Getting Your Portfolio in Better Shape, Part 2

What I Bought

Bronco Drilling (BRNC): Seems to be a cheap land driller and replaces some of the exposure I lost selling Apache and Devon.

Komag (KOMG), Nam Tai Electronics (NTE) and Vishay Intertechnology (VSH): Cheap technology stocks that are near the beginning of the technology food chain. The businesses are more stable than those who buy their products.

Summary

Here are the key ideas:

1. Systematically rank your portfolios for valuation, neglect (out of favor), and earnings quality (NOA).
2. Do swap trades to force improvement in your portfolio.
3. Make swap trades in bunches, and not too many of them at a time, to avoid overtrading. Good ideas take time to work out.
4. Focus on industry selection, because it is 60% of the game.
5. Think about how each company that you add and delete will affect the portfolio on the whole.

If you do these things consistently, your portfolio will stay fresh, you will not overtrade and you will end up with a good balance of cheapness and growth potential due to industry selection. Individual company risk gets reduced by a focus on balance sheet quality and NOA. This is how I avoid risk, which enhances return.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Lithia Motors, Optimal Group, P.A.M. Transportation, Spectrum Brands, National Coal, Home Solutions of America and Bronco Drilling to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

>To order reprints of this article, click here: Reprints