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Investing: Following the masters

Computerized copycats are trying to mimic top stockpickers. True, imitation is the sincerest form of flattery—but is it the way to invest?



Benjamin Graham sure knows how to pick stocks. The man who's known as the father of security analysis once parlayed a $720,000 investment into $500 million, and his portfolio outperformed the market last year by more than seven percentage points. This is particularly impressive—and, at first, mystifying—when you consider the fact that Benjamin Graham died almost 30 years ago. So how is it, then, that Graham's portfolio continues to not only survive, but to thrive?

Graham "lives" thanks to John Reese. Two and a half years ago, he began adding guru-based portfolios to Validea.com's offerings in the belief that, if you're going to invest in stocks, you might as well take your leads from the best. Reese got the idea for emulating the methodology of master investors after reading One Up on Wall Street by Peter Lynch, former manager of Fidelity's flagship Magellan mutual fund and the namesake of one of Validea's computer models. "It took me two hours to analyze data and pick a single stock using Lynch's criteria," recalls Reese. "I have a background in computers, so I put together a program that could gather and analyze data according to certain guidelines, screen the universe of stocks, and make instant selections."

Since then, he's expanded his computer stock screens to offer 11 different gurus' portfolios, based on the experts' writings, statements, or actions. Portfolios contain the 10 or 20 highest-rated stocks that meet a particular guru's investing criteria. "They're faithful implementations of strategies that made these men successful," says Reese.

But to make each portfolio work as he intends, you'll have to buy all of the stocks in it and make trades yourself as its composition changes. (There's no trading on Validea.com you'll have to do that at another website or through a brokerage firm.)

The American Association of Individual Investors ( http://www.aaii.com) also offers guru portfolios. Here, we look at the principles of guru investing and some comparisons between the portfolios offered by Validea and the AAII.

Attempting to replicate past glories

Each of the guru portfolios attempts to follow in lockstep with its namesake. Graham, for example, felt you should only invest in a stock whose real value was at least 50 percent more than its share price, and he measured value largely by future earnings potential. In his book, The Intelligent Investor, he argued for buying stocks of large, conservatively financed companies with long records of dividend payouts. Validea's Benjamin Graham portfolio reaped an average annual 31 percent since its July, 2003 inception, compared to the S&P 500's 9.4 percent.

The same care is taken in creating model portfolios from other investment greats. For instance, the stock selection compiled in the mold of Warren Buffett—widely considered the best investor of all time—zeroes in on only those stocks whose return on equity was at least 10 percent for each of the last 10 years. Then there's the portfolio configured to the beliefs of guru David Dreman, manager of the Scudder-Dreman High Return Equity Fund and well-known for his contrarian style. He likes to invest in fundamentally sound large companies that are out of favor for some reason. And Kenneth Fisher, author of Super Stocks, popularized the idea of using price-to-sales ratios to isolate companies with growth potential; the Validea portfolio named for him follows that philosophy.


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