk: $82K in Roth IRA/Stocks

Adam has decided to use the $82K to fund a moderately risky MI strategy, as follows,
Spark 1-4 Annual
Keystone 1-4 Annual
PEG 1-4 Semi Annual
RS26 1-4 Quarterly

(We'll discuss "Picking Your Screens" in Part 7, for now we're just looking at how to buy and run one.)

First thing Adam wants to do is look up the CAGRs for each of his screens. For that he use either backtester, though BDFinney's does not currently have 1999 data.

Screen Gritton 86-99 86-98 BDFinney 86-98
Spark 1-4 Annual 40% CAGR 36% CAGR 36% CAGR
Keystone 1-4 Annual 33% CAGR 27% CAGR 27% CAGR
PEG 1-4 Semi Annual 55% CAGR 48% CAGR 48% CAGR
RS 26 1-4 Quarterly 55% CAGR 42% CAGR 42% CAGR

Notice that 1999 was a good year across the board for our screens. The CAGRs went up. In some cases, particularly in RS screens, A LOT! RS26 rose 13% alone based on the addition of 1999 returns.

Many people when looking at which screen to choose, don't include the 1999 data, but prefer to go a little conservative. Others argue that 1999 is simply a "view of things to come" and that momentum screens will exhibit increased CAGR in the future.

Big Note: As you learn about mechanical investing you'll find over and over there questions which we have no clear cut answer. The decision is left up to the personal preference of the user. That's you. IMO conservative is better. When in doubt, Be Cautious.

The above CAGRs are for January starts. What do we get if we run them for another month? Say Adam is starting in May.

Screen Gritton 86-99 86-98 BDFinney 86-98
Spark 1-4 Annual 22% CAGR 24% CAGR 22% CAGR
Keystone 1-4 Annual 25% CAGR 27% CAGR 19% CAGR
PEG 1-4 Semi Annual 32% CAGR 35% CAGR 40% CAGR
RS 26 1-4 Quarterly 37% CAGR 38% CAGR 30% CAGR

FAQ: "Why do Gritton's and BDFinney's backtesters have different numbers? And does this invalidate the returns?"
Both backtesters use the same data, supplied by Peter Kuperman and the VL Gravedigging Project. The dates used are explained in this post by Peter.

Talking with Brian and Jamie, the best I can figure the differences in non January starts are the result of differences in the internal programming of each backtester. Over time the differences even out, and should not effect your expected returns. If they bother you, use the January starts.

"The backtests are only models. Even if you and I try our best to trade at the same time we cannot guarantee that we'll get the same price or pay the same commission. However, these differences tend to balance out in the long run. There is no systematic difference between buying at the close, open, or in between. Furthermore, since rebalancing involves selling some stocks and buying others at the same time, the significance of the trading time is even smaller.

The backtest uses trading days and prices that are realistic. It assumes that you had the Value Line data for the screens on Friday and you traded based on that data at the close on Monday. We use the closing prices because they are normally the published numbers and are easiest to find."


The January Effect
Wow! What a difference a few months can make. This brings up something we call "Seasonality".

Seasonality or the "January Effect" is a perceived rise in returns for those screens bought in January and to some extent, the months between November and March. Also, Seasonality covers the "Summer Doldrums", when stocks seem to inch up a bit, then down, then up, never making any real large gains, staying flat during the summer months.

We have seen numerous posts here on the boards on this subject. Many people believe, as I do, that seasonality exists. That it is a real effect, showing statistical significance, but with many cumulative origins. I'm guessing that seasonality is sort of a self-fulfilling prophecy. Large block institutional investors are aware of seasonality. So they jump in at the beginning of the year and run up prices. Then the fear of a seasonal summer drop causes everyone to try to beat each other out of the market. The increased volatility of late, can only exuberate the effect.

"Even if there is not inherently any more information in a RS52 ranking compiled on January 1 versus one compiled on October 1, it seems possible to me that many more investors are using this information in making their stock selections in January than in other months. In other words, perhaps RS52 works well in January because of all the momentum investors out there that are running up the stocks that register good RS at that time. We have met the enemy (or friend in this case) and he is us!"

Interestingly enough, chrisjames posted a table last year showing that the average for our screens, the January Effect had migrated to March. Though he posted this before the 1969 data was available. Take a look at the table here.

Others say that Seasonality is just random fluctuations in our data. And there may be something to that. Look at these CAGRs for Adam's screens. Sparks and Keystone as annuals, PEG as a semi annual, RS 26 as a quarterly. I've included the CAGRs for RS 52, both for 1986 through 1998, and 1969 through 1998.

