When I originally set up My Mad Method of evaluating stocks to add to my portfolio (or MMM), I only had a few metrics that I was tracking. It really didn't evolve into MMM until I had about 13 metrics, then I added the last two from The BMW Method to make it 15. Since then, I've combined my watchlist with my portfolio list so I can evaluate all of those stocks together to try to determine whether I should start a new position or add to an existing one. Around the same time, I added a method of weighting each of the 15 metrics so that at any given point in time I could put more emphasis on one or more of the metrics over the others to adjust for what it was that I was looking for at that time.
Now, the next evolutionary step of the MMM spreadsheet has arrived. Since I've merged my watchlist with my portfolio, it occurred to me that one thing I could do is weight my allocation of each of the stocks in my portfolio so that it either emphasized or de-emphasized the stocks that I didn't already have a position in.
Thanks to fellow Seeking Alpha Contributors like Robert Allan Schwartz, Todd Johnson and Five Plus Investor, I've recently updated my watchlist to include some better options to improve my dividend growth investing-centered portfolio. Let's take a look at the combined super list and how everything ranks up with equal weighting ("P" indicates a stock on my portfolio, while "W" indicates a watchlist stock):
BHP Billiton plc
Republic Bancorp Inc - Class A
American Capital Agency
Alliance Resource Partners, L.P.
SeaCube Container Leasing
General Dynamics Corp
Wells Fargo & Co
Main Street Capital Corp
NTT DoCoMo Inc.
MV Oil Trust
General Electric Company
Johnson & Johnson
National Grid, plc
Proctor & Gamble
Lockheed Martin Corp
National Presto Industries
The Clorox Company
StoneMor Partners, L.P.
Annaly Capital Mgmt
Crescent Point Energy Corp
Freehold Royalties, Ltd.
Ford Motor Company
Endeavour Silver Corp
Kimberly Clark Corp
United Parcel Service
Central Fund of Canada
On one worksheet in my Microsoft Excel MMM spreadsheet I maintain a "dashboard" of all of my positions, and on another worksheet I have my combined list of my watchlist and my portfolio with the 15 metrics and their rankings. (Actually, I have many, many worksheets in this spreadsheet, but that's the beauty of the combination of Excel and a relatively inexpensive wide screen monitor!) On the dashboard I calculate the percentage allocation of each of my positions relative to the total value of my IRA's portfolio. It's a relatively simple matter then to link a cell on one worksheet to the cell of another and keep all the cells on a given row in sync with each other, so I dropped this allocation percentage at the end of the MMM worksheet and added a Rank column and, voila! A new metric was born.
Next I added this new metric's rank to the average calculation of all of the other metrics, including the ability to weight this new metric by multiplying it by the weighting factor placed statically in the header of the worksheet.
The final step was to reset all of the baseline weighting percentages of all of the metrics from the 6.67% I used for 15 metrics to now be 6.25% for 16 metrics (=1/16).
The interesting thing about this metric is that, for stocks that are on your watchlist, you have the option of assigning them either a 0% allocation or a 100% allocation. If you plug a zero into this metric for your watchlist stocks and then increase the weighting factor, it skews the overall rankings in favor of stocks you don't yet own and the stocks that you do already own but have a lower allocation of than others.
For instance, if I assign the watchlist companies an allocation of zero and then weight the allocation metric by 25%, the stocks that I don't own, or don't own much of, rise higher in the rankings like cream.
Notice how Corning stays in the top 10 even though it's a portfolio stock, with about a 2.5% allocation in my portfolio. (The average allocation across 29 stocks in my IRA's portfolio is 3.38% of its total value.)
On the other hand, I can easily replace the zeros in the allocation metric column that the watchlist stocks have with 100, resort, and keeping the 25% weighting on allocation, see whether any of the watchlist stocks are able to hold a high ranking slot or not:
This time BHP Billiton and Republic Bancorp from the watchlist make a strong showing, indicating that even when competing with stocks I already own, they're worthy of consideration.
While this isn't earth-shattering on its own, the ability to weight the allocation percentage in combination with one or two other metrics that are also weighted really helps bring the stocks that best meet my selection criteria into tight focus. For example, if we revert the watchlist stocks' percentage allocation zero, set the weight on the allocation metric to 30 and also apply a 30% weight to the yield metric and 5 years dividend growth metric, I get a clearer picture of which stocks are potential Dividend Divas or Dividend Monsters:
That lines things up nicely. With its 15.38% yield, it's no wonder that American Capital Agency ended up in first place, but the real telling story is that BHP Billiton and Republic Bancorp wound up in second and fourth places with yields of "just" 4.06% and 3.15% respectively. What's even more revealing is how closely BHP Billiton scored in terms of its Weighted MMM Average, coming in just one tenth of a point behind American Capital Agency.
I recently tried to pick up some shares of Hatteras Financial to increase my exposure to mREITs while the Fed keeps interest rates so historically low, but it never dropped down to the limit price that I was willing to pay for it. Now that I've added AGNC to my watchlist, it looks like it's a better candidate to be the next Dividend Monster in my portfolio, while Billiton has definitely caught my attention as well.
I hope this helps illustrate how you can add metrics to your own method of evaluating stocks, and the value of looking at the allocation you have in your existing stocks vis-à-vis stocks that you currently have no exposure to.
Additional disclosure: In addition, I may initiate a long position in AGNC and/or BBL within 72 hours.Finally, I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do, and I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.