Tracking Your Portfolio
by Al Levit
Glendale, CA (July 15, 1998) -- Since today is Wednesday, it's time to look back on recent contributions to the Cash-King Companies and Cash-King Strategy message boards for a question or two that deserves a more public answer.
Before I get to the question, though, I'd like to mention that any of you today who haven't recently visited our message boards on the Fool's website really should. The Fool Techies did a phenomenal job on the upgrade -- with new functionality, like the ability to read a profile and interview with today's questioner: Tatyana, as well as an opportunity to go directly to her post and read the other responses to it: Message 3917.
Without further ado, then, let's get to Tatyana's message, which she entitles, A Newbie Question:
"Howdy, I'm a newbie just out of college looking to start investing money from my first job, and I have a couple of questions I'm hoping you nice people will help me with.
"I've been looking over financial information for several companies. I just finished reading The Motley Fool Investment Guide, and the techniques for evaluating stocks are for small-cap stocks. Now, to start out, I'm looking at companies I'm familiar with, but most of those are large/mid-cap stocks. I've been reading the Cash-King methodology online, and I noticed a lot of the larger stocks in it. It looks like the Cash-King criteria are the ones I should be using for the bigger stocks as opposed to what's in The Motley Fool Investment Guide. Is this right?
"My other question is about comparing your portfolio to the S&P 500. I haven't really seen a good explanation as to how to go about doing that. Do you just record the S&P 500 level on the day you start your portfolio, and then check it again however often you want to? Or is it more complicated?"
Tatyana has asked several great questions.
First of all, you're correct in your feeling that the Cash-King criteria, which are laid out in our 11 Steps to Cash-King Investing (especially Steps 6 and 7) and linked at the right of this column are more appropriate for large-capitalization stocks than the eight steps shown in the The Motley Fool Investment Guide (MFIG).
When you're looking at small stocks (which we think you'll only want to add after getting a Fool-4 and Cash-King base), you'll want to focus on a company's growth in new customers, in the acceleration of sales growth, careful product and cash-flow management, and at the youthfulness and commitment of the management team. When looking at large-caps in the Cash-King model, you'll still want to look for excellent cash-flow management, and also ascending gross and net margins, an increase in cash relative to long-term debt, and we think you'll want to look for non-cyclical name-brand consumer companies -- companies with millions or billions of potential buyers.
As for your second question, you're right again -- you should just type in the price of the S&P 500 on the day you begin your investments. If you have $4,000 to invest, you'll want to track its total gain relative to that of the S&P 500 which, for example, is sitting at 1177.59 today. If your portfolio's investment gains broaden it to $4,300 a year from now, you'll have gained 7.5%. You'll then be hoping that the S&P 500 gained no more than 88 points, to 1265.90. That'd be a 7.5% gain. And you want to beat the market!
Now, here in the Cash-King Portfolio, we've got to be very careful going forward when we compare our performance with the S&P 500 and the indices. That's because we're going to be adding savings money to our portfolio starting next month. That makes things a bit more complex.
We want to make sure that our performance reflects our market gains, and not the increase in portfolio value owing to an additional infusion of cash. Now that the world has been alerted to accounting problems (cf. Beardstown Ladies, Cendant, Crazy Eddie's, et al.), we have plenty of reminders of the importance of accurately reflecting the growth in value. Fortunately for us, the Drip Portfolio is already using a method that deals with the problem of additional investment in a portfolio. We'll be switching to this method come August 3rd, when we add $2,000 in savings to the Cash-King Portfolio.
In brief, this "share method" structures the portfolio almost as a fund, with individual shares. This is the best way to reflect the real gain, or the real investment returns in the portfolio. Here's how it works:
1. February 3, 1998 marks the day the C-K Portfolio was launched. To reflect this, we retroactively assign an arbitrary number of shares to the Cash-King Portfolio. For example, we'll use 100 as the initial share amount.
