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Guru Investor / John Reese5/19/2008 12:01 AM ET

Time to sell some winners

The numbers told me to buy World Acceptance in January when financial stocks were poison. I made 60%. Now, it's time rebalance my portfolio, take some profits and find new winners.

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A few months ago, Wall Street considered financial stocks to be poison. The subprime-mortgage and related credit crises had walloped many financial companies, driving many of their stocks down to prices they hadn't seen in years. Hedge funds had folded, billion-dollar write-downs kept on coming, and fears of a major financial-sector collapse were growing.

It was just the type of situation that makes a patient, deep-value investor such as Warren Buffett -- who has famously said that investors should be greedy only when others are fearful -- ready to pounce.

Not surprisingly, then, amid all of the financial-driven fear and anxiety a few months ago, the Guru Strategy that I base on Buffett's investing approach did indeed find some value in the financial sector.

One of the places: World Acceptance (WRLD, news, msgs), a South Carolina small-loan consumer-finance company that operates in 11 U.S. states and Mexico. World Acceptance was beaten up at the time; it had lost about half of its value from the summer of 2007 to early January. My Buffett-based model thought the firm had been beaten down too much, however, and snatched it up.

Today, my Buffett-based model is selling World Acceptance for about $44 a share -- a profit of close to 60%, a big reason for my overall portfolio's strong performance in this competition.

The numbers told me to buy

My success with World Acceptance is a perfect example of why it is so important to develop and stick to an investment plan that removes emotion and focuses on the numbers.

Back in January, just about anyone, including myself, would have had some serious reservations about investing in a small-loan consumer-finance company in the middle of the worst credit crisis we've seen in a long, long time.

But by using a quantitative, unemotional system, I didn't have to struggle with the anxiety of adding such a company to my portfolio -- the numbers did the work for me.

My Buffett-based model saw that World Acceptance had a long track record of success, having steadily increased its earnings in each year of the past decade while posting above average returns on equity and assets. It saw this historically strong performer's low price as more of an opportunity than a problem, and it ended up being right.

7 winners out of 8 stocks

As you may know by now, part of my numbers-driven approach is a 28-day rebalancing schedule that I stick to no matter what, because I've found this time period offers the best results when performance and trading costs are considered.

Today it's time to rebalance again. In addition to selling World Acceptance, the five guru-based models I'm using for this competition are selling seven other holdings in my 20-stock portfolio, either because their fundamentals have dropped or because they've been surpassed by those of other stocks.

As always, I've replaced all of the departing stocks with new stocks that score better using my models, ensuring that only the stocks with the strongest current fundamentals are in my portfolio.

Seven of the eight stocks I'm selling today have gained ground since I bought them. In addition to World Acceptance, National Instruments (NATI, news, msgs) has gained about 20% in the two months I held it, and Baldor Electric (BEZ, news, msgs) has gained about 18% in three months.

The one losing position I'm selling this month, ExxonMobil (XOM, news, msgs), has dropped about 1% or 2%.

The newbies joining the portfolio are an eclectic bunch. They are:

  • Manufacturing -- Parker-Hannifin (PH, news, msgs).

  • Aerospace and defense -- General Dynamics (GD, news, msgs).

  • Education services -- Strayer Education (STRA, news, msgs).

After the rebalancing, here is the new breakdown of which of my Guru Strategies have picked which stocks:

  • David Dreman-based strategy: Siliconware Precision Industries (SPIL, news, msgs), Lloyd's TSB Group, Banco Bilbao Vizcaya Argentaria (BBV, news, msgs) and Telefonica.

  • James O'Shaughnessy-based strategy: Eni (E, news, msgs), General Dynamics, Parker-Hannifin and Metalico (MEA, news, msgs).

  • Martin Zweig-based strategy: Credicorp (BAP, news, msgs), Greenhill, Strayer Education and Fastenal (FAST, news, msgs).

Whether any of these current holdings will yield me World Acceptance-like profits is unclear. You certainly can't build your portfolio counting on 60% gainers. But if you stick to the numbers and keep emotion out of your decision-making, you'll likely be right more than you're wrong -- and you'll sometimes get those big-time gainers as an added bonus.

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John ReeseGuru Investor John Reese

Round 17

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