Portfolio Management

1. THE PORTFOLIO
By Charlie Cameron, Western Wisconsin Investor’s Club

2. BIG PICTURE
We 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.

3. 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

4. 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

5. MANAGING RISK & RETURNS WITH DIVERSIFICATION AND TIMING
Sector
Size
Location
Timing
Reducing Risk
&
Maxing Returns

6. MANAGING RISK & RETURNS – DIVERSIFY COMPANY LOCATIONS
Sector
Size
Location
Timing
Reducing Risk
&
Maxing Returns

7. 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

8. MANAGING RISK & RETURNS – DIVERSIFY BUSINESS SECTORS
Sector
Size
Location
Timing
Reducing Risk
&
Maxing Returns

9. 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 Sector
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Materials
Technology
Telecommunications
Utilities
Sector

10. CLUB’S PORTFOLIO - SECTOR ALLOCATION
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Materials
Technology
Telecommunications
Utilities
• Industrials and Consumer Defensive are overweight. With the sale of ISRG (12.2%), healthcare is now 4.8%
Sector

11. MANAGING RISK & RETURNS – DIVERSIFY COMPANY SIZES
Sector
Size
Location
Timing
Reducing Risk
&
Maxing Returns

12. 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

13. CLUB’S PORTFOLIO – COMPANY SIZE ALLOCATION
• Very few small
companies are
represented in the
Clubs portfolio, this
could hurt long term
returns.
Size

14. MANAGING RISK & RETURNS –TIMING
Sector
Size
Location
Timing
Reducing Risk
&
Maxing Returns

15. 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

16. MACRO PICTURE - TIMING THE MARKET
 Growth Stocks (left) versus Cyclical Stocks (right)
Timing

17. 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

18. IMPROVING AN EXISTING PORTFOLIO?
Sector
Size
Location
Timing
Reducing
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