(I had to use 98, because there will not be annual data yet for any start after May.)

Start Spark Key PEG 26 RS 26 RS 52, 1-4,A
Month 1-4,A 1-4,A 1-4,SA 1-4,Q 86-98 69-98
Jan 36% 27% 48% 42% 34% 20%
Feb 29% 36% 32% 38% 26% 21%
Mar 13% 22% 32% 36% 29% 19%
Apr 19% 30% 34% 36% 20%
May 24% 27% 35% 42% 27%
Jun 20% 29% 34% 25% 16%
Jul 23% 24% 23% 15%
Aug 21% 32% 21% 21%
Sep 25% 29% 24% 19%
Oct 25% 28% 22% 21%
Nov 27% 32% 22% 22%
Dec 26% 38% 33% 25%

Looking at some of the screens you can see an increase in December and January start returns. Is this seasonality or just random noise because we don't have enough data? And look at the spike in RS screens in May. Could this be people getting their income tax checks back and buying stocks? Or again, just noise? A lot of questions, with no clear answer. Seasonality does bring up one question for the new investor.

FAQ:"Should I wait to start my screen in January?"

The simple answer, NO.

"I believe that the January effect is real (not this year though) and that the summer doldrums are real. But the other truth is that on average the market rises in all months, and the MI screens rise even more during all months. Therefore the best way to utilize the screens is to be invested at all times. Sometimes you'll gain more and sometimes less, but you will always gain (on a long term average). Besides, January has gone by. As the year progresses more and more people ask whether they should wait until January to begin investing. The answer is no, because staying out of the market is worse than getting in at the "wrong" time."

Had you waited last November, you would have missed out on stellar gains in December. And then faced January's drop! We say here, if you are ready to invest, "The best time to invest is today. The second best is tomorrow." Don't wait to try to get a better return. The market will confound you every time.

Looking at those CAGRs
What many people do in evaluating screens is average their returns over all starting months. Something we call CASM or Compound Average of Starting Months. RatioFool covers the method where you get the average of each month in this thread.

So for Adam's RS 26 quarterly, looking at the above quarterly CAGRs, CASM would be calculated as
%CASM = {[(F1 + F2 + F3)/3]^(1/N) - 1}*100

where F1 = (1 + R1/100)^N when R1 is the quarterly CAGR. So
F1 = (1 + 42/100)^4 = 1.42^4 = 4.067
F2 = (1 + 38/100)^4 = 1.38^4 = 3.627
F3 = (1 + 36/100)^4 = 1.36^4 = 3.421

(N=4 for quarterly, N=6 for semi annual, & N=12 for annual. By their nature, monthlies do not have a CASM.)

%CASM = {[(F1 + F2 + F3)/3]^(1/N) - 1}*100
%CASM = {[(4.067 + 3.627 + 3.421)/3]^(1/4) - 1}*100
%CASM = [11.115/3]^(1/4) - 1}*100
%CASM = ((3.705^0.25)-1)*100 = (1.387 - 1)*100 = 38.7
RS 26 1-4 Quarterly CASM = 39%

And using the same formula
Spark 1-4 Annual CASM = 25%
Keystone 1-4 Annual CASM = 30%
PEG 1-4 Semi Annual CASM = 36%

How does this compare to simply taking the average?
Spark 1-4 Annual Average of CAGR = 24%
Keystone 1-4 Annual Average of CAGR = 29.5%
PEG 1-4 Semi Annual Average of CAGR = 36%

Close but not the same. The difference has to do with compounding, which changes the return slightly. It's good to know how to do CASM but for what we need, you can just run the average.

Dividing Up Your Cash
Now remember Jeffrey Clarke's (ImaKiwi) "Universal Friction Calculator" from Part 2.
Simply plug the CASM figures (or the simple average if you're lazy) into the Friction Calculator to see how much is needed for each screen. We'll assume Adam had a broker that charges $10 a trade.

Spark 1-4 Annual 90% of 25% CAGR: $1030 each or $4120 total
Keystone 1-4 Annual 90% of 30% CAGR: $860 each or $3440 total
PEG 1-4 Semi Annual 90% of 36% CAGR: $1600 each or $6400 total
RS 26 1-4 Quarterly 90% of 39% CAGR: $3775 each or $15100 total

Usually all you need to check are the screens with the lowest CASM (Spark, 25%) and the most often holding periods (RS 26, quarterly). What you are interested in, is the minimum you need to fund each stock to keep costs below 10%. Ideally we want to fund each stock in the portfolio equally, so no screen is over weighted. In this case, Adam needs a minimum of $3775 to fund his RS 26 screen properly. With 16 total stocks in the portfolio, at $3775 each, he needs $60,400 total. Which he has.

