Optimization tells us precisely how to diversify the portfolio, whether I should have 12% in semiconductors or 4% in biotech, etc., and it literally tells me how to diversify not only the industry groups but the stocks.
I expect my return to be 18 to 25 percent in 1988, while the Standard & Poor's 500 should rise 8 to 12 percent and OTC stocks gain 15 percent as liquidity emerges.
I had Dell for four and a half years, and its sales are still phenomenal, but their operating margins started to contract, so I sold it in early 1999. There's nothing wrong with Dell! It's a fine company. It's just the business risk they took.
I simply can't buy as much of some stocks such as Detection Systems or United Education & Software as I'd like because there just aren't all that many shares available.
If you go back to 2001, the market had two violent short covering rallies then, although I know the market didn't officially get going until March 2003.
Internally, when we manage portfolios, we figure out what works in large cap, what works in mid cap, what works in small cap. Generally speaking, large cap stocks want earning stability, strong cash flow, margin expansion.
My advice to the average investor in 1988 is to be patient and think long-term. It will take 18 months for confidence to get better and, in the meantime, this is absolutely no place for short-term money.
Now quantitatively we rank things on something called alpha over standard deviation, which is the return independent of the market divided by volatility. Usually, to get a high ranking, you need some buying pressure.
One of our big challenges with the newsletter is that everyone thinks big stocks are safe. That's not true at all. They're only safe if the money is flowing there.
Open the borders to willing workers from any and all nations. They will create businesses that pay taxes, especially payroll taxes to fund Medicare and Social Security benefits of retiring baby boomers.
Since we try and take a fairly buy-and-hold approach to our newsletter portfolios and don't sell at every whipsaw, we want to have a mix of stocks that will perform at both ends of the oscillation.
Social Security was designed to give a few years of modest benefits to people whose bodies were worn out through coal mining, factory work and other physically demanding labor.
There's 4,000-plus stocks out there, and sometimes it gets a little confusing. And we like them to start with the portfolio grader, but if they'd like to see how I use the system and pick stocks - we offer that as well.
There's something we calculate called an alpha, and that's the stock's return that's independent, uncorrelated to the market. And the only way you really get a high alpha is for something to zig when the market zags.
We call it the zigzag theory. You want to find something that zigs and something that zags and blend them together to get a better combined performance.
We really believe in the earnings. We're very proud that often we do well in the down market. But you know, there are some markets where they just lose liquidity, like 2001, 2008.
We test everything on a one- and a three-year cycle. And you want to stress-test a model, and the three-year test usually does that because you have a growth and value bias. You have different interest rate environments.
What we do is we test what works on Wall Street. And sometimes it is earnings momentum, and sometimes it's earnings surprises. Sometimes it's price-to-sales cash flow, and then we put together our stock selection models.
Zeroing in on the best sectors or the best regions of the world is great, but zeroing in on the very best individual stocks is the key to making truly impressive profits.
