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Guru Investor / John Reese4/21/2008 12:01 AM ET

A better way to buy and hold

Things continued to be pretty wild on Wall Street over the past month, with the market bouncing all over the place from day to day. The net result has been good for the market -- the major indexes are up about 2% or 3% over the past four weeks -- and even better for my Guru Strategy computer models.

My portfolio is now up more than 8% since the start of the contest, but my models aren't getting complacent. In fact, they're shaking things up quite a bit today as I perform my regular 28-day rebalancing. I'm dropping a dozen of my 20 holdings and replacing them with new, more highly rated stocks. A few of these are familiar faces.

Among the departing stocks are several winning positions; two in particular have really helped me out over the past month. Brush Engineered Materials (BW, news, msgs), a Cleveland-based maker of beryllium and other alloy products, gained about 30% over the past four weeks, while ITT Educational Services (ESI, news, msgs) jumped almost 25% in that time.

Those two stocks' performances were fantastic, and they may have some more upside left in them. (Both still get interest from my models.) But with their prices going through the roof over the past month, my models are now finding more upside in other areas.

One of these is retail.

I'm adding four new retailers -- Abercrombie & Fitch (ANF, news, msgs), American Eagle Outfitters (AEO, news, msgs), Charlotte Russe (CHIC, news, msgs) and Steven Madden (SHOO, news, msgs) -- to the portfolio this week.

Abercrombie and American Eagle are favorites of the model I base on the investing strategy of the great Warren Buffett.

Russe and Madden get high marks from the model I base on the writings of Buffett's mentor, Benjamin Graham. All of these firms have solid earnings histories and carry very low debt. In fact, Abercrombie is the only one carrying any long-term debt, and its debt/equity ratio is below 3%.

With the latest rebalancing, here's the new breakdown of how my stocks have been picked by each Guru Strategy:

  • Warren Buffett strategy : Abercrombie & Fitch, American Eagle, Mobile Telesystems (MBT, news, msgs) and World Acceptance (WRLD, news, msgs).

Back at better prizes

One thing you may notice is that this isn't the first time I've held some of these "new" names. ExxonMobil, American Eagle, ING and Steven Madden have all been in my portfolio before during this competition. I sold each of them in either February or March, only to repurchase them now.

How, you might be wondering, can I consider myself a "long-term investor" if I'm buying certain stocks one month, dumping them the next and then buying them again a month later? Doesn't a long-term investor buy and hold specific stocks for the long haul?

Well, sticking with particular stocks for long periods -- "buy and hold," as it's called -- is one type of long-term investing, but I don't think it's the best type using the quantitative system I've developed. Instead, what my data and research show is that can you improve your performance and chances for success by sticking with a strategy over the long run, not necessarily with individual stocks.

A change in the numbers can change a decision

I didn't buy and sell the four stocks I just mentioned on hunches that they would go up or down, and I'm not repurchasing now them because I regretted my decision to sell them earlier.

I sold them and then bought them back because the numbers -- either their fundamentals or their prices, or both -- changed. Those changes increased or decreased their underlying value and attractiveness based on the strategy I am using. (In some cases, it can also be that the relative value of a stock increases because other stocks previously ranked ahead of it fall in value.)

What's important is that, while price is a factor in these buy and sell decisions, it's by no means technical analysis. Technical analysts try to use a stock's past prices to predict what its future price will be; my models look at price as it relates to a company's fundamentals to determine if the stock is selling above or below its real worth.

It's not much different from the spending decisions many of us make in regular life. Let's say you're considering joining a gym, but you think the per-month cost of $150 to use exercise machines and weights is just too much. So, you pass. The next month, however, the gym might have a special sale and lower its price to $75 a month. Or, it might keep its price the same but open a new swimming pool, and use of the pool becomes part of the fee.

Either way, the value of that membership has increased and you might be more likely to join.

Similarly, the value of what you're getting for your money changes constantly in the stock market. I might not buy a stock at $150, but if it drops to $75 without its balance-sheet changing, I'm more likely to buy it. Or, if it stays at $150 but improves its balance sheet significantly, I'm more likely to buy, because now I'm getting a share in a stronger company that has better prospects -- i.e. more value.

While this can result in some short-term trading costs, the variety of discount brokerages now available to investors has lowered such costs. And my experience is that those expenses are a small price to pay compared with the long-term benefits of keeping your portfolio updated with the most valuable stocks available.

It's an approach that has worked so far for Strategy Lab -- and one that has worked extremely well for all of the guru-based model portfolios I run on my Web site, Validea.com. Given their continued success, I'll stick with this long-term mindset, even if I encounter any short-term bumps in the road.

Please feel free to write me with questions and comments. I can be reached directly at johnreese@validea.com.

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