2. A single share of the Cash-King Portfolio is then equal to 1/100th of the market value of the whole portfolio, up until we add that new $2,000 in savings.
3. Whenever new money is added to the overall portfolio, we'll add shares to the total. Conversely, if any money is removed from the portfolio, we'll subtract shares from the total.
4. As of July 10, 1998, the Cash-King Portfolio's market value was $23,797. At this point, we still have 100 shares to the C-K Port. We haven't yet added any money, and none has been removed.
So, please note that with 100 shares, the share value at this point is ($23,797 / 100) = $237.97 per share. The performance of the C-K fund can be measured as ($237.97/ $200.00) = 18.99%, which is exactly equal to the statement of returns in our numbers as of July, 10.
5. Assume, for purposes of illustration, that an additional $2,000 had been used to buy a new stock for the Cash-King Portfolio on Monday, July 12.
6. Since the share value is $237.97, that means that another 8.40442 "shares" would be purchased. $2,000 divided by $237.97 equals 8.40442 shares. These would be added to our 100 shares.
7. After the addition of the money, the portfolio value is $25,797. But $2,000 of that is just new money and does not reflect investment returns. So, at that time, the share value would be calculated as $25,797 divided by 108.40442, equaling $23,797. The performance, as measured by the share method, then would remain at (237.97 / 200.00), or 18.99%.
Thus, we'd add $2,000, but it wouldn't be reflected in the real investment returns of the portfolio. I know there were a lot of numbers there, but I hope the principle of it was clear.
Now, chances are that, on occasion in one of our write-ups, we'll state the total gain of our portfolio -- including investment returns and cash infusions -- to emphasize the great importance of methodically saving a bit of money and adding it to an investment account. But we will never state our real investment returns without deducting out the new cash, via the "share method."
That's all for today, except to say thanks to Tatyana for an important question. I'll be back tomorrow when I'll begin a two-part look at how to manage an ongoing Cash-King Portfolio. Until then...
Day Month Year History C-K +0.67% 6.24% 21.16% 21.16% S&P: -0.24% 3.61% 17.33% 17.33% NASDAQ: +1.33% 5.27% 20.67% 20.67% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 117.38 49.96% 2/3/98 22 Pfizer 82.30 116.00 40.95% 5/1/98 37 Gap Inc. 51.09 65.00 27.23% 2/27/98 27 Coca-Cola 69.11 87.81 27.07% 2/6/98 56 T. Rowe Pr 33.67 42.25 25.47% 6/23/98 23 Cisco Syst 86.35 95.50 10.60% 5/26/98 18 American E 104.07 114.56 10.09% 2/13/98 22 Intel 84.67 84.31 -0.43% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 82.50 30.65% 3/12/98 20 Exxon 64.34 71.63 11.33% 3/12/98 15 Chevron 83.34 82.94 -0.49% 3/12/98 17 General Mo 72.41 69.81 -3.58% Cash-King Stocks Rec'd # Security In At Value Change 5/26/98 18 American E 1873.20 2062.13 $188.93 2/3/98 24 Microsoft 1878.45 2817.00 $938.55 2/3/98 22 Pfizer 1810.58 2552.00 $741.42 5/1/98 37 Gap Inc. 1890.33 2405.00 $514.67 2/27/98 27 Coca-Cola 1865.89 2370.94 $505.05 2/6/98 56 T. Rowe Pr 1885.70 2366.00 $480.30 6/23/98 23 Cisco Syst 1985.95 2196.50 $210.55 2/13/98 22 Intel 1862.83 1854.88 -$7.95 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 15 Chevron 1250.14 1244.06 -$6.08 3/12/98 20 Eastman Ko 1262.95 1650.00 $387.05 3/12/98 20 Exxon 1286.70 1432.50 $145.80 3/12/98 17 General Mo 1230.89 1186.81 -$44.08 CASH $94.76 TOTAL $24232.57 *The year for the S&P and Nasdaq will be as of 02/03/98