• AAII Model Portfolios
  • Model Shadow Stock Portfolio: Purchase Guidelines and Rule Changes

    by James B. Cloonan

    The Model Shadow Stock Portfolio is up 55.6% year-to-date compared to 29.0% for the S&P 500 index, as measured by the Vanguard 500 Index fund (VFINX). Figure 1 shows the year-to-date returns as of November 30, 2013, as well as annual returns for one-, three- and 10-year periods.

    This has been an exceptional year, and if the Model Shadow Stock Portfolio stays at this level it will be the third-best year in its 21-year history. As you can see in Table 3, the years 2003 and 2009 were both up over 70%.

    Many pundits keep predicting a pullback. It may happen, but the market increase has about doubled since the dire predictions began.

    We had been running a chart in this column showing the number of first-pass qualifying stocks at my quarterly review. If the number of stocks passing my initial screen each quarter had any predictive value, the market would have fallen six months ago, since very few stocks have been qualifying. Like most possible predictors of future market direction, it has not shown any meaningful guidance. Therefore, we are no longer showing historical figures here in chart form, although we may mention the number of qualifiers when discussing purchases.

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    William Horsfall from NY posted over 2 years ago:

    Jim Cloonan certainly deserves the accolades he received at the November meeting. The Shadow Stock Screen alone justifies a lifetime membership in AAII

    Joseph Hoffman from TN posted over 2 years ago:

    I have been unable to sell my shares of FAB Universal. Trading has stopped. I'm ready to move on and put it behind me. But there is no trading. How do I get out?

    Charles Rotblut from IL posted over 2 years ago:

    Hi Joseph,

    Unfortunately, no information that I am aware of has been issued about when the trading will resume on the stock. You can try contacting FAB Universal's investor relations department or its transfer agent. Contact information can be found at http://www.fabuniversal.com/investor-contact/.


    Jeff Goodwin from CA posted over 2 years ago:

    How do you view the 10Q changes FVE filed last month?


    Joel Gitnick from NJ posted over 2 years ago:

    Check out this website for class action info on Fab Universal.


    Richard Dimattia from NJ posted over 2 years ago:

    I also own shares of Fab Universal and was wondering what the next move should be. Join the class action suit or wait for trading to resume and dump it at at 45% loss. Any thoughts?

    William Ford from IN posted over 2 years ago:

    When AAII purchases a stock to put in the Shadow Stock Model Portfolio it usually takes two weeks for us to find out about it. Why can't AAII notify its members (sooner) a day after the purchase ??? By the time we find out it has gone up significantly.

    Bill R. Vickery from NM posted over 2 years ago:

    I would also like an answer to the same question as William Ford (time lag of notification of new stock purchase). The Dividend Portfolio seems to be much more member friendly in that regard.

    Bill R. Vickery from NM posted over 2 years ago:

    Are there other members with same concerns regarding two previous posts?

    Nicholas Caringi from FL posted over 2 years ago:

    I would think that an E-mail to AAII clients on new stock addition could be sent out in nano_seconds and would be greatly appreciated.

    Charles Rotblut from IL posted over 2 years ago:

    Updates to the Model Shadow Stock portfolio are posted to AAII.com on the 15th of each calendar month. A monthly email with updated return information and notification about new transactions is also available. Stocks are added once a quarter, if a transaction occurs.

    While a stock may rise between the time it is added to the portfolio and the time a transaction is announced during a bull market, a stock may fall during a down or a flat market between the time it is added and the transaction is announced.

    Subscribers to Stock Investor Pro have access to the Shadow Stock Portfolio screen, which allows them to see an updated list of passing companies on a weekly basis.


    Fred Coffinger from AZ posted over 2 years ago:

    Does AAII want to share whether or not they will join any of the many class action lawsuits, and, if so, which one? The deadline seems to be Jan 17, 2014. Thanks.

    Harvey Ganz from CA posted over 2 years ago:

    How did FVE ever get onto the shadow stock portfolio?

    From the 10-K report, Earnings Per share for the last year are less than for both the preceding two years.

    A review of the 8-K reports of 12/19 2013 and 11/27/13 indicates that all prior financial reports are unreliable and that they don't have good financial controls.

    Why would I buy this stock?

    Edward Schaul from OK posted over 2 years ago:

    You write in this issue, "we sent out an emergency notice to sell on November 20, and a few days later it stopped trading." regarding the FAB debacle. How was that notice delivered?

    I'm thinking of setting up a shadow stock portfilio. I'm an experienced investor, and would like to know if that emergency notice was sent out by email or just how it was delivered to your readers.

    Charles Rotblut from IL posted over 2 years ago:


    A note was sent out via email and posted on AAII.com. You can sign up for the Model Portfolio Updates here


    Edward Schaul from OK posted over 2 years ago:

    Thanks, Charles, I will sign up right now. Appreciate the help.

    James Cloonan from IL posted over 2 years ago:

    Regarding FVE It passed all requirements on 12/2/13 when purchased. It has since gone up 18% and would not qualify because p/b now not available and would likely be too high. The problems with past financial reports seem to indicate improved restatements. It was profitable 0n 12/2 on a quarterly and annual basis. Things do change from time I buy and time you find out. You can do the analysis yourself on an ongoing basis buy your selections might be different sometimes if their are multiple qualifying stocks.
    James Cloonan

    Ken Jones from FL posted over 2 years ago:

    Ya, I'm stuck with FU, which seems to be appropriately named.

    Bill Rusk from Ohio posted over 2 years ago:

    Do "passing" Shadow Stock companies pass all the rules, including ADR's & foreign exchanges? Some of those on the passing list look like Chinese companies to me.

