My Intelligent Portfolio

Armed with my new knowledge of investing I set about reviewing my portfolio. My portfolio was in pretty good shape. My financial advisor had been applying much of Graham’s theory for me (e.g. advising me to keep a portion of my portfolio in bonds). There were two securities that were speculative and I decided to sell them: the Indian and Lithium ETFs. On 15th April I replaced these with two new stocks.

  • SELL Lithium ETF (LIT) @ US$21.95
  • SELL India Nifty Fifty ETF (INDY) @ US$29.82
  • BUY Goldman Sachs (GS) @ US$155.17
  • BUY Intel (INTC) @ US$19.618

I selected these two stocks by analyzing the fundamentals of a range of stocks. I began with a basic screen to identify stocks that met the following criteria:

  • Dividend: yield of 0.5% or more
  • Growth: expected 5-year annual earnings growth of 8% or more
  • Popular: consensus analyst opinion of “buy” or “strong buy”
  • Large: revenues of $40B or more
  • Value: PE ratio of between 8 and 18

I then took a few names and did a more detailed analysis of their earnings forecasts to estimate the return (dividend and appreciation) I could expect given the share price. I decided that I would not buy anything that has a estimated annual return of less than 12%. Next I used MSExcel to do an IRR calculation to understand what my maximum entry price would be for this return. Finally I applied a 20% margin of safety to the maximum entry price to obtain my buy price. This is the kernel of what Graham would call my “Investment Policy”.

Using this method I predict a return as follows.

  • Goldman Sachs will provide an annual return of 15.83% over the next four years
  • Intel will provide an annual return of 17.7% over the next four years

With these changes, I consider my stock portfolio “Intelligent”.

POSTMORTEM

One month after these trade, on 15th May 2011, these trades are mixed. Intel is up around 20%, while Indy and Lithium ETFs were down 7% and 9% respectively, al of which are a good call. Goldman is down 9%, which is a bad call.

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