Modern Portfolio Letter

Best Risk Adjusted Returns (Net of Tax)

July 2001

Objective: To pick stocks that as a group provide greater returns than an unmanaged index. The index is the Value Line Index which has approximately 1700 stocks. The stocks include value/growth stocks; small / large capitalization stocks; and domestic/ foreign stocks. The second index used to measure performance against is the S&P 500 index, the most common index used. The S&P 500 has 500 stocks in its index.

Training and Education:

The characteristics of the short term portfolio is that it is a small capitalization stock portfolio where the valuations are reasonable with very fast growth rates in earnings. The characteristics are compared to the S&P 500 Index. The S&P index are stocks with large market capitalization and have high growth rates. As you can see by the numbers, the short term portfolio is a growth portfolio in which the valuations are below the S&P 500. This is called growth at a reasonable price or GARP

The characteristics of the long term portfolio is valuation which are substantially below the S&P 500 index and the growth rate is lower but the profitability is only slightly lower that the S&P 500. These stock tend to be the survivors in industries where there will be consolidations and less competition in future years. These companies will be the beneficiaries of having clean balance sheets and good cash flow underneath the accrual accounting.

(1) The S&P Index is the most common index used to measure performance of professional money managers. Under performance of the portfolio to the index over a long period is usually grounds for dismissal.

SHORT TERM PORTFOLIO (6 TO 12 MONTHS)
(Portfolio Based Upon Pleasant Earnings Surprises and Relative Strength)

Cyclical (Stocks very sensitive to the general economy e.g. building, autos)

Interest Sensitive (Stocks Sensitive to Change In Interest Rates e.g. Banks, Insurance Companies)

Inflation Sensitive (Stocks Sensitive to Changes In Inflation e.g. Gold,Oil, Timber)

Noncylical (Defensive Stocks e.g. Food, Tobacco, Health Care)

LONG TERM PORTFOLIO (1 TO 5 YEARS HOLDING PERIOD)
(Based Upon Valuations Trading Below Each Companies Long Term Valuations)

Cyclical

(1) Spin Off of Deluxe

Interest Sensitive

Inflation Sensitive

Defensive Sensitive

Portfolio Management Guidelines:
1. Pick 8 to 24 stocks from the recommended list.
2. If the stocks are available put 30% in Foreign Stocks and 70% in
Domestic Stocks
3. If the stocks are available put 25% in each category, cyclical,
defensive, interest, inflation
4. Mix the stocks with a money market fund. This will affect the risk
characteristics of the portfolio. More money market funds less risk.
There is no right or wrong answer, mix so you feel comfortable.
5. Please don't buy stocks that are in your own occupation. Most
investors get caught in this mistake. Diversify individual stocks, the average investor does not do this.

Reasonable Expectations of Return: Some reference points to examine how your portfolio is doing.

Annual Rates of Return

S&P 500 Return -4% The average return of a mutual fund, including mutual funds that go out of business

S&P 500 Return +0% Matching the S&P 500 return puts the portfolio in the top 20% of all portfolios

S&P 500 Return +2% The top rankings of all portfolio managers examined by Morningstar, defined as alpha, the return not explained by the S&P 500 returns

S&P 500 Return +5%. The returns achieved by Benjamin Graham, the father of fundamental analysis

S&P 500 Return + 11% The returns of Warren Buffet, one of the wealthiest people in the United States, from the late 1950’s to the 1980’s

Editor: Scott Carter
MS Finance MAS Accounting BS Economics CPA Certified Public Accountant CMA Certified Managerial Accountant Member of the Investment Analysts Society of Chicago, Member of AIMR: Association of Investment Management and Research

The publisher owns stocks from the recommended list and trades according to the recommendations.

Past Performance is not a guarantee of future results.

Subscription rate is $240 per year for 12 issues. New stock selection are posted when found on the Internet site www.scottsmpl.com within the month.

Scott Carter’s Modern Portfolio Letter
1015 Deerfield Road Suite 235
Deerfield, Il 60015