    Vaughan from NZ posted over 2 years ago:

    Can someone let me know what the premise is behind using 0.8 or 0.9 price to book value? Is this set with reference to the general market (i.e. companies with P/BV in the bottom 20%)or is it a figure considered 'good value'? Why not use 1.0 or even 1.5?

    Thanks all

    James Mate from OH posted over 2 years ago:

    Regarding changes in the model shadow stock portfolio, if we got the information 2 weeks sooner, the market would move against us 2 weeks sooner. These stocks are so thinly traded that AAII can move markets when they announce buy and sell decisions. It's then up to us to decide whether to act when we receive the info, already having had the market move against us, or to wait a while, hoping the price will revert to the norm. They can't do everything for us. As long as they are the ones who lead, and we are the ones who follow, a good argument can be made that we cannot duplicate their results.
    After all I've been through, if I ever make any money at this game, I'll be thankful.

    Carol Krausz from IL posted over 2 years ago:

    what is happening with VOXX?

    James Mate from OH posted over 2 years ago:

    With regard to VOXX, it's probably earnings related. Though they beat estimates on earnings per share, management lowered sales guidance. Nothing horrible. I took it as an opportunity to add a few shares, even though AAII has a restriction on it.

    Richard Orwoll from NC posted over 2 years ago:

    Is the Shadow Stock Portfolio intended to be a realistic example of the results an AAII member can expect to experience by following the trades executed by AAII? If so, I would suggest that AAII notify members of the intention to execute a trade before the actual execution. This would expose the Shadow Stock Portfolio to the same challenges as the rest of us.

    S Burrill from MI posted over 2 years ago:

    I concur with Bill Vickery.

    Does AAII have adequate staff to handle ssuch issues as this?

    James Mate from OH posted over 2 years ago:

    Richard - That's an interesting notion, that AAII announce its intention before the actual execution. But it can't be done. The AAII membership may have so great an impact on the price of a stock, and on one of the variables in the purchase rules (such as price-book value ratio), that the stock no longer satisfies the rules and can't be purchased by AAII.
    See Mr. Cloonan's note above "Regarding FVE...Things do change from the time I buy and the time you find out. You can do the analysis yourself. Your buy selections might be different."
    Leaders lead. I don't want them to abdicate that role. The model shadow stock portfolio is meant to be just that - a model. They've always encouraged us to think on our own.
    The question then becomes whether we can capture enough of the gains so that following the portfolio is more profitable than acting on our own. I am hopeful that we can.

    Richard Orwoll from NC posted over 2 years ago:

    James - I agree with much of what you say. Indeed there could be times when the Shadow Stock Portfolio (SSP) would not be able to obey the rules and purchase a recommended stock. This is the same situation encountered by a typical AAII member following the AAII selections. This brings me back to the question of whether the model portfolio is intended to give us a realistic estimate of the results a typical investor following the SSP recommendations would obtain. I would be interested in seeing the performance of an SSP without the tail wind of advanced purchase. The fact that the AAII SSP might not be able to buy one of its own recommendations does not bother me; that makes it a better estimate of the results to be expected by AAII members. If the SSP is not intended to be an example of typical results, I’m not sure what it is – perhaps a limiting value on the high side of performance.

    Charles Rotblut from IL posted over 2 years ago:

    Our Stock Investor Pro screening program has a Shadow Stock screen built into it. This screen gives you a weekly update of the passing stocks. Though you may end up selecting different stocks than appear in the actual portfolio, those of you concerned about the delay of when transactions are announced will have access to a more frequently updated list of potential buy candidates.

    Fred Coffinger from AZ posted over 2 years ago:

    Well, it's been a week since I asked if AAII planned to join any of the many class action lawsuits against FU and no response. I'm surprised, and a bit miffed at your silence. Seems to me like you could at least answer the question. As I read it, the drop dead date to join one of them is 1-17-14. This is the 14th. Time is running out. Hopefully you will see fit to respond. Thanks.

    James Merritt from OR posted over 2 years ago:

    Is there any chance FU will recover? Or is it clear that this was a fraud? It may affect tax deductions for worthless securities and is important. With trading stopped the loss occurred in 2013 I think. If deducted then any recovery would be income. I got the notice, but couldn't act on it so am holding the shares in digust.

    Charles Rotblut from IL posted over 2 years ago:


    We (AAII) did not realize a loss in FAB Universal and will not be joining the lawsuits.

    I suggest reading the press releases from the law firms carefully. I saw three saying the January 17, 2014 deadline is to be a lead plaintiff. The law firms are seeking some one with a large financial stake in the stock.


    Fred Coffinger from AZ posted over 2 years ago:

    Thank you very much.

    J Stensvold from MN posted over 2 years ago:

    I have found it easy to run the Shadow Stock Screen and build my own portfolio. The rules are pretty straight forward and I find that I can do the research in just a few hours each quarter. My portfolio is not identical to the AAII portfolio but contains most of the same companies. By doing the research myself, I am not waiting for the announcement of the purchases.

    FAB Universal was one of the companies that showed up when I did my screen. Fortunately, I had a similar experience with a US company doing business in China in 2012, that was accused of fraudulent accounting. I got out of that with a 30% loss and vowed never to buy a company whose sole business was in China. I was also suspicious that the stock symbol of FU was a warning!!

    Harry Ploss from TX posted over 2 years ago:

    Shadow Stock returns and Beta really picked up since 2002. Returns were pretty mediocre from 1993-2002.

    Is that largely a Small stock effect or was there a change in risk profile of the shadow portfolio??

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