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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
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
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