Building A Successful Portfolio Similar To Building A Winning Football Team

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Includes: ABT, ADP, AFL, BMY, COP, CPB, CVX, EMR, ETN, EXC, GIS, HON, INTC, ITW, JNJ, KMB, KO, LLY, MSFT, PEP, PG, RPM, RTN, T, TEG, UPS, UTX, WM, WMT
by: Winning Formula

Recently I received a question on Seeking Alpha on how to determine which stocks to sell from my portfolio. My answer to that question was:

“I stay 100% invested in 30 DG stocks. Before I can buy a new one, I need to sell an old one. If the new stock is fundamentally better than one of my current stocks, I sell the one to buy the other. Many times the new one cannot displace an old one, so I don't do anything. All the stocks compete to stay in my roster, but I don't trade very often. I have an all-star lineup that is hard to improve.”

After posting this comment, I realized that building a successful portfolio is similar to building a winning football team. So I decided to explain my portfolio in football terms.

A football team has 22 players. These 22 players are divided into 11 on offense and 11 on defense. My portfolio has 30 players. There are 10 offensive players – stocks with a 60 month Beta of greater than the market. These stocks rise faster than the market in a bull market and fall faster than the market in a correction. The following stocks in my portfolio are listed in descending order of volatility: Aflac (NYSE:AFL), Eaton (NYSE:ETN), RPM (NYSE:RPM), Honeywell (NYSE:HON), Emerson Electric (NYSE:EMR), ConocoPhilips (NYSE:COP), Illinois Tool Works (NYSE:ITW), Intel (NASDAQ:INTC), United Technologies (NYSE:UTX), and Microsoft (NASDAQ:MSFT). There are 20 defensive players – stocks with 60 month Betas of less than the market listed in ascending order of volatility: General Mills (NYSE:GIS), Campbell (NYSE:CPB), Abbott (NYSE:ABT), Wal-Mart (NYSE:WMT), Kimberly Clark (NYSE:KMB), McDonalds (NYSE:MCD), Procter & Gamble (NYSE:PG), PepsiCo (NYSE:PEP), Bristol-Myers Squibb (NYSE:BMY), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), Exelon (NYSE:EXC), Waste Management (NYSE:WM), AT&T (NYSE:T), Automatic Data Processing (NASDAQ:ADP), Raytheon (NYSE:RTN), Lilly (NYSE:LLY), Chevron (NYSE:CVX), UPS (NYSE:UPS), and Integrys (NYSE:TEG).

On a football team, the offensive and defensive teams are further divided into groups including the line, linebackers, running backs, quarterback, kicker, wide receivers and defensive backs. The market, as defined by the S&P 500, is also divided into groups. The following table lists the S&P 500 groupings. To have a winning team, the coach selects the best players available within the salary cap of the team and each position on the team needs to be selected to complement the other players.

My Portfolio %

S&P 500 %

Cyclical Sectors

9.38

28.43

Basic Materials

3.12

3.44

Consumer Cyclical

3.13

9.23

Financial Services

3.12

14.04

Real Estate

0

1.72

Sensitive Sectors

50.00

45.56

Communication Services

3.12

4.34

Energy

12.5

12.43

Industrials

28.13

12.31

Technology

6.25

16.47

Defensive Sectors

40.63

26.01

Consumer Defensive

21.87

11.20

Healthcare

12.5

11.49

Utilities

6.25

3.32

The coach may decide to be a passing team and choose to spend more of the salary cap on the best quarterback, wide receivers and offensive line. The coach may decide to be a defensive team and spend more of the salary cap on the best defensive ends and defensive backs. I have decided to be a dividend growth investor, so more of my portfolio value (salary cap) was spent on defensive players. The cyclical group is more offensive and the defensive group is obviously more defensive. You can see my portfolio is weighted more toward defense.

The coach spends time studying the players, their stats and choosing whether to keep the current player or trade for another player. If a player is not performing well, the coach is more likely to look for a replacement player. As an investor, you need to look at the fundamentals of each of your stocks, compare them to the fundamentals of the available stocks, and decide if you want to trade one of your current positions for another position. For an example of how to use fundamentals to sell and buy stocks, see my article.

As you can see, developing a portfolio is similar to being a football coach. A football coach has offensive and defensive players on their team. They have players for all positions and have more than quarterbacks on their team. A coach analyses each player on the team and decides which ones give them the best opportunity to win. As a diversified investor, you also need offensive and defensive stocks in your portfolio and need to diversify among the various sectors of the market to have a winning portfolio season after season. You monitor your positions to keep the best available stocks in your portfolio.

Disclosure: I am long AFL, ETN, RPM, HON, EMR, COP, ITW, INTC, UTX, MSFT, TEG, UPS, CVX, LLY, RTN, ADP, T, WM, EXC, KO, JNJ, BMY, PEP, PG, MCD, KMB, WMT, ABT, CPB, GIS.