We believe that, with the availability of online financial data, equity portfolios can be structured and managed, using a range of S&P 500 listed stocks, to successfully compete with the performance of unmanaged market indices. We acknowledge, however, that only a small percentage of funds and other investment portfolios consistently achieves such a positive result.

We believe the following strategies could be employed with available financial data services, current levels of commissions, and without potential income tax considerations.

Eliminate holdings of stocks whose prices underperform the market index, for more than a relatively short period. Relative to the index, an underperformance for 2 or 3 months should be sufficient reason for significant position reduction, and elimination if the underperformance persists.

Stocks which have a higher Compound Annual Growth Rate (CAGR) of EPS, lower P/E and are outperforming the index, should be bought, as well as stocks that are already owned and have the same characteristics.

Limiting the percentage of the portfolio holdings that have a P/E which is greater than that of the index. The amount invested in the holdings at a lower P/E than the index can be used as an offset against the positions which have a higher P/E than the index.

On a monthly basis, the portfolio manager can review the relative data for the index and positions. Additional time can be invested in researching relevant investment opportunities, depending on the objectives of the investor about doing more than outperforming the index.

This investment concept aims to apply portfolio management discipline, consistent with the investor’s objective of outperforming a particular index. It is not suggested as an approach for eliminating the possibility of loss or achieving maximum gain. It is simply an approach which is believed likely to produce a better investment result than what might be achieved by investing in an index-tracking ETF. The services of a professional investment advisor and income tax authority are also recommended, since we are neither.

 

Arthur Lipper, Chairman                          arthurlipper@gmail.com
British Far East Holdings Ltd.