I believe, but cannot prove, that to approximate the performance of the Model Shadow Stock Portfolio it is important to own the better-performing (hence, probably the larger-market-cap) stocks. The primary reason for this is that they are likely to be a larger percentage of the model portfolio, having been in the portfolio for a while and having performed well. If all you own are the newcomers to the portfolio, I think you will underperform. When I have some time, I will try to see if the actual numbers bear this out. It seems intuitively likely. I do not believe AAII publishes the exact position sizes of the stocks in the model portfolio. I wish they did.
—RickB via Web Inquiry
CI Editor’s Response:
The answer is both yes and no. There is no doubt that to achieve the results of the Model Shadow Stock Portfolio, the better-returning stocks must be held. But that can be said for any portfolio. In essence, that is the point of a portfolio—to invest in enough stocks with strong fundamentals so you can ride the winners that you choose. However, these larger-cap stocks were once “new” additions that were small positions. The portfolio should have every chance to do well if you are buying the newly added stocks. That said, there are also going to be losers in our model portfolio. However, the portfolio is not dominated by large-cap stocks. In fact, there are no large-, medium- or even small-cap stocks in the entire portfolio. When a stock reaches a market capitalization of $600 million, it is sold. No questions asked. The proceeds are then put into several other micro-cap stocks. The portfolio has been in existence since 1993; naturally, there are some positions that are larger than others. These larger positions will have a greater effect on the performance of the portfolio in good times and bad.
The individual positions that AAII holds in the Model Shadow Stock Portfolio are actually of little consequence. Equal proceeds are used to purchase all stocks so that no single stock will cause a significant spike or drop in the overall portfolio. We are not holding massive chunks in a few stocks. Micro caps are risky, and we are trying to reduce the overall portfolio risk by holding a well-diversified micro-cap portfolio. Our largest holding is only about 2.5 times the size of the average portfolio holding.
Is there a downloadable copy of the DuPont three-step and five-step ROE spreadsheet available? If so, could you provide a link to where I could get this so I do not have to reconstruct the spreadsheet from scratch myself? Thanks for your help and assistance.
—Kevin via Web Inquiry
CI Editor’s Response:
In the First Quarter 2012 issue of Computerized Investing, Wayne A. Thorp, CFA, wrote “Deconstructing ROE: DuPont Analysis” for the Spreadsheet Corner. The article can be found online at: www.aaii.com/computerized-investing/article/deconstructing-roe-dupont-analysis. We have provided a link within the online article (in Figure 1) to the spreadsheet. The spreadsheet contains the three- and five-step DuPont models and the formulas are already written. Simply change the numbers and each part of the DuPont analysis formula will be calculated as well as the ROE.
What are some of the best resources to obtain a company’s past one-, three-, five- and 10-year financial statements?
—Kaiserman via Web Inquiry
CI Editor’s Response:
We have a great article on where to find past financial statements at www.aaii.com/computerized-investing/article/company-financials. This article lists sources for the actual SEC filings. The major financial sites such as Reuters, Morningstar.com and SmartMoney.com will also provide financial statements, but these are not directly from the company. Most of these websites provide select financial statement information going back a number of years. You should be able to find what you are looking for using one of these sites.
Do you have a suggestion for a beginner learning about options? What I have seen is a bit overwhelming to say the least.
—brucemcd1 via Web Inquiry
CI Editor’s Response:
Options can be a big part of an intermediate or advanced investor’s portfolio. Unfortunately, it is not an area that AAII covers extensively. A quick AAII website search for “options” shows that the AAII Journal discussed covered calls in the August 2010 issue and Computerized Investing covered the put-call ratio in the Fourth Quarter 2010 issue. These are two very popular option strategies.
Outside of AAII, several sources exist that can help the beginning investor get started. Investopedia.com provides a superb seven-part series on options, strategies and options investing. The series is a great read and one of the best free sources available on the Web. It can be found at www.investopedia.com/university/options.
The Chicago Board Options Exchange also provides an Options Education Center that can be found at www.cboe.com/learncenter. The website has seminars, online courses, websites and other educational tools designed to help investors begin using options.
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