|
Our approach is simple and straightforward. We invest in stocks, which demonstrate growing earnings power. Earnings drive valuations. Earnings in turn are affected by various systemic factors like economic cycle and the interest rate environment, and non-systemic company-specific factors like new markets, new products, new management, etc. Although the approach is simple to declare, the successful implementation of the approach requires a rigorous methodology to screen and select stocks for investment. Maximizing Returns and Minimizing Losses are two important constructs of our approach.
Market conditions are uncertain and that is why investing is a very careful and deliberate exercise. Our stock models use computer scans on thousands of stocks and adaptive algorithms to create a portfolio of stocks that represent some of the best investments for that particular investment style. These mathematical models continue to adapt to market uncertainties in order to manage risk. Nonetheless, no system can identify all kinds of risks with complete certainty. That is the reason we have built a layered investment approach. Our mathematical models and algorithms guide us to the stocks with strong earnings and appreciation potential. Our various risk management layers include a series of market indicators that determine our entry or exit in the broader market. Even stocks with good earnings momentum get bogged down in adverse broader stock market conditions. Additionally, we use portfolio diversification in our approach to limit company-specific or unsystematic risk. We limit the amount we invest in any single stock. As a final risk management defense, we use the computer generated stop-loss triggers to liquidate our positions. This limits our risk exposure against unforeseen risk of company events such as lower earnings guidance, merger news or a secondary stock offering, etc., which may create significant selling pressure on the stock.
Investing requires an unemotional approach. Emotions have no place in financial markets. At the same time, market excesses are driven by emotions. This piece of obvious knowledge has been so well stated, repeated and rehearsed by investors for generations. But it continues to be the most difficult part of investing. Money and emotions are hard to avoid. They become one or merge during investing. However, they both don’t mix well for long. Emotions can force us to make imprudent and irrational decisions, which are glaringly evident in hindsight. Our emotions muddle our ability to identify the beginning and end of market trends, a task that is already very hard to perform. One of the reasons to select professional money managers is to diminish this emotional bias. You will note that our entire investment approach is rooted in mathematical models and algorithms. A lot of human intelligence and time has gone into creating these models and building the portfolios. Once the portfolio is generated, we minimize further human intervention and manage the portfolio strictly by our Sell rules. Managing downside risk is just as critical as discovering stocks with superior appreciation potential.*
|
Using the Model Portfolios |
Each newsletter provides you with a Model Portfolio, and the Top 40 Ranking of stocks from our database. The beginning value of the model portfolio is $100,000. The investment approach though is equally and proportionately applicable to portfolios bigger or smaller than $100,000. For a portfolio size of $100,000, we believe much of the diversification benefit is achieved with up to 10 stocks. Investors can have a smaller or larger size portfolio and invest in the same proportion as our model portfolio.** Investors should strive to own our entire model portfolio. We invest approximately 10% of our total portfolio in a single stock. Stocks can grow to be a bigger part of our portfolio. But our initial invested capital in each holding will be approximately 10%.
As we have mentioned in our Philosophy, we take great pains to ensure that we limit our downside. Capital preservation is of paramount importance. If we can manage the downside risk, the upside usually takes care of itself. We believe our discipline in keeping our losses limited while giving room to stocks that are delivering returns, has allowed us to exceed our return objective. We invest in a portfolio of up to 10 stocks. We have strict stop-loss levels that typically close the positions for a maximum loss of up to 10% of the investment position. Since each position is approximately 10% of our total portfolio, the maximum risk or drawdown that we wish to assume for each position in the portfolio is 1% (10% loss of a 10% portfolio position). We do recognize that earnings misses or management changes or some unexpected bad news may cause a loss higher than 10%. We reflect such losses in our performance calculation, although so far we have not had many such instances. Our strict stop-loss discipline contributes to relatively higher transaction count, but has been instrumental in avoiding steep losses.
Each stock investment has a Stop-loss trigger associated with it, which must be strictly observed. It is important to strictly follow these Stop-loss selling rules. The Stop-loss triggers are created based on market conditions and natural price support lines, and typically allows a stock enough room to build on its gains. As mentioned earlier, we usually try to limit our losses to up to 10% of our investment. At times we will encounter situations where the stop-loss triggers are breached during the day resulting in a closing of our position, and then only to see the stock move back higher by end of the day. Don't be disheartened. Those are unfortunate and disappointing situations. But over the long-term, we have observed that these stop-loss triggers serve us extremely well. We may rotate back into the same stock, if it continues to show strength, or purchase other promising stocks. But please don't let your emotions and hope compromise the stop-loss triggers. Subscribers are recommended to insert the stop-loss triggers at the time of initiating position at the beginning of the week, thus avoiding constant monitoring of the investment.
If you are a new subscriber, you will notice that the existing recommendations may already be above the recommended price. These recommendations continue to be in our portfolio even after gains as we believe they can appreciate further. As a new investor, you can purchase all the securities to start your portfolio. You may also consider waiting for a pull-back in these securities as long as they continue to be part of the recommended portfolio. However, these stocks may continue to move higher. You can also choose to take an incremental approach and purchase our new recommendations as they are added to the Portfolio. This approach will take some time to acquire the full portfolio, and you may expose yourself to risk of portfolio concentration in a few stocks. Another approach is to purchase a minimum of 3 securities to form a portfolio, and thereafter continue to add based on new recommedations and pull-back in existing ones. At times, prices of stocks that we recommend open higher or lower on the first trading day of the recommendation. Typically, such increase or decrease offset each other in the context of the entire portfolio. But as long as the prices open within 5% +/- of our Buy Price, investors can consider buying such recommendations. Whatever approach you may take, the stop-loss triggers must be maintained.
Our model portfolios liquidate all positions at the end of the year, and begin the new year once again with the beginning value of $100,000. This is done to encourage subscribers to participate in investing. A model portfolio that has already grown to $1 million will be intimidating to new users. That's why we start every year all over again.
We do not use margin or leverage in our portfolio. All our investments are cash investments. Investors may use leverage based on their own personal situation. Our model portfolios primarily hold Long positions only. If market conditions warrant, we may hold some ETFs which appreciate on market declines. But we typically do not Short individual stocks in our model portfolios. We may purchase Puts occassionally to only hedge our gains and protect from downside. We do not purchase Options for speculation in our model portfolios.
The Top 40 Ranking is offered as a bonus with each issue to provide you with an idea for stocks that are ranking high based on our methodology. You may choose to pick stocks from the Top 40 holdings or from our Model Portfolio. However, we do not offer any stop-loss trigger prices for these Top 40 stocks. Furthermore, our Model Portfolio is constructed from a larger subset of stocks, and there may be holdings in the portfolio that are not part of the Top 40 list.
As we have mentioned in our Philosophy section, by continuing to invest in stocks with strong earnings potential, while diligently limiting losses, will provide investment results that will significantly surpass the performance of the market indexes. Thus far, this methodology has worked for us successfully.
* Please note that while we limit risk in our portfolios, the nature of the model portfolio may carry inherent risk that may be unsuitable for investors. For e.g., the aggressive growth portfolio has a high risk/reward proposition, and the degree of risk that is still inherent even after our risk management approach may be unsuitable for you.
** There are some diversification risk issues that investors will have to be aware of for a smaller or larger sized portfolio than our $100,000 model portfolio. It may not be optimal to invest in 10 stocks for a much smaller portfolio. At the same time, it may require investment in more than 10 stocks to achieve most of the diversification benefit for a much larger sized portfolio or $350,000 and above.
|
LOGIN
Aggressive Growth Newsletter