Elegance and Simplicity
Cover Story, by Ken Kavula, Subscriber January 1st, 2012
We invited Ken Kavula to share his thoughts on portfolio design and management and the stunning comfort that he finds in keeping it simple, simple enough to hear the revelations and wisdom from the people around us.
We don’t know about you, but sometimes we work a little too hard at investing. There’s a lot to worry about and the closer you get, the more things you’ll be able to find to worry about. We invited Ken Kavula to share his thoughts on portfolio design and management and the stunning comfort that he finds in keeping it simple, simple enough to hear the revelations and wisdom from the people around us. In Ken’s case, that reminder came from a granddaughter and her curiosity about the forced festivities jammed into Times Square on New Year’s Eve. We all need reminders that it’s about the “forest” not the trees. Happy New Year and Best Wishes for a healthy and prosperous 2012 from all of us to all of you!
“Grandpa, it’s really simple. It’s just the clock moving one second from today to tomorrow. Nothing else really changes.” And once again, the children shall lead us when it comes to perception vs. reality. Not that there’s anything wrong with fanfare and celebration, but sometimes we work a little too hard at drumming up a frenzy. Don’t be duped by the 24-hour, 7-day news cycle. It’s the long-term trends and long-term relationships in our lives that really matter.
Did you watch the ball drop in Times Square on New Year’s Eve? I was in the company of my wife and my grandchildren and we all gathered around the television at 11:55 PM in anticipation of the great event. The hosts had already spent hours talking about the thousands of Waterford crystals on the glittering ball, the thousands of people gathered at “the crossroads of the world” and the unparalleled array of celebrities that were set to entertain us in a way we had never been entertained before.
As the anticipation was ramped higher and higher, I glanced at the grandkids, wondering if all of this hoopla, this complicated effort to squeeze an unforgettable moment from the normal movement of the clock, was really working. My instincts told me as I gazed at their faces that they understood you had to really work to make this moment special. It wasn’t like a birthday or Christmas. It didn’t have the cache of Thanksgiving or Halloween. And then the youngest granddaughter confirmed it for me. “It’s really simple.”, she confided. “It’s just the clock moving one second from today to tomorrow. Nothing else really changes!”.
Suddenly, I knew what I would write about. “It’s really simple!”
That was the hook that made me investigate Manifest Investing for the first time many years ago. And that’s the hook that keeps me engaged. While I appreciate all of the hoopla that surrounds investing today – think CNBC, the internet, etc. – I really want to manage my portfolio in as simple a way as I possibly can. Simple to me does not mean elementary or simplistic. Rather, to me, it means elegant. Just as my granddaughter was able to see through the dropping balls and frenetic partiers and focus on what was really happening, I want to be able to focus on what really contributes to a strong stock portfolio.
First off, I need to remind myself I’m evaluating the portfolio as a whole. The goals I set are for my entire portfolio, not for each individual holding. I start with a performance goal. I’d like to see my portfolio’s potential appreciation beat the market average by at least five points. What’s so nice about using a dashboard to track my holdings is that this value – in fact all of the values that I am targeting – are shown at the bottom of the appropriate column or on a chart to the side of the dashboard. I like to call the chart the Report Card and I use it always as a quick reference to check the health of my holdings.
It’s useful to note that all of the targets that I am referencing can be changed to fit your own unique situation. There is absolutely nothing wrong with setting a performance target higher or lower than the one I use. Younger investors, for example, might target higher performance numbers which probably would necessitate a little more risk-taking.
Demostration Dashboard: Bivio Most Widely-Held Companies. The 16 most widely-held companies by the investment clubs using bivio for their record keeping are shown here. These 16 stocks represent approximately 60% of total assets for this aggregate portfolio. The overall projected annual return (weighted average) is pretty solid at 12.2% and the overall quality rating is superb at 78.5. We’re also nudged — as a community to seek, discover and own more promising faster growing companies as suggested by the overall sales growth forecast of 9.7%. We’d really like to a blend of companies that delivers 11-13% for the overall sales growth forecast of the portfolio.
Dashing Report Cards
We all like good report cards. This is true whether they’re our own or somebody that we care about. To me, our investing experience and efforts are not very different from the goal-setting and monitoring that comes in the realm of report cards.
Our Portfolio Report Cards are actually based on the dashboards. The weighted averages (by % of total assets) are gauged for the major objectives of return, quality and growth and continuously measured against objectives or target ranges.
We’re here for the returns. The building blocks that we choose for our portfolios have to be targeted to deliver sufficient returns. Do you know what the overall return forecast is for your portfolios?
I am committed to building a portfolio of high-quality growth stocks. That means I want to keep the overall Quality of my portfolio in the top quintile or “in the blue”. Numerically that means I want the portfolio quality average to stay at 65 or better.
From my studies I have concluded that to reach a return that will consistently beat the market by 5 or more points, I need to have an overall sales growth somewhere in the 11-13% range. The report card measures the weighted sales growth forecast of the entire portfolio and displays it at the bottom of the growth column or on the Report Card to the right of the dashboard.
The Report Card next lists P/E Value and Yield. I glance at each of the values, remembering that the average P/E value for the entire market usually fluctuates in the teens and reminding myself that for my portfolio, dividends are extra income which is appreciated but not necessarily expected because of the types of companies I have in the portfolio.
A Natural Emphasis on What Matters
My next target is Financial Strength. I want to invest in companies with superior balance sheets and no obvious financial shortcomings. In the MANIFEST world that means I will be aiming for a weighted portfolio financial strength of at least 80 (A). Again, adjust the target to fit your personal style and goals.
I want to next check my Earnings Stability. I like to keep that value above 80 as well. In other words, when graphed, I would like the EPS historical results to be a relatively straight trend.
That’s it! My granddaughter was right. “It’s simple!”
No longer am I blinded by the 24-hour a day, seven day a week sideshow put on in the name of investing. I’m not dazzled anymore by the bright lights or the celebrity. I’ll still turn to CNBC for entertainment. Jim Cramer still makes me chuckle occasionally but for now, I’ll manage my portfolio in an elegant, successful way. In just a few minutes I can check my portfolio. If my numbers are within the ranges I set, I can spend more time with the grandkids. If one of the numbers needs boosting, I can adjust the entire portfolio by buying and selling appropriate stocks to bring the numbers back to where I want them.
And that leaves me plenty of time to really appreciate all of you.
Happy New Year! May we all be prosperous and healthy.
Ken Kavula is a retired educator and successful long-term investor. Ken has served in a number of leadership positions for the National Association of Investors and is active in four investment clubs. Welcome to the Clubhouse. Subscribers are invited to share their favorite experiences, suggest best practices and most importantly, let us know “What’s on your mind?” What topics and questions do you have? We all get better when we do this together. Email Ken at firstname.lastname@example.org.