Several questions arise.

FAQ: "What if I don't have enough capital?"
Suppose Adam had only $50K? He would have several options.

1)He could trim a little off each of his annuals, funding each of their stocks with $3000 or even $2500. Then keep the RS 26 stocks fully funded with $3775. He shouldn't cut funding too much, and make his RS 26 screen too large a percentage of his overall portfolio.

2)He could go to less individual stocks, 3 instead of 4, in some or all of his screens. No smaller than 3 or he risks decreasing diversity. If you must cut enough that you would go below 3 per screen, consider a SOS, or Screen of Screens, to replace those annual screens. (SOS's will be covered in Part 7)

3)He can drop a screen and go with less total stocks. But again he risks cutting out diversity. While he does not have a "Value" screen like RP4, with the 4 screens Adam's picked, he has a nice spread of stocks. His portfolio of MI stocks should do well in most market conditions. IMO it might be better to accept slightly higher cost percentages, than drop stocks. A modest gain of 20% this year will increase his capital enough to fully fund everything next year, so accepting a slightly higher cost percentage this year would IMO be acceptable.

"And why no value screen?" With Adam's investment timeframe, the decision to go with no value has it's risks. Especially in light of recent volatility and the performance of value screens like RP4 during the downturn of March and April. We'll go into Value vs. Growth in Part 7.

None of this applies for those investors who are running very small portfolios. (Re: Part 4, "When to Accept Less Diversity") For those investors with low capital or shorter time frames, the important thing is to keep costs at a minimum for each stock you buy. You want every bit of your capital working for you. Not your broker! Be sure to fully fund to 90% of CAGR.

"Look at the backtest results carefully. From one month to the next, or one year to the next, there is enormous variation in returns. There is also enormous variation among the individual stocks in a screen. The narrower your selection, the greater the odds that your returns will deviate from the screen's average. If you buy just one stock, there is a risk that the particular stock will tank. With two stocks the risk is reduced somewhat but it is still too large. Depending on your portfolio size, risk management dictates that you invest in a diversified portfolio. With just a few thousand dollars, you may have no choice but to limit yourself to 5 or so stocks to limit trading costs. As you add to your portfolio, the number of stocks should rise to the 10 to 20 range."

FAQ: "What to do with the extra money?"
It never hurts to pad your screens with a little extra funding. This may be the year that your screens return less than the average. After all, "average" assumes some years will return more, others less. By adding money, you are assured of keeping your cost percentage low no matter what the screen returns.

With 4 screens of 4 stocks, 16, Adam doesn't need to add another screen to gain diversity. Though with $19K to add, if he feels he can handle the extra work of another screen, there's no reason against it. There is one change he should consider IMO, changing his PEG to a quarterly.

"The Risk of Inconsistent Returns"
Take a look at this table prepared by Elan Caspi (TMFElan), included in his MICon handout.
(Which if you haven't read, you should.)

Start PEG 26 Spark Keystone RS 26
10/30/98 92%/ 60%/ 92%/ 184%/
11/06/98 16%/2 65%/2 92%/1 215%/1
11/13/98 37%/2 78%/1 84%/1 178%/1
11/20/98 39%/2 89%/2 87%/1 203%/1
11/27/98 41%/2 84%/1 109%/1 150%/2
12/04/98 41%/2 88%/1 80%/1 151%/2
12/11/98 34%/2 91%/0 117%/1 158%/1
12/18/98 22%/0 80%/1 150%/2 165%/1
12/25/98 85%/1 86%/0 131%/1 137%/2
12/31/98 36%/2 88%/0 134%/1 117%/1
01/08/99 20%/3 69%/0 105%/0 84%/1
01/15/99 105%/4 62%/0 145%/2 96%/1
01/22/99 53%/2 70%/1 136%/1 95%/0
01/29/99 4%/2 42%/1 113%/1 70%/0
02/05/99 248%/3 54%/0 118%/1 126%/1
02/12/99 68%/3 58%/0 130%/0 143%/0
02/19/99 44%/3 42%/1 70%/2 119%/0
02/26/99 56%/2 54%/0 194%/2 74%/1
03/05/99 44%/3 40%/1 138%/1 76%/0
03/12/99 17%/2 47%/1 158%/1 97%/0

Had you started an annual screen on these dates, buying the top 5 stocks, you would have seen these CAGRs, with /# stocks turned over.

