OSV Auto Investing Paper Portfolio

Passive Investing with Automated Portfolio

I don’t know about you, but over the past couple of months, things have been extraordinarily busy. My usual 1-2 company analysis per week has now become 1-2 stock analysis per month.

So with 2010 just around the corner, I wanted to try something for next year.

Something that will resonate with many folks out there, especially for those who

• have an interest in investing but can’t dedicate the time
• have a 401k that they would like manage on their own
• prefer passive investing
• want an auto portfolio but not a mutual fund

My idea is to track the progress of a passive investing portfolio where stocks are added whenever all three of my stock value calculation methods is greater than the market price with a reasonable margin of safety.

Margin of safety doesn’t have to be 50% which is my personal strict requirement but the safety margin should be at least greater than 10%.

Why am I doing this?

Don’t misunderstand that I am advocating an automatic portfolio or passive investing. The reason for this is that if you’re a regular here at OSV, you’d know that I screen and filter through literally hundreds of companies each year.

Even now, trying to go through 200 companies is time consuming and in the process, I often miss a few real gems due to my haste. So I want to know whether a group of undervalued stocks that I deem undervalued will beat the market without  me having to do so much research.

Call it another version of Joel Greenblatt’s Magic Formula, except I base my decision not on the earnings yield, but on my ability to calculate and apply a realistic growth rate, discount rate and few other factors to calculate the intrinsic value.

How it Will Work

Basically this is how it will work.

• Throughout the year, use the investment spreadsheet to go through companies
• Apply and adjust numbers to get the intrinsic value based on discounted cash flow valuation, Graham formula valuation and EPV
• Quickly run through the financial statements to make sure there are no serious problems in the company (nothing too detailed)
• If all three intrinsic value calculations are higher than the market price add it to the OSV paper portfolio
• All positions will be $1000
• Positions are sold if it reaches intrinsic value

The only condition is that the company is not a net net, distressed opportunity or special situation. This portfolio is suited more for passive investing and auto portfolios.

Check out the few companies that are likely to make it to the portfolio highlighted in magenta below. Click to enlarge image.

Auto Portfolio Expected Outcome

Assuming you at least know how to adjust variables to calculate the intrinsic value, I expect that buying undervalued companies should beat the market.

I’ll update you with a monthly progress status and hopefully, things will look good.