Higher Prices Prompt Rule Change in the Model Shadow Stock Portfolio

by James B. Cloonan

Higher Prices Prompt Rule Change In The Model Shadow
Stock Portfolio Splash image

While the market in general keeps approaching and then backing off new highs, the Model Shadow Stock Portfolio has broken through and is now up 28.5% year-to-date as of November 30, 2012. This compares to 14.8% for the S&P 500 index as measured by the Vanguard 500 Index fund (VFINX). The returns for longer periods can be seen in Figure 1 and Table 3.

The presidential election is over, and we are spared the media barrage of negative comments. We do have the fiscal cliff debates and speeches, which seem to be affecting the stock market for about an hour at a time. I hope that problem will be mostly resolved by the time you read this column, but who knows.

I am not a technician, but I certainly have the feeling that the market wants to go up. Even with the mess in Washington and the threat of a serious negative impact on the economy if something isn’t done about taxes and spending, the market hangs in. With billions on the sidelines and in very low yield bonds, there is certainly the scenario for a strong stock market even though post-election years have historically had the weakest average returns of the four-year presidential cycle.

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James B. Cloonan is founder and chairman of AAII.


Chett Maruyama from Hawaii posted about 1 year ago:

Is it possible to enter or post the date the stock has been posted? something to refer back to.

Thank you
keep up the good pick

Robert Warnock from California posted about 1 year ago:

The annual returns of the Shadow Stock Portfolio seem impressive, but from the management rules as stated it is impossible to know what these figures actually mean. Do they refer to the actual portfolio as it has evolved, or to something else, perhaps a periodically balanced portfolio of qualifying stocks? If the former, how are we to know the amounts of each position in the portfolio? The rules for the initial portfolio and for selling are fairly definite, but the rules for investing proceeds of sales are highly indefinite. For instance, what are the "requirements for new purchases" mentioned in Management Rules? Shouldn't we at least be told the weights of the various positions in the current portfolio?

Martin Blackman from Illinois posted about 1 year ago:

Charles Crowley from Florida posted about 1 year ago:

Very informative.....

John Steinmetz from California posted about 1 year ago:

I have not been getting the weekley updates/ What do I need to do?

Bruce Jacobson from Tennessee posted about 1 year ago:

I have been recording Cash Flow for potential stocks. However some stocks that look very good have negative CF. How much weight should you give Cash Flow?

Glenn Rawls from Florida posted about 1 year ago:

Table 2 showed no transactions for the 4th qt.
However, the portfolio showed 4 stocks that qualified on 11/30/12. Why the contradiction?

Jean Henrich from Illinois posted about 1 year ago:

Chett - Click on Transaction History on the right side of the Shadow Stock Portfolio page for the dates when stocks were added:

Robert - The performance shows actual returns our chairman, Jim Cloonan, has achieved using the Shadow Stock approach; he holds the stocks shown in the portfolio here. There's a detailed history page at the above-mentioned Transaction History link that shows exactly how many shares he purchased. But for anyone starting a Model Shadow Stock Portfolio today, equal dollar amounts should be put into each stock chosen initially. The portfolio is not rebalanced, but when new stocks are added, you can simply calculate a new average investment amount based on your total investment and the number of stocks you hold.

John - There are no weekly updates on the portfolio, but updates are sent out monthly. Go to My Account at the top right corner of this page to subscribe to the free monthly Model Portfolios Update email.

Bruce - The portfolio rules don't address cash flow, but you can use it as a secondary factor when you are investigating the Shadow Stocks, if you you wish. You can find articles in our archives on cash flow as a selection criteria in stock investing approaches and how to analyze cash flow by using the search tool at our home page.

Glenn - Stocks that are already in the actual portfolio are marked "qualified as of" to show members who are starting out which stocks currently meet the purchase rules. Since these stocks were not newly added to the portfolio, they are not shown as fourth-quarter transactions. (Again, see the Transaction History page for when each stock was originally bought.) At this point, since our chairman has the actual portfolio at a size that he is comfortable with, he doesn't add new stocks unless he sells stocks in his quarterly review and frees up funds for new purchases.

--Jean at AAII

Antonio Gomez from California posted about 1 year ago:

No Comment

E Birnbaum from Pennsylvania posted about 1 year ago:

Regarding the label "qualified as of", would that statement be a good basis for adding to a position, or is it more important to keep the portfolio balanced?

Jean Henrich from Illinois posted about 1 year ago:

E - Keeping the portfolio balanced would outweigh adding to a position

-Jean from AAII

William Millhiser from Tennessee posted about 1 year ago:

The canned shadow stock screen in Stock Investor Pro still seems to be screening for market caps between $17M and $240M. I'm under the impression Mr. Cloonan has raised the lower number to $30M for qualifying companies. Did I miss something? Developed my own screen at $30M and it makes a difference.

Rob Capellini from New York posted about 1 year ago:

First -- thank you for providing this service. The performance charts are truly impressive. Could you please discuss in a little more detail the following questions:

1) How is the market capitalization range derived? How was the minimum of $30M derived? How was the maximum of $240M derived?

2) How one decides on the price-to-book value ratio? Why is 0.8 a good number, based on current market conditions?

3) How one determines the price-to-sales criterion? What makes 1.2 the right number?

4) What would prompt one to revise the market cap, price-to-sales, or price-to-book criteria? James mentions that the adjustment in the market cap criterion is because micro-cap stocks have risen in price. Is there a more definitive quantitative criteria for determining the specific ranges of values?

Thank you again for providing this service and thank you in advance for answering my questions.

Chuck Esposito from Utah posted about 1 year ago:

i don't understand the sell rule for getting over 3 times initial plurchase making any sense.

Vaidy Bala from posted about 1 year ago:

I am new to this site. From 1993 to 2011 the total return is some 16.3 %. I notice practically no dividends except a couple. So, my assumption the total return every year is about 16 % comes purely from price change. Plus the standard deviation is also high. Is this portfolio you recommend for retired investors who are looking for income today?
thanks, I will wait to read your comments.

Charles Rotblut from Illinois posted about 1 year ago:

Hi Vaidy,

The Model Shadow Stock portfolio is focused on capital appreciation, not generating dividend income. It invests in micro-cap stocks, which tend not to pay dividends and can be more volatile. You should consider the year-b-year volatility to determine whether you would be willing to stick with the portfolio in both bull and bear markets:

If income generation and less volatility is what you seek, we do offer a premium newsletter, AAII Dividend Investing. This is a hand-picked portfolio of 24 dividend-paying stocks. Though we do focus on total return (price appreciation and dividend income), the portfolio is less volatile than the Shadow Stock portfolio. You can find out more information about it at or by clicking on the "Dividend Investing" tab at the top of the page.

I hope this helps,

Scott Youngquist from Ohio posted about 1 year ago:

Price to Book sell rules. Is the valuation rule of 3 times the initial price-to-book valuation a rule or a guideline? There are stocks like CSU and SXI that have exceeded a PB of 2.4 (3x0.8) and have not been sold. I am setting up Stock Investor Pro screens to track when to sell and I am not sure how to use the price-to-book ratio.

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