Look at the period from January 8th to February 12th for PEG! Why would the difference of one week's start give a nearly 250% difference in annual return? You might expect that from an RS screen because you're playing momentum, but not PEG. Compare that to Spark. Notice the week to week variation is smoother for Spark. Also, notice the turnovers. PEG changes stocks more from week to week than Sparks or Keystone. This no doubt contributes to the large variation in returns.

Admittedly, this is a very short period of time to make assumptions about screen performance. As we get more and more data, we are finding that some of our screens can vary substantially in returns depending on when you start. Why? Best guess, it is in the nature of the final screen criteria and cutoffs. PEG ratio seems to drop stocks only to pick them up again the following weeks. This may lead to a poor performer slipping in.

Several methods have been studied on the MI Board for mitigating this inconsistency. Most spread your purchases across several weeks. One method has you buy the number 1 stock for this week. Next week buy the new Number 1, or if the same, then Number 2. Continue until you have the number of stocks you want.

A second method was purposed by jhindroff in this thread
and he follows up on fund management in this thread

Also some additional reading:
BlissAK brings up the difference 1 week in starting can make
also Dneuman covers this in

I'm a fan of simplicity. This is why I say Adam should consider changing his PEG from a semi annual to a quarterly holding. Shorter holding keeps you from being stuck with a poor set of stocks. It will however add some to your costs. PEG 1-4 Quarterly has a CASM of 43%, and would require $1850 a stock to fund.

So with that change, Adam's screen picks are,
Spark 1-4 Annual
Keystone 1-4 Annual
PEG 1-4 Quarterly
RS26 1-4 Quarterly
With $80K in his IRA, he'll buy each stock with $5000.

Just for fun, I ran these four screens through Gritton's Blend Backtester. It shows a 46% CAGR for January start from 1986-1999. You can see the backtest here
(For January 1986-98:38% CAGR. For May 1986-98: 34% CAGR)

Finding Our Stocks
Brian Finney's Phillysite and Jack Cade's Rankings post (Short and Long) are used by the majority of mechanical investors on these boards for the weekly stock picks. Some of the other screens, such as WER, Movers and some of the SOSs are generated each week by other individuals. The stock rankings are generated with Value Line's Friday morning download. This data is based on Wednesday's closing prices, and will not reflect any sudden drop or sudden increase on Thursday or Friday. Investor's Business Daily download does take into account Thursday's data.

Peter Lapin (monkban) maintains "Monkban's Practical Resources for MI Stock Selection" site, where on Friday after everyone posts their rankings, Peter updates his site with that week's board postings. His site is handy, you don't have to search the board yourself. Bookmark his site

The Official Motley Fool Rankings are also updated on Friday, though not usually until that afternoon or evening. Just not fast enough for many of us who want to rebalance our screens with the ultra freshest data. Which brings up the question.

FAQ:"Do I have to buy on Friday, or can I wait until Monday, or even later?"

The commonly held wisdom here is that it does not matter which day you buy your stocks. Pick a day and buy, but be consistent. If you decide to buy on the first Friday of the month, then do that. Just be consistent. Not the first Friday one month, the first Monday then next.

Jamie Gritton though has done some preliminary backtesting that shows the longer you wait, the less your return will be. Look over this post

Also, we have had questions about how fresh the data we receive from Value Line and Investor's Business Daily. Value Line does not update their RS 52 week rankings but once a month. For RSW screens which use this ranking, the second third and fourth weeks use progressively staler data. This may also be the case for IBD data. We have seen instances where the RS percentile rankings (re:RS99, RS98 etc.) have grown out of wack. There have been weeks where there were no 99 rankings. For these reasons, most of us do our stock buys on the first Friday of the month.

By being consistent with your buys, you are building a habit of confidence in the screens. This will help when you have a down month and lose 20 or 30% of your portfolio. If it is not the day to rebalance, then no matter what your portfolio is doing you don't rebalance.

So Adam has decided to do his buying on the first Friday of each month. His first stop is Monkban's Resource site, to click on Brian Finney's Ranking Summary. Be sure to check the date of the summary. You don't want to make purchases with last week's rankings.

