Workshop Portfolio

<FOOLISH WORKSHOP>

The Golden Rules?      

By Ethan Haskel (TMF Cormend) (Cormend)

[Editor's Note: Jim Stevens is on vacation this week. In his place we present a reprint from former Workshop writer-since-moved-to-the-Foolish-Four Ethan Haskel. It originally ran on November 4, 1998.]

BALTIMORE, MD (August 12, 1999) -- Some time ago, we discussed the importance of finding an optimal database from which to select stocks for a proposed screening strategy. Let's call such a potential new strategy the "Beating Everything Super Trust," or BEST for short. How do we choose those few golden nugget stocks for our BEST Portfolio out of a database that may contain hundreds or even thousands of companies?

We obviously need some rules. But what kind of rules work best? I've listed below six guidelines for writing the rules for any screening model. What follows might be considered the "rules for the rules."

1. The rules should be specific and objective. Give 10 people the rule book, and each should be able to come up with the same list of stocks. No hunches are allowed. No ambiguities are tolerated.

2. The rules should use relative rather than absolute criteria. For instance, let's examine a rule that states: "First, choose all companies from the database that have a market capitalization over 25 billion dollars." The "25 billion dollars" figure represents an absolute number. Such a rule might work this year, next year, and even five years from now. But what about 15 years hence, when half the stocks in the S&P 500 Index might have such a market value? Similarly, a rule that states: "Choose all stocks with dividend yields over 3%" might be useful today but much less so when interest rates are 10% and the average stock yields 6%.

A much better rule for choosing large company stocks for our BEST Portfolio might be: "First, choose the 100 largest companies from the database." The stocks chosen using values relative to other stocks hold up well for all time points in all market conditions. Whether it's 20 years ago or 20 years from now, you'll still have the stocks you want, without needing to change the rules midstream.

3. The simpler the rules, the better. Uncomplicated guidelines are easier to work with and inherently less prone to errors or manipulations. The medieval monk William of Ockham said it best about 700 years ago: non sunt multiplicanda entia practer necessitatem, or entities are not to be multiplied beyond necessity.

4. The rules should be based on sound investment principles. Without such a foundation, the possibility for data-mining errors increases dramatically. Data-mining traps are set when large numbers of variables are analyzed and applied nonsensically to obtain the best fit for a hypothesis. For instance, check out the essay "Cheating the Dow," in which I showed that certain Dow stocks that ended the year with a particular fraction in the closing price perform phenomenally. Obviously, the conclusion is spurious. Claims based on questionable assumptions should be regarded even more skeptically than usual.

Time-tested stock formulas often best form the basis for excellent screening rules. Such formulas may include relative strength for growth stocks, or the price to sales ratio (or dividend yield) for value stocks. Often, combining proven stock characteristics in novel combinations leads to fruitful new approaches.

5. The rules should select an appropriate number of stocks. This rule is self-explanatory. For instance, many of James O'Shaughnessy's screens are not appropriate for individual investors. They choose 50-stock portfolios, which are better suited for fund managers than individuals.

6. The rules should select portfolios that can be backtested. Without the ability to do backtesting, the usefulness of any screening strategy is diminished greatly. Old databases should be available that allow you to choose the stocks as if you actually had been investing at that time.

There likely are a number of other appropriate guidelines that I've overlooked. If you've got some others, let's discuss them on the message boards. Who knows, maybe you too can come up with your very own BEST Portfolio strategy!


New Rankings | Workshop Returns


Workshop Portfolio


9/28/01 as of ~5:30:00 PM EDT

Ticker Company Price
Change
Daily Price
% Change
Price
AETAETNA INC NEW0.943.36%28.94
BABOEING CO(1.04)(3.02%)33.36
CATCATERPILLAR INC1.112.53%44.91
COGCABOT OIL & GAS 'A'0.693.59%19.90
DDDU PONT (EI) DE NEMOURS0.992.74%37.14
DGXQUEST DIAGNOSTICS(0.45)(0.73%)61.42
EKEASTMAN KODAK0.421.31%32.49
GMGENERAL MOTORS1.393.38%42.55
LHLABORATORY CORP AMER HLDG(NEW)1.141.42%81.21
MOPHILIP MORRIS COS(0.76)(1.55%)48.24
NEWPNEWPORT CORP0.261.90%13.97
NVRNVR INC(0.54)(0.38%)140.41
PKXPOHANG IRON & STEEL ADS1.097.51%15.61
PVNPROVIDIAN FINANCIAL1.075.64%20.04
QCOMQUALCOMM INC(0.40)(0.84%)47.16
RJRRJ REYNOLDS TOBACCO HLDGS(0.69)(1.19%)57.31
SLESARA LEE CORPUnchg.Unchg.21.09
UNFIUNITED NATURAL FOODS0.563.18%18.15
WMIWASTE MANAGEMENT(0.01)(0.04%)26.74

