The amateurish way in which Gaffer's portfolio was chosen

and how the system saved the day

Gaffer's portfolio was established using final trades of December 2008 to either prove or disprove in real time that The Gaffer Wealth System works.

But there was a problem: I have been associated with investments both professionally and privately for 55 years. The system must work for ordinary men and women who have no clue about the stock market. After all, these are the folks for whom the system was developed so they could avoid all the mistakes I made starting at age 20.

I retired as a professional in 1998 but I clearly still have more knowledge than any beginner.

The portfolio follows all the strategies described in The Gaffer Wealth System, an unusual and simple multimedia teaching system for beginning investors and even for intermediate ones. But there was one major problem: How could I demonstrate whether the system would work for you? 

I needed as best I could to show that anyone can use the system with no previous knowledge and do so successfully.

The 20 companies within the model portfolio are each from an entirely different industry. They might have been picked with a pin; it wasn't quite like that, but close.

I have lived in Panama for the past six years, in a mountain village far removed from the financial world. I watch CNN so I am reasonably up on significant world events. President Obama was about to take office and I knew some of his agenda for change the last trading day of December 2008.

On the Internet and freely available to anyone is a list of stocks that allow dividends to be reinvested and another that describes the industry group to which each stock belongs. The description of the industry for each selected stock is straight out of Yahoo Finance (Company > Profile).

That's all! I had nothing else to go on except ordinary commonsense – which I assume you already have or you would not be reading this.

You are fully capable of selecting a winning portfolio. I demonstrate this in The Gaffer Wealth System and in an article in my upcoming multimedia blog, www.TheStockMarketForBeginners.com  due to be launched in September or early October. I think I demonstrate it here, too. What do you buy at the grocery store? Which is the best brand of popular car? If you don't know, ask friends. As the economy recovers do you believe the world will use more energy? If so, what will happen to the price of oil? It truly is that easy.

Now let me go through the portfolio I chose to show you how I made all kinds of beginner-type mistakes and how The Gaffer Wealth System not only saved my bacon but so far has allowed the model portfolio to vastly outstrip the S&P 500 Index of stocks.

I'll take them in alphabetical order and you can check the actual records on the following pages which begin with May09 under this current page.

The portfolio record started at the end of January, 2009, on www.lunchwithgaffer.com (where you will find full details of The Gaffer Wealth System) but it was not kept as a running record. Each month, the previous month was wiped out and replaced with the new month. Then some complicated behind-the-scenes programming was added for which I had to call in an experienced programmer. That meant changes or updates I made to the site messed up his programming (which uses a different code than the one I use). As a result, an ongoing record of changes in the portfolio was switched to this site which includes nothing I could mess up. I hope you like the new arrangement.

So let's start at the top and I will give you the reasons for my choices (and often surprises I had when my reasoning was wrong).

We've all seen Caterpillar heavy equipment. President Obama promised major infrastructure work to rejuvenate the economy, things like roads and bridges. Caterpillar is the leader in its industry so of course road and bridge building would be a marvelous stimulus for it. Here's what happened during the first six months of 2009: Bought at $44.67; price at the end of June: $33.04! How's that for professional research! But the point is that any amateur may have reached a similar conclusion and bought Caterpillar.

Am I concerned? Absolutely not! Caterpillar will have its day when funds are actually released for building roads; first the roads, bridges and other projects have to be designed.

Diana Shipping is one of four companies (20% of the list) that I had never heard of but it fit the profile of a company in which I could invest with zero brokerage fees. What is dry bulk cargo (see company description on the next page)? I can only guess, but it struck me that as the economy recovers and powerhouses like China and India increase activity and imports, shipping should do well. There was a small profit in this company by the end of June.

I had heard of Freeport-McMoRan Copper & Goldin the dim and distant past but had never invested in the company and so knew nothing about it other than what its name describes. I could see that it reached a high of $127.24 in 2008. Apart from its use in jewelry, gold has a role to play in the ever-expanding electronic market, and – if you remember before the economic downturn – the Chinese were buying copper like there would soon be no more left and prices shot through the roof. 

It seemed reasonable to buy at its then-current price of just $24.44. A low price is not necessarily a bargain, but I was sure this company would weather the recession and live to fight another day. By the end of June it was nice to see my investment had more than doubled to $50.11. 

Brokerage firm Goldman Sachswas an intriguing idea. I wanted a financial services company in the mix for a number of reasons: 

• Despite the collapse of Lehman Brothers and the problems many other financial services firms were having, including major banks and AIG, I knew that when the dust settled corporations would still need a means of marketing their shares;
• I had heard nothing negative about Goldman Sachs, though I did no research; and
• Less competition ultimately should be good for its business.

