In his article in last Saturday’s Report on Business, Rob Carrick dredged up an idea he came up with in 1999 - the ‘Two-minute Portfolio’. It involves investing equal amounts in the two largest stocks in each of the S&P/TSX’s sub groups.

Since 1999, the portfolio has basically equaled the return of the S&P/TSX Composite Index – outperforming by a bunch in the down market and lagging significantly in the commodity-driven bull market.

The article spurs me to make the following comments:

• I like what the Two-minute Portfolio (and ones like it) tries to do – provide a balanced equity portfolio that doesn’t get overly tilted towards a particular sector(s). And it takes the emotion out of investing and stays disciplined at times when it is the hardest to do (i.e. think back to 1999).
• There are lots of these types of strategies. They are appealing to many investors because they have catchy names and are easy to implement.
• We must remember that they always reflect what’s happened in the past. And in the case of the Two-minute Portfolio, it is the recent past.
• In general, the ones that get the press attention are the ones that have a good record at the time. This, of course, is similar to stocks, mutual funds and fund managers. In fairness, Rob has brought back the Two-minute Portfolio at a good time in the cycle, even though its record is not very good over the longer term.
• Most often, these strategies don’t take into account transaction and administration costs. It’s not clear what Rob has done in this regard. Depending on the amount of re-balancing required, these costs can have a significant impact. My recollection of Valueline’s model portfolio (a U.S. equity research service) is that it has a superb record, but to follow the model would require a lot of transactions, which makes it costly and tax inefficient to execute.
• The part of Rob’s article that spurred this posting was the changes he was contemplating. These models are only useful if they’ve been around for a while and they don’t change. We can always look back, make a change or two, do some back testing and come up with a better result. In this case, there is nothing wrong with the change Computerized Portfolio Management Services recommended to Rob (the companies must pay a dividend), but it puts the Two-minute Portfolio in the bin with all the other back tested strategies.
• Finally, there are simple rules/strategies like this one that are intuitive, time tested and most importantly, make you do what you’re not inclined to do. There aren’t many of these models I follow, but the ‘Dogs of the Dow’ is one I do like (http://www.dogsofthedow.com/dogs2006.htm). Basically, at the beginning of each year, you buy the ten most out-of-favor stocks in the Dow Jones Industrial Average based on dividend yield (i.e. the ten highest yields). Its long-term track record is not great (it has tied the Dow Jones Industrials over 10 years), but it has performed better in the poor market years. And it definitely makes you do what you wouldn’t otherwise do. For example, without the Dogs strategy, do you think you would have bought General Motors, Merck or AT&T at the beginning of 2006?