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(12/24/1998)
Workshop1.30%7.32%(12.02%)(20.66%)(18.91%)
Comparable S&P 500n/an/an/an/a(19.07%)
S&P 500 (DA)1.95%7.48%(8.33%)(21.22%)(14.88%)
NASDAQ2.02%4.71%(17.46%)(39.68%)(31.41%)
DJIA (DA)1.68%7.07%(11.07%)(17.86%)(2.22%)

Internal Rate of Return -- Annualized Rate of % Gained (Lost)
  Since Inception (12/24/1998)
Workshop(17.62%)
vs. S&P 500(17.63%)

Trade Date # Shares Ticker Cost/Share Price Total % Ret
1/8/0126MO40.9448.2417.82%
1/8/0122RJR50.1057.3114.39%
1/8/0167UNFI16.4518.1510.34%
12/24/9824CAT43.0844.914.24%
1/8/018NVR136.63140.412.77%
1/8/0140WMI27.4426.74(2.54%)
1/8/0150SLE22.5421.09(6.42%)
1/8/0161PKX17.8315.61(12.46%)
1/8/0115DD48.8337.14(23.95%)
1/8/0129AET38.1728.94(24.19%)
1/8/0139COG28.7519.90(30.79%)
1/8/0114QCOM75.5447.16(37.57%)
1/8/018LH134.6981.21(39.70%)
12/27/9918GM73.2642.55(41.92%)
1/8/0118BA59.5333.36(43.96%)
1/8/019DGX114.4961.42(46.35%)
12/27/9920EK65.0932.49(50.08%)
1/8/0120PVN55.5020.04(63.89%)
1/8/0115NEWP74.9613.97(81.36%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
1/8/0126MO$1,064.50$1,254.24$189.74
1/8/0122RJR$1,102.25$1,260.82$158.57
1/8/0167UNFI$1,102.12$1,216.05$113.93
12/24/9824CAT$1,034.00$1,077.84$43.84
1/8/018NVR$1,093.00$1,123.28$30.28
1/8/0140WMI$1,097.50$1,069.60($27.90)
1/8/0150SLE$1,126.88$1,054.50($72.38)
1/8/0161PKX$1,087.75$952.21($135.54)
1/8/0115DD$732.50$557.10($175.40)
1/8/0129AET$1,107.00$839.26($267.74)
1/8/0139COG$1,121.37$776.10($345.28)
1/8/0114QCOM$1,057.62$660.24($397.39)
1/8/018LH$1,077.50$649.68($427.82)
1/8/0118BA$1,071.50$600.48($471.02)
1/8/019DGX$1,030.44$552.78($477.66)
12/27/9918GM$1,318.62$765.90($552.73)
12/27/9920EK$1,301.75$649.80($651.95)
1/8/0120PVN$1,110.00$400.80($709.20)
1/8/0115NEWP$1,124.37$209.55($914.83)
 
Cash: 
Total: 
$10.80
$15,681.03
 

Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.
• DJIA (DA) = dividend adjusted. Dividends have been added to the total return of the DJIA.

Note
Note: The Workshop Portfolio was launched on December 24, 1998, with $4,000 which was invested in the Foolish Four strategy. Approximately $15,000 was added on January 8, 2001, to support five additional mechanical strategies. At that time approximately $1000 was transfered out of the Foolish Four strategy to bring the Foolish Four into balance with the other strategies. (That's why the Foolish Four's overall return is not consistent with stock values.) Such rebalancing will take place each year among the strategies so that each will start out with approximately the same value at the begining of the year. No more cash additions are planned. The first four tables above show the overall performance of the portfolio. Below that we also track the performance of each component strategy. All transactions are announced publicly before being made, and returns are compared daily to the S&P 500 and the Dow. (Dividends are included in the yearly, historic and annualized returns.) Stocks are chosen using strategies developed by the Workshop community.