Charlie Sheen Portfolio (Winning)

by: Roger Nusbaum

A reader left the following comment on yesterday's post that I thought was worth exploring further;

Winning at stock picking over the long haul is very, very difficult business, but not impossible.

The first thing is, what does winning mean? As a long-running theme here, one way to define winning is that the investor has enough money when he or she needs it, like at retirement. One way to get there of course is to save a lot and be in the ballpark performance-wise. With this in mind I wanted to spell out how to win in this context without being some sort stock picking genius. Below is a stock portfolio that someone who regularly reads Smart Money and Money magazines might have assembled in early 1993 (so 20 years ago).

  • Financials Fannie Mae (OTCQB:FNMA) and Bank of America (NYSE:BAC)
  • Healthcare Merck (NYSE:MRK)
  • Tech Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC)
  • Industrials General Electric (NYSE:GE)
  • Energy Exxon (NYSE:XOM)
  • Telecom Southwestern Bell
  • Staples Procter & Gamble (NYSE:PG)
  • Discretionary McDonald's (NYSE:MCD)

These were all very popular stocks 20 years ago and the 1990s was a heyday for the equity market. A couple of notes on the list include that I believe BAC's chart would actually be Nationsbank as when they merged it was the BAC name that survived but not the shares. AT&T (NYSE:T) is actually Southwestern Bell because the original T is no more. Picking a mainstream financial stock going back so far is difficult because similar to BAC, JPM has a lot of Bank One, Chemical and if I am remembering correctly I think Chemical bought Manufacturer's Hanover. Maybe Wells Fargo would have been a better choice.

Putting $10,000 equally into each of the 10 names until early 1999 would have worked out as follows;

  • Fannie Mae $42,089
  • Bank of America $30,051
  • Merck $33,843
  • Microsoft $161,845
  • Intel $107,089
  • GE $55,853
  • Exxon $28,760
  • AT&T $38,058
  • Procter $40,877
  • McDonald's $33,792

This would total $572,257 versus $332,519 putting the entire original $100,000 into Vanguard S&P 500 (MUTF:VFINX). Having made no trades, by the summer of 2002 the values would be as follows;

  • Fannie Mae $45,831
  • Bank of America $34,029
  • Merck $30,279
  • Microsoft $88,746
  • Intel $57,496
  • GE $54,077
  • Exxon $32,586
  • AT&T $21,134
  • Procter $42,919
  • McDonald's $21,634

The total in summer 2002 would have dropped to $428,731 and the all-VFINX option would have been at $247,508. At the 2009 lows this is what it would have looked like;

  • Fannie Mae $280
  • Bank of America $5219
  • Merck $17,525
  • Microsoft $8787
  • Intel $9810
  • GE $15,720
  • Exxon $65,923
  • AT&T $22.837
  • Procter $48,743
  • McDonald's $53,346

The total at the March 2009 low would have been $248,190 versus the all VFINX option at $207,650. Finally, having held on to all 10 through Friday;

  • Fannie Mae $219 lag
  • Bank of America $17,741 lag
  • Merck $36,574 lag
  • Microsoft $128,179
  • Intel $123,133
  • GE $56,425
  • Exxon $103,722
  • AT&T $47,014 lag
  • Procter $87,528
  • McDonald's $109,351

Today the portfolio would be worth $709,886 versus $513,903 for all-VFINX.

Of the 10 stocks, four lagged but the long-term total result obviously outpeformed. Keep in mind also that some of the names still greatly outperformed even after having done nothing for the last 10 or more years. I did not change the list during this number crunching so I did not know what the outcome would be but being right a little more often than being wrong would have delivered a very good result despite some periods of extreme lagging for the 10.

The point I intended to make was about rebalancing. I am a big believer in selling partial positions for any holdings that go up much faster than the market. While I would be clear that 10% in 10 stocks is not how I would ever construct a portfolio we can stick with the example. At the 1999 check point MSFT had grown to 28% of the portfolio and INTC 18%. In targeting 10% weightings here I don't know if at 18% I would have rebalanced INTC down (never started with 10% in one stock before) but I do think I've laid the groundwork to say with credibility that MSFT would never get to 28% after having started at 10%.

If money had come out of MSFT and gone into Fannie Mae then interestingly enough the rebalancing argument weakens if we stick with the same 10 stock universe.

Due to Super Bowl time constraints I will move this along to a conclusion. If you were to pick the same nine stocks for the next 20 years, omitting Fannie Mae, I imagine some would beat the market, some would lag and maybe one of the nine would be effectively out of business. The result might be ahead of the market or maybe not but combined with an adequate savings rate, I bet the investor holding the group would at least be in decent shape.

Please notice that I don't have any ownership disclosures to make. That means I don't own any of these stocks personally or professionally and right here right now there is no visibility to buy any of those names (unless they are in an ETF we own). I got the above data from Morningstar so I believe it does include dividends.

Picking 10 domestic mega caps to buy will probably never be the best result but it can still be a very effective result and is not insanely difficult. If that is one starting point then from there are unlimited different directions to go. A very simple way to go might be 10 more domestic mega caps (total of 20) for a little better diversification. A more complicated type of direction to go would be riskier companies like single-drug biotechs, stocks that capture a fad like Wheelies or tech stocks with products targeting a narrow application.

To the original reader comment, this makes "winning" complicated. A basic, simple portfolio with an adequate savings rate can get it done without "beating the market" and by "it" I mean having enough when you need it.

One last tie in to past blog themes. I've mentioned before that it would be great to be so correct with how a portfolio is put together that it never needs to be changed or rebalanced but of course this is not practical. The above 10 stocks were chosen with just two criteria. One is that they were mega-cap household names 20 years ago and that I could chart them for the entire 20 years. So that was as random as you want to believe (I think its was a reasonably random group).

If you can accept that this would not have been impossible to create 20 years ago and you really can define winning as having enough when you need it (not everyone can) then beating the market takes a back seat and the task does indeed become easier and simpler for someone wishing to be their own portfolio manager.

This was a long post so I had to take a pretty healthy dose of deer antler spray to get through.