The 2008 high was $216.79; the portfolio bought at $84.39. The stock was at $147.44 at the end of June and at the time of writing (July 26) is at $160.44 not counting the quarterly dividends that have been paid and reinvested. That's roughly a 100% gain in six months.

Yes, I am a former broker, though I had no connection with Goldman Sachs, but anyone could have used the same reasoning I did when I made the selection while the market overall was still tumbling at the start of this year. The S&P 500 Index lost 8.57% in January and the model portfolio lost 2.47%. Worse was to come for both in February.

I remembered that do-it-yourself stores tended to do quite well in recessions as homeowners fixed homes rather than trading them – and who was going to voluntarily trade homes this time given their dramatic price slump. So Home Depotseemed like an obvious defensive choice. It was; the portfolio has not lost money! Shares were bought at $23.02 and by the end of June had staggered to $23.63! 

Recessions are bad for computer makers and the makers of parts that go into them. Purchases are delayed for as long as possible, and a little past knowledge did come into play here: I remembered that they, like financial companies, typically led others into the next bull market. That led to choosing chipmaker Intelto be one of the 20 portfolio picks. Just about anyone knows it is a leader in its field, so choosing it took no particular skill the ordinary computer user might not have. It was bought for $14.66 and six months later was up almost $2. 

Johnson & Johnsonhas been disappointing though the portfolio has not lost too badly once dividends are factored in. Baby powder and Band-Aids seemed like a recession-proof bet. JNJ is a well-run company that in the past has made a lot of money for its shareholders. I knew that much but anyone could have discovered the same information. The only difference between me and you: I did not need to do any research. I bought at $59.83 and by the end of June the stock had slipped to $56.80. So much for prior knowledge and experience! 

Korea Electric Poweris another of the four companies I had never heard of. I chose it because power companies normally pay healthy dividends and are therefore defensive in down markets. It also gave the portfolio some foreign diversification and protection in case of a falling U.S. dollar. If you still need proof of my deliberate lack of research, I did not know at the time the company had suspended dividends to preserve cash flow during the recession. 

The stock has given a somewhat bumpy performance but was losing just pennies – from $11.61 to $11.50 by the end of June. 

Kraft Foods? Hey, all that macaroni and cheese has to do well in a recession, right? Oops! So much for a defensive stock! Bought at $26.85, it has slid to $25.34 after six months! You, as a grocery shopper, might have had your own reasons for buying this stock – or maybe Kellogg's or some other favorite brand that's been around a while. Perhaps Heinz for the Ketchup you put on your macaroni and cheese! 

What I'm trying to prove to you is that this stuff is not rocket science! It took me less than an hour to look through the list of 1,300 eligible companies and make 20 choices, some great and some not so great. 

Nikeseemed like another obviously defensive brand. All those out-of-work stock brokers could park their Gucci loafers while construction workers could hang up their work boots and relax in running shoes instead. Maybe I really should have used a pin to make my selections! Bought at $51.00 it was $51.78 at the end of June! 

It didn't seem to matter whether it was Pepsior Coke, except I am sometimes partial to underdogs. I drink neither but I assumed a lot of nervous out-of-work people might raid the fridge more often. We are not normally a disciplined lot and it didn't occur to me (though it is eminently sensible) that folks would see soft drinks as an unnecessary luxury. Pepsi was bought for $54.77 and by June 30 had rocketed to $54.96! Plain cold water anyone? 

Potash Corpproduces fertilizer. I didn't choose it as a defensive investment for today but because as the economy improves and China in particular needs more agricultural products to sell to a wealthier, larger and hungrier population, food costs will undoubtedly rise, more production will be required, and fertilizer will be in greater demand. I did not expect immediate results (remember, this is a long-term portfolio designed to require just about one hour of work per year) but I got them anyhow. 

I paid $73.22 for Potash which, in 2008, had been as high as $241.62. It stood at $93.05 after just six months. 

Schlumbergeris a name I knew from years gone by but I couldn't remember what it did. When I learned it is into oilfield servicing to recover more oil and gas from wells I immediately thought of President Obama's quest to make the U.S. more energy self-sufficient. All I knew about the company is what you can read beside the entry on the next pages – except I knew it had been around for a few years. Maybe the portfolio is not fully diversified because it also contains an oil company that we'll get to shortly. 

Schlumberger has not disappointed. Bought at $42.33 (it had been as high as $111.95 in 2008) it had risen to $54.11 by the end of June, a gain of 27.83%. 

Here's another of the companies I had never heard of, Chinese company Suntech Power Holdings. And, like all the other companies in the portfolio, it can be bought in the U.S. I was intrigued when I learned it is the world's largest manufacturer of photovoltaic cells and modules, those things that turn free sunlight into electric power – another way out of foreign oil blackmail. 

