Investing Is About the Whole Portfolio

This column was originally published on RealMoney on Aug. 12 at 3:00 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

I'm not crazy about giving individual stock ideas on RealMoney because all investing is best viewed in a portfolio context. Individual stock ideas are important, but I believe portfolio construction and management are more important.

Too many investors are looking for the next hot company when they should really be looking for a consistent theory of how to produce reliable returns while minimizing downside risk.

In my column Evolution of an Investment Style, I tried to describe how I achieve above-average returns while trying to squeeze out risk. This is not an easy process, but it is achievable if you think about investing in the same way an intelligent businessman thinks about his own firm.

That's what my seven rules from that column are all about.

One of the first things you'll notice is that there doesn't seem to be any rhyme or reason to the order in which the stocks are listed. There is a logic here, but the order is based on the timing of initial purchases. Stocks that I have held the longest are on top, and stocks that I have bought for the first time most recently are at the bottom.

This helps me see on a day-to-day and week-to-week basis, which group of ideas are doing well. If my newest are doing well, there may be some mean-reversion happening in valuations.

If my oldest are doing well, there may be a bit of momentum happening for those that have already reverted to the mean. Because I tend to make shifts to the portfolio quarterly in groups of four or so stocks, I can see themes working out as I look at performance in the order that stocks were purchased.

The Current Portfolio

Listed below are the stocks in my portfolio. They are roughly equal-weighted.

Value With a Twist David Merkel's current holdings
Name	Aug. 10 Close	P/E	Yield	Market Cap	P/E (This Year)	P/B	P/S
Cemex (CX:NYSE)	46.94	6.99	2.51	16.80	8.98	1.83	1.45
Dycom (DY:NYSE)	23.50	21.08	-	1.15	20.98	2.01	1.13
Cytec (CYT:NYSE)	48.25	14.87	0.83	2.22	14.26	1.81	1.18
Ameron (AMN:NYSE)	37.25	21.08	2.14	0.32	10.35	1.14	0.49
Allstate (ALL:NYSE)	58.04	11.62	2.04	38.79	9.33	1.74	1.13
Unilever PLC (UL:NYSE)	41.19	19.40	3.51	66.36	13.18	6.90	1.32
Liz Claiborne (LIZ:NYSE)	41.80	14.18	0.54	4.57	13.71	2.43	0.94
Fresh Del Monte (FDP:NYSE)	25.46	10.80	3.91	1.47	10.97	1.37	0.46
Montpelier (MRH:NYSE)	34.27	11.12	4.08	2.17	7.53	1.49	2.36
PartnerRe (PRE:NYSE)	62.92	7.43	2.26	3.47	8.84	1.00	0.84
ConocoPhillips (COP:NYSE)	65.64	9.66	2.07	91.39	8.42	2.00	0.71
SPX Corp. (SPW:NYSE)	45.36	3.75	2.22	3.41	17.43	1.21	0.76
Canadian National Railway (CNI:NYSE)	67.44	16.43	1.26	18.57	15.36	2.44	3.23
Petro Canada (PCZ:NYSE)	79.42	18.95	0.74	20.83	12.13	2.78	1.67
Stone Energy (SGY:NYSE)	53.71	9.63	-	1.44	7.86	1.51	2.34
Barclays PLC (BCS:NYSE ADR)	42.39	12.67	4.22	68.39	11.54	2.20	2.85
Valero Energy (VLO:NYSE)	90.77	10.74	0.49	23.30	10.14	2.92	0.37
Toyota (TM:NYSE ADS)	78.42	11.93	1.24	128.10	11.12	1.53	0.75
Sappi (SPP:NYSE ADS)	10.88	51.92	2.78	2.46	90.00	1.13	0.50
Apache (APA:NYSE)	71.93	11.09	0.46	23.61	9.46	2.48	3.60
Premcor (PCO:NYSE)	81.05	9.80	0.08	7.24	9.91	2.75	0.38
Ryerson Tull (RT:NYSE)	19.37	6.05	1.28	0.49	5.13	1.05	0.10
Jones Apparel (JNY:NYSE)	29.03	13.14	1.79	3.44	12.10	1.31	0.70
Neenah Paper (NP:NYSE)	31.45	20.09	0.93	0.46	20.09	2.40	0.63
Johnson Controls (JCI:NYSE)	57.46	12.39	1.70	11.03	12.83	1.91	0.39
Japan Smaller Capitalization Fund (JOF:NYSE)	11.81	5.20	-	0.19	50.00	0.98	108.19
Pfizer (PFE:NYSE)	26.39	20.04	3.43	196.20	13.39	2.92	3.70
Sara Lee (SLE:NYSE)	20.02	13.31	3.83	15.76	13.51	4.61	0.80
Repsol (REP:NYSE)	29.61	14.95	2.19	36.15	8.98	2.00	0.80
Premium Standard (PORK:Nasdaq)	14.76	6.70	0.41	0.46	9.07	1.10	0.40
Anglo American (AAUK:Nasdaq ADR)	26.72	11.68	2.62	39.62	10.32	1.59	1.53
ABN AMRO (ABN:NYSE)	24.73	11.54	7.52	41.28	10.25	1.78	1.61
Gold Kist (GKIS:Nasdaq)	18.93	8.60	-	0.97	7.86	2.46	0.90
Dana (DCN:NYSE)	15.01	11.73	3.12	2.26	12.92	0.98	0.24
SABESP (SBS:NYSE)	17.14	8.00	4.52	1.95	10.05	0.54	0.98
		11.68	2.04	4.57	10.97	1.81	0.90
Source: David Merkel, Yahoo!

This Portfolio Is Weird

Even though I manage this portfolio the same way that a "long-only" mutual fund manager would, because my portfolio is diversified by country and capitalization, it doesn't fit any of the neat classifications common to mutual funds. I'm not running a mutual fund for which I'm anxious to gather assets, so this doesn't bother me. Given that, I will now describe the way the portfolio breaks down by country, capitalization, sector and industry.

Sector Mix The makeup of this portfolio defies easy categorization

Source: David Merkel