BI > SEPTEMBER 2004

Dipsticks as Divining Rods

Embracing Simplicity in Portfolio Decision-Making

"We're back, in the car again." -- Tim Murphy, "Jurassic Park"

I often think of automobile components when describing the NAIC approach to investing. We've discussed people who drive using solely their rear-view mirrors on these pages before. We've also extolled the virtues of windshields. Some NAIC investment clubs use dashboards to navigate the bumpy roads of long-term investing. We've even "whispered" warnings about risk and road kill. It's now time to turn our attention to the most indispensable automotive part of them all -- the dipstick.

Disclaimer: My family's awareness of the joys of automobiles may have been unduly influenced by our relocation to Detroit a few years ago. After all, that first experience at our daughter's soccer game soon after moving to Michigan left an indelible mark. It was here we first encountered scores of parents on the sidelines reading the latest bestseller or indulging in various other distractions. Sure, we'd seen parents partaking in diversions back in Illinois. And we understood, too. After sitting through our third straight scoreless tie, it was clear there was some time available between goals.

But this was the first time we'd seen a parent reading an automotive technical and repair manual on the sidelines. The guy next to him was devouring a copy of Better Investing. I walked by the first guy and muttered something in honor of Chilton. I didn't want to admit I still couldn't find the latch to release the hood on my own vehicle. Turned out the guy speed-reading his magazine would send it to his parents in Tulsa when he finished each month. NAIC investors are clearly a frugal bunch.

Under the Hood

Doing it yourself is a large part of NAIC investing. Thank goodness that our life with automobiles helped us along this way a couple of decades ago. Do you remember the days of full-service gas stations?

I know it's hard for some of you to believe, but there was a time when people didn't have to pump their own gasoline. At the best service stations, you'd pull in with the family in tow in the station wagon and watch as four men in uniforms descended on your car not only to pump the gas, but also to check the air in the tires, clean your windshield and pop the hood so that they could check the oil level and add some washer fluid if you needed it. At this point, some of you think I'm crazy, or you've forgotten those good old days before self service arrived at the gas station. You have two choices. You can either rent a copy of the film "Back to the Future" with Michael J. Fox and see for yourself, or you can drive to Oregon where the pumps are still attended.

Click to enlarge.

"Dipstick Oil Analysis," Practicing Oil Analysis Magazine, November 2003.

Most people probably don't check or change their oil often enough. You probably didn't know there's a magazine dedicated to dipstick analysis. I'm not making this up. The publication is Practicing Oil Analysis and it even has its own version of the Oscar, the Augustus H. Gill award for achievements in oil analysis.

Your Portfolio Engine -- Three Main Dipsticks

Did you know your portfolio has an engine, too? There are three dipsticks you should check regularly and "fill or drain" when necessary. They are portfolio quality, overall sales growth and expected reward.

You can use the report card method (see the cover story) to check the quality. It appears that the more successful investment clubs achieve magna cum laude GPAs of 3.75 or so. NAIC co-founder George Nicholson suggested that the low- and high-level marks on the overall sales growth dipstick are something like 10 and 12 percent. The third dipstick is expected reward. The reward dipstick can be focused on either upside-downside ratio or the estimates of total returns determined by our NAIC Stock Selection Guides. George Nicholson's low oil level was a portfolio upside-downside less than 2.0. When this level droops below 2.0, it's time to add some upside. My personal preference is the projected average return (PAR), and I like to keep the portfolio between 15 and 20 percent on the reward dipstick. Whether your portfolio is a Lamborghini or a Roadmaster, it has dipsticks that need to be checked regularly.

Mark Robertson is director of online resources and senior contributing editor for BetterInvesting. He serves as a member of BetterInvesting Magazine's Editorial Advisory & Securities Review Committee. Mark can be reached at Robertson_Mark@comcast.net.