Bought for $11.70, the stock promptly plunged to $5.34 over the next nine weeks but by the end of June had risen to $17.86 and was above $20 in late July. After losing more than 50% it is now up close to 100%. When you recognize the protections built into The Gaffer Wealth System you can weather volatility like this. The initial drop in price actually allowed for great profit later on as we were able to buy more shares each month at lower prices through dollar cost averaging.

So long as you have overall confidence in your strategy you can actually welcome market downturns almost as much as bull markets. Both help you make more money if you follow a few simple rules.

For me, Toyota was an obvious choice. My wife owned one in Canada once. She had had it for three or four years when she was asked if she would bring it into the dealer and leave it there for 24 hours. A team of four technicians from Toyota in Japan gave her entire car a microscopic inspection looking for rust which had been plaguing some manufacturers. She was given a free rental car while they worked on hers. She had looked after it well in a part of the country where it seemed there was more salt on winter roads than in the ocean – but there was not a speck of rust. 

Although I had never owned a Toyota, I heard nothing but good comments from people who did, who found them reliable and easy to fix if something went wrong. 

While GM and Chrysler had their troubles, Toyota continues to make money. Bought for $65.44, it stood at $75.53 at the end of June. As this is written near the end of July, it is now above $80 and has been over $83. 

Transoceanprovides offshore drilling services under contract to oil companies. President Obama's stated wish to increase offshore drilling in Alaska and elsewhere rang a bell with me here. The portfolio bought at $47.25. The price was $74.29 at the end of June and was at $81.73 near the end of July. 

Transocean made the list simply because I listened to the news and Obama's desire for energy self-sufficiency, news everyone heard over and over again. When I saw what Transocean does, it became an obvious choice. 

Although already heavy of the energy side, and for that reason not perfectly diversified, Ultra Petroleumwas added as a pure oil and gas exploration company. Although prices have slipped dramatically from their 2008 highs, my belief is that once the economy becomes healthy once more prices will rise again. This stock, in a sense, is partial insurance against that. 

Bought at $34.51 it was $45.28 at the end of June but had slipped to $43.36 near the end of July. 

Union Pacificwas bought for $47.80 when the freight business was in bad shape. But I had faith in the eventual recovery of the U.S. and world economy. Recovery results in more imports and exports – more freight. By the end of June, the stock was ahead more than 10% at $52.06. It had jumped to $56.56 near the end of July. 

The remaining three stocks in the portfolio have all been a disappointment so far: Verizon, Vulcan Materialsand Wal-Mart. Perhaps naïvely, I did not expect the recession to have much effect on Verizon, nor did I anticipate the competitive problems it has been going through. Bought for $33.90, it was $30.73 by the end of June though was attempting a small recovery near the end of July. 

Vulcan Materials is a major producer of the stuff from which roads are made: an obvious choice under the economic recovery plan. But, like Caterpillar, it has had to wait for construction to actually start. Planning and bidding do not take place overnight however much we might need the jobs.  

Bought for $69.58, Vulcan the stock plunged to $34.65 and now seems to have stabilized around $46. Meanwhile, additional shares have been bought each month at lower prices, boding well for the future. 

I thought Wal-Mart, with its inexpensive goods was a perfect defensive company for a recession. People, even those on unemployment insurance, must still buy necessities, so my thinking went. The stock was bought for $56.06 and by the end of June stood at $48.44. It seems for the moment to be in a sideways trading pattern and going nowhere. 

As you can see from this rather long tale, my professional skills were not used in the choice of stocks, just some basic diversification and hunches gleaned from the daily round of mostly-political news available to everyone with a TV and CNN.

In a few days, I will know what the results are to the end of July and they will appear on a page called July09 on this site. So how did we do in the first six months when the S&P 500 Index was up 0.76%? I am almost embarrassed to say, despite all the less-than-perfect choices, the portfolio is up 40.5%!

It certainly was not because of masterful selection or specialized knowledge. I simply followed a truly easy system, listened to the news as I do almost every day, and used what I thought was commonsense. Did it work every time? Not at all! But it worked often enough and well enough to make up for the losses and provide an overall annualized gain of 40.5% in the first six months.

Is that long enough to prove anything? Was it sheer luck? I have no idea. I know what I'd like to prove but I'm not sure this is yet proof, though it is encouraging. I hope you will continue to watch with me as the months continue to unfold.

I expect the portfolio – any properly constructed portfolio managed according to The Gaffer Wealth System – to beat the long-term market average, but not by almost 40%. The system gives several very slight advantages over the general market which itself has a long-term average annual gain of 10.8%. Frankly, I expect the average long-term gain for the portfolio to be two or three percentage points higher than that for the S&P 500 Index, at around 12% to 14%. But that's just a guess. I don't know any more than you do.

So please keep watching.

You can comment and discuss on the blog at http://lunchwithgaffer.com/portfolio . That's a good place to ask questions, too.