(Note:Most of us, also check Jack Cade's Short Rankings as a way of double checking. There have been a few times when they differ. You might then check the MI Board for reasons. Usually Brian and Jack are on it, and at most you'll need to wait a few hours while they sort the confusion out.)

FAQ: "What if I buy a stock that later turns out to have been on the Rankings by mistake?"
Some people are tempted to just hold that mistake until next rebalance. I am not. You save yourself the $10 or $12 commission on an uncertain product. IMO if you discover you've bought a stock you shouldn't have, sell it and replace it with the one you should have as soon as you can.

FAQ: "What if something comes up, and I can't do my scheduled rebalance?"
If for some reason you can't do your rebalance on the day you plan, do it as soon as possible afterwards. If it is Wednesday or Thursday, you may want to wait for the new rankings on Friday. Then at next rebalance, follow your original plan. One holding period with a few less days, or even one less week, will not mess up your returns. Remember, you are investing, I hope, with a multi-year plan.

Looking at the Phillysite Summary for May 5th, Adam's stocks are,

Spark Keystone PEG 26 RS 26

Notice the overlap of Oracle in both Spark and Keystone?

FAQ: "What do I do when a stock shows up on more than one screen?"
You have two choices when a stock shows up on two or more of your screens.

1)You can buy a double weighing of the stock. In this case, Adam would buy Oracle with $10K. This mimics the returns from the backtesters, which assume your portfolio is evenly divided between all positions. The downside is that Oracle will be 12.5% of Adam's total portfolio, and should it tank, would cause a bigger drop in his portfolio value. As long as no stock exceeds 20%, you will usually be OK to double up.

2)Or you can go deeper in one of the two screens. In this case, Adam could go one deeper in his Spark screen and buy Eneron Corp. (ENE), or from Keystone, Sun Microsystems (SUNW). But how to choose which to substitute?

You can compare charts:
Hmmm, Sun's returned a higher percentage, but looks flat recently. Enron has been climbing well over the last year. But which will do better in the future?

You can compare backtests:
Spark #5 stock returns 27% annually for a January start. Keystone #5 returns 29% annually for a January start. Both returns are so close as to be statistically the same.

You could look at the fields each of your companies are in and pick the stock in another field. Get a little more diversity across the portfolio. Adam has several tech stocks, so a petroleum stock might be a better candidate. It often comes down to a personal choice between two good candidates.

The overlap was between the two annual screens. What if Oracle had been in one of Adam's quarterlies instead?

We call an overlap between screen of the same holding period a "Horizonal" overlap. The same stock picked in two screens of different holding periods is referred to as a "Vertical" overlap. (Not to be confused with the "Overlap" screens like RSO.)

Where Spark and Keystone would have held Oracle for all year, had it shown up in Spark and RS 26, Oracle would have been dropped by RS 26 three months hence. Often times, people will double up in this case.

Usually you will be fine with doubling up on a stock, though we don't recommend tripling up. (A stock on three of your screens.) Ultimately it will come down to a personal decision.

"What! Emotions mixed with MI. I thought the screens would do all the work?" Yeap, it's your portfolio. Lets say that in this situation, Adam decides not to double up, and picks Eneron as his eighth annual stock.

Now for the BIG SCARY PART!

Your First Screen Purchase! Or Introducing the Foolish Buy Calculator.
Bring up a second window, and go here
This nifty tool is the "Foolish Buy Calculator". First thing, read the instructions. Learn how to use this calculator and it will save you tons of time in the future. Take some time and play with it if you want.

To begin, we enter $80000 for start cash, $10 for commission and leave "Shortfall Cushion" at zero and "Expense Limit" at 2%. Then, enter the symbols for the stocks.

In real life you would bring a second window up, and log onto your broker. For now we will assume that the purchase price for each stock, is the closing price for Friday, March 5th. During the day in actual trading, you would enter a market order for the first stock with your broker, in this case Corning Inc. (GLW) for 25 shares. Wait for the confirmation, then entered the price you got the stock at, which in our example comes back with $189.062 a share. This information would be entered in the first line of the Buy Calculator, which would automatically update the amount to buy for the next stock. Proceed with each purchase until the last stock.

(Note: These purchases were done on 5/16, which the Calculator displays today's prices. The buys were entered with 5/5 data, which throws the share amounts off slightly. If you were doing this on the day of your buys, this wouldn't happen.)

