Put Jubak's Picks to work for you

By Jim Jubak

You've come in late. Past performance of Jubak's Picks looks attractive -- it's up more than 330% since the beginning of the portfolio in May 1997. But how do you get started? Buy everything all at once? Buy just the most recent picks? Cherry-pick the list looking for what's most attractive now?

Here's how I'd suggest you get started.

Here are my rules

Let's begin with a few simple principles.

• First, Jubak's Picks is an equal-dollar-weighted portfolio. I buy the same dollar amount of each stock, no matter what the price of the shares or how enthusiastic I am about the stock at the moment.

• Second, I don't make additional buys to add to positions if the price of the pick goes down. Nor do I sell partial positions when the price climbs. (This is more a way to simplify bookkeeping than it is an investment rule: Many times I wish I could buy additional shares or sell partial positions. I just can't offer you any advice on these strategies.)

• Third, Jubak's Picks is not intended to be a complete portfolio. I try to construct a balanced portfolio of equities that fits the stock market at the moment, but the portfolio is 100% stocks. It doesn't include bonds, CDs, gold coins, real estate or other asset classes. You should own assets other than stocks. I just can't tell you, given all that I don't know about your individual financial situation, how to mix those other assets with Jubak's Picks.

• And finally, don't buy everything, but don't buy just what you think looks hot at the moment, either. The first strategy will get you into some stocks that don't match your investment objectives, whatever they may be. The second approach will put you into exactly the most risky stocks on the list.

Picking from my picks

With that general advice out of the way, let's get to the hard part: How do you decide which of my picks to buy if you're coming to Jubak's Picks now and not when all the current picks were new?

Let the difference between today's price and my target price be your guide. Ideally, you should be calculating your own target price for every stock you own, instead of just accepting mine. I know some readers don't: They either don't know how or they don't have the time. But whether you accept my target or calculate your own, the steps are pretty much the same.

Look for target-price updates less than three months old. At the end of the blurb for each pick, you'll find a target price and the date it was set in bold type. You're looking for target prices that reflect recent developments in the stock and in the stock market. Ideally, the targets should be as up to date as possible. You don't want to buy stocks on stale information.

At a minimum, you'd like to begin with a target that captures the most recent quarterly earnings report. (A good time to jump into Jubak's Picks is often during or right after earnings season, when I've just updated a stock and its prospects.) Any target prices that were set more than three months ago are too old. I'd hold off on buying any of those until the target price is updated.

Eliminate stocks swept up in major market moves. From the remaining stocks, throw out those target-price updates and initial stock picks made when the character of the stock market was very different from the current market. Examples: if higher interest rates suddenly take hold and slam the home builders or a war in the Middle East causes transportation stocks to plunge. I admit this is subjective, but if you're going to run your own stock portfolio, you'll have to make these calls.

Estimate potential rewards for each pick. Calculate the difference between the target price and today's closing price. This will give you a measure of the stock's potential appreciation -- if everything at the company goes the way I (or you) project. So, for example, if PepsiCo (PEP, news, msgs) shares closed at $63 and my target price six months out is $70, then I'm looking for a potential appreciation of 10% in six months.

Weigh the reward against the level of risk. Decide if the potential appreciation from today's price to my target price (or yours) is an adequate return to you for the risk you're taking on.

In the example above, PepsiCo would go in Jubak's Picks because I think a 10% return in six months is more than adequate compensation. Why? Because the risk in owning a stock like this is very low. Another stock with more erratic earnings might be worth owning one if the potential return was significantly higher. How much risk you're willing to accept for a given potential return is a determination you'll have to make for yourself.

Throw out any stocks that seem too risky. Lastly, decide if some of the stocks in Jubak's Picks are just too risky for your portfolio no matter what the potential return. Remember, all these returns are only potential. If I'm looking for potential 30% appreciation, you should take it as a sign that this stock is highly risky and may not suit your investment goals or your own psychology.

A word here on selling: You don't need to sell when I do. Jubak's Picks is a 12- to 18-month portfolio, and your time horizon may be longer than that. And keep in mind that while I'm running a portfolio here, I'm also writing a column. I'd be less than honest if I didn't acknowledge that some part of the turnover in Jubak's Picks is a result of my need to keep enough happening in the portfolio that readers will come back frequently.

You don't have that need in your own portfolios, which is one reason why I think you should be able to use my picks and post even better returns than I do.

The ones I buy

I personally own a number of the stocks in Jubak's Picks. But I don't own them all, and neither should you. Some I don't own because they don't fit my investment goal. I'm willing to take on a fair amount of risk because, while I'm no spring chicken, I've got a long time until retirement. Some I don't own because they would too heavily weight my personal portfolio in one direction or another.

And like many of you, I sometimes have personal reasons -- moral, environmental, political, whatever -- for not owning shares in certain companies. I try not to let those personal choices influence what I pick in the column. I figure, perhaps wrongly, that I shouldn't impose my standards on your portfolios and that the readers of this column are perfectly capable of making these choices for themselves and on their own grounds.

I hope that helps to get you started. If I've left something out or left something confusing or unexplained, I hope you'll let me know. We intend to permanently attach a version of this article to Jubak's Picks, and any improvements you might suggest will be added to that permanent version.

Editor's note: A new Jubak's Journal is posted every Tuesday and Friday. Please note that recommendations in Jubak's Picks are for a 12- to 18-month time horizon. For suggestions to help navigate the treacherous interest rate environment, see Jim Jubak's portfolio of Dividend stocks for income investors. For picks with a truly long-term perspective, see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com.

E-mail Jim Jubak at jjmail@microsoft.com.

At the time this column was originally published (Aug. 29, 2006), Jim Jubak owned or controlled shares of the following equity mentioned in this column: PepsiCo. He did not own short positions in any stock mentioned in this column.