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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Uncle Frank who wrote (47120)	9/25/2001 8:20:13 PM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 54805

hi Uncle Frank, would you agree that examining product adoption and resistance to substitution is the logical initial screen for identifying investing targets? Then the second screen might well be related to current valuation, and the third screen, a forecast of marco economic conditions. for me personally, it's not the logical starting place. why? because i am working from the bottom up. that is, first set allocation to risk-free assets, then with remainder of assets, divide among various asset classes in index funds. these ten classes are: 1. US large growth 2. US large value 3. US small growth 4. US small value 5. REITs 6. Intl large growth 7. Intl large value 8. Intl small growth 9. Intl small value 10.Emerging markets all of the above are available in high-quality indexes, and i think you would agree it gives exposure to a pretty good range of equities. the aim here is not to find the next Cisco and turn $10,000 into $1.2 million or whatever as is described on the dust jacket of at least one version of TFM. it is rather to have a portfolio with decent prospective returns on a risk-weighted basis ex ante. so in my approach, the kind of screen you are talking about would not be a help because i am buying asset classes instead of particular companies. this is also why i harp alot about the prospective returns for different asset classes, as detailed in a number of the links i provided. now, indexing is not for everyone. some people prefer to own equities directly, and other people are trying to get rich quick. indexing is probably not a good way to get rich quick (but with proper diversification, is hopefully not going to make me poor quick either, which is my greater concern). so, for somebody owning equities directly, how good, going forward, is the GG approach likely to be? my answer would be, it all comes down to how large-cap growth stocks do over the next X years. this is especially true for somebody who owns only gorilla-type stocks. my guess is, if you pick 10 gorilla-type stocks today, their performance over the next 10 years will be very close to the performance of US large growth as a whole (e.g., S&P 500/Barra Growth barra.com. so one approach is to closely follow a bunch of stocks and find the ten best-looking candidates and buy them, keep close track of them, and switch when necessary, or one could simply buy a growth index of, say, the third of S&P500 cos with lowest book-to-market and invest the "dummy" way. i would venture to guess the returns would be similar over a ten-year (just a guess!). the point of this little exercise is i believe what a 100% GG portfolio (diversified among ten or fifteen cos) is is not so much a bet on the particular cos, but a bet on the asset class in question (US large growth). so then the issue becomes, does it make sense to bet on the asset class? and if you're interested in that question, i can recommend a load of books! actually, if the economy REALLY tanks, large growth may turn out to be a decent category, relatively speaking. although i spent the first half of this year in value stocks (getting out to cash in july by dumb luck, my favorite kind :), and was somewhat prejudiced against growth at that time (because it is not growing--just expensive), looking back at history, there have been times where value just got destroyed. one of those times was in the Great Depression. during this period, weak companies died by the truckful, while the "better" and more expensive cos ("growth" or low BtM), held up better. of course, that didn't mean stocks with a 75 PE returned 25% a year for ten years. probably more like a stock with a 20 PE returned 5% a year (that was great back then!). on the other hand, growth got destroyed in the 73-74 bear market (that was when the nifty fifties died), while small value did swimmingly. so it's very hard to call what asset class will do best in the trying times ahead, and i would rather own them all. i will try to post some other info, but it looks like my computer's about to crash...

To: Uncle Frank who wrote (47120)	9/25/2001 9:14:20 PM
From: Wyätt Gwyön	Respond to of 54805

hi Uncle Frank, i wanted to add one other thing about the issue of screening. it is said w/r/t value investing, but it is an intriguing insight which may also have some interesting applicability to growth investing in the context of active vs. index (passive) investing. dfafunds.com Active managers have not identified or delivered true value strategies... This isn't surprising. An active manager's primary directive, hardwired into his psyche, is to pick winners. Value investing is about investing in earnings-distressed companies. Picking the big potential earners from the value stock universe is similar to picking the almost-large small cap stocks. It dilutes the effect. The poorest earners have the highest costs-of-capital and therefore the highest expected returns. A portfolio of value stocks with bright prospects is a growth-biased portfolio. Active managers have the additional disadvantage of being able to buy whatever they want. They aren't forced by a strict, disciplined charter to stay within a certain size range or certain levels of distress. They have more personal accountability because of this freedom. They have to explain the ugly stocks in their value strategies. Some of these stocks are hard to look in the eye, and harder to justify to an investment committee long steeped in the notion that big earners get higher returns.