We get to the last stock, International Rectifier (IRF) with $4986.47 left. The warning displayed is, "An execution price of $46.55 or higher when buying 'IRF' will cause a shortfall. You may want to buy fewer than 106 shares of 'IRF' for additional safety, especially if trading in an IRA. If you are required to deposit cash to cover the buy, you could exceed your contribution limit."

Since Adam is trading in an IRA, he would want to place a limit order with his broker. Limit Orders are often more expensive than market orders, so remember to include the extra expense. Adam's broker charges $12 for limits, so he places a limit order for 106 shares at $46.50 totaling $4929.50. He is left with a cash balance of $45.47.

(Don't know the difference between market and limit orders? Check this out for more information.

FAQ:"When in the day is the best time to buy?"
It's recommended you not trade at the open. This happens when you place your orders the night before, or over the weekend for Monday purchase. We have seen too many examples of the prices fluctuating widely in the first hour of trading. Common opinion here is to try and make your trades later in the day.

Dan2 disagreed and shows some past data
The thread has some interesting counter points, worth the read.

FAQ:"Should I place Market or Limit Orders?"
Probably one of the best posts on the pros and cons of both market and limit orders was posted by Ganymede here,
You might also consider a recent news report on SEC findings of noncompliance by broker's over failing to post limit orders in a timely manner.

And if we haven't scared you enough about the problems with limit orders and trading at the open,
"I've got something better for you, and for anyone concerned about their trade prices. When you get to the page, click on "Commentary" for the article "Trading Online: It's A Jungle Out There".

Ever heard of the term MOO? It was the first time I read about it. Among market makers it stands for Market Order On Open, and it's the sound of cattle being led to slaughter. ;-)


Portfolio Tracking
Confession time. When I first started investing, I kept track of my trades on a clipboard hanging behind my computer. And figured up the number of shares I needed to buy with a hand calculator. Now I'm a little more advanced.

Most brokers have decent software on their site for tracking the performance of your stocks. Some though only track the stocks you have with them. What if you have two brokers? The Internet has given investors some wonderful sites for tracing your portfolio. MSN Investor has high marks with some people. Also Quicken, which has the advantage of being based on your computer. Quicken allows you to import your portfolio performance to tax software, an advantage at tax time. However you do it, you'll need to track the performance of your portfolio.

Many people set up Excel spreadsheets. TMF has a message board, if you should need help with Excel.

You can also take a look at this thread on the Workshop board for some more tracking suggestions.

In addition to my broker's system, I also use the Motley Fool's Portfolio Tracker. While it will not keep track of closed out positions (a flaw I wish they would correct), it does let me check my stocks when first logging onto TMF, as well as providing me with a link to each stock's message board. I find it helpful to read what other fools are saying about the companies I hold.

I'm going to use TMF's Portfolio Tracker as a default in the further explanations for Adam's portfolio. If you've not used TMF's Tracker, begin here,
read through the introduction.

Give your new portfolio a name, then enter the ticker symbols for each of the stocks separated by a space. Then click, "I Want to Tell You More". You'll go to a screen where you'll need to enter each stock's quantity, purchase price and commission. Enter these for each of your stock. Once you're done, hit "Submit". And then since we have no additional info, click "I'm Done Editing".

Adam's MI portfolio looks like this:

Spark # shares cost/share cost
Cisco Systems (CSCO) 74 $67.885 $5023.50
Nokia Corp ADS (NOK) 88 $57.114 $5026.00
EMC Corp (EMC) 36 $138.278 $4978.00
Enron Corp (ENE) 67 $74.399 $4984.75
Oracle Corp (ORCL) 65 $76.966 $5002.78
Corning Inc (GLW) 26 $189.447 $5083.00
JDS Uniphase (JDSU) 53 $94.001 $4982.04
Applied Material (AMAT) 49 $102.079 $5001.88
PEG 26
Vishay Intertech (VSH) 62 $81.411 $5047.50
Intl Rectifier (IRF) 106 $46.613 $4941.00
AVX Corp (AVX) 51 $97.446 $4969.75
Teradyne Inc (TER) 46 $108.842 $5006.75
RS 26
Newport Corp (NEWP) 39 $129.256 $5041.00
Adv Micro Dev (AMD) 54 $92.185 $4978.00
BEA Systems (BEAS) 102 $49.023 $5001.57
Lab Corp Amer HLDG (LH) 80 $63.055 $5044.40
Costs include commissions

So Adam is now the proud owner of $80,000 worth of stock. Pretty simple!

Next up, "Holding the Screen and Rebalancing".
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