Thinking About My Tracking Portfolios

As my avid readers know, I create a tracking portfolio of the 50 stocks greater than 100m every month and hold them hypothetically for a year. I also then track the Russell 3000 and see which is doing better.

Then I publish how they are doing pretty much every month either here or on the Yahoo board. Now here is something I have been thinking about. For any month in isolation, the approach is fine. But for the totals I have simply been taking an average, and that is obviously not right over time. If one stock goes up 10%, then the next year it goes down 10% that is different from another stock that goes up 50% and then down 50%. But my approach after two years would show them both "averaging" 0%.

So what I have done is take my tracking and assumed in the first year that I invested 100k evenly over the first 12 months. Then figure out where I would stand today.

To illustrate the difference, right now the average annual change has been +0.4% for my mechanical portfolios. The average change for the Russell 3000 has been -2.4%. But if you'd put the $100,000 in each over the first year (2006) you'd have $97,312 in MFI and 89,751 in IWV. So you'd be down about 3% in total (despite the "average gain") in MFI and down a bit more than 10% in IWV. Obviously volitility of the portfolios is a key. The standard deviation of the portfolios is .27 for MFI vs 21% for IWV, so that also explains why the "spread " isn't as great as the out and out averages.

It was kind of a sucky day for my portfolio today. Largely driven by two stocks that reported earnings.

GME had pretty poor earnings (GameStop posts slimmer Q2 profit, cuts forecast). They were down 7%. They discussed the company on Fast Money. On one hand, the stock is relatively cheap at $23.41 a share despite guidance between $2.40 and $2.60 a share. But one thing I hadn't thought about was the potential for video games to go the way of music and movies. Will Gamestop be the Blockbuster vs Netflix? Or the CD stores against the Ipod? Or the TV against the Internet? I am starting to have 2nd thoughts about GME.

BKE was a real head scratcher today (The Buckle posts 12 percent increase in 2Q profit). Up 12%, revenues up, beat guidance... yet the stock sells off about 4%. I am bullish.

Then to close, I was reading an interesting blog about GTLS, which is new to my mechanical portfolio but I haven't bought (Chart Industries Rides the Natural Gas Trend). GTLS is around $21 a share, still down substantially from $55 52 week high. Per the blog, GTLS manufactures and supplies engineered equipment used in the production, storage, and end-use of hydrocarbon and industrial gases in the United States and internationally. If we really start tapping into the natural gas wealth of this country, it may depress the price of natural gas but will be a boon for storage and pipeline companies. Hmmm. I may add them next week.

Watching Mad Money, they just had the CEO of Shaw Group on to talk about Nuclear Power. I should have, would have, could have bought SGR when it hit my Mechanical screen. It is already up 37% since July 10th.