Smart Investing

Fall is in the air, the nights are cooler the days are shorter and the financial worries are still the same.

Since 2002, now going on the seventh year, I've talked about the likely 11. For those of you who aren't familiar with the Likely 11 it is 11 stocks that I pick in January and do not sell until Dec. 31. It is a mock portfolio of $110,000 with $10,000 invested in each company.

Since 2002 this mock performance has more than doubled the S&P 500 return. The performance could be off a little. It is not audited for performance. There are no investment or management fees, and I try to disclose as much as I can to be fair and project a true picture of what happens over 12 months when one buys companies with low valuations and holds those companies for 12 months.

The whole idea is to show investors that your portfolio will move up and down, but if you stay the course with quality companies you can do OK (if you want to see the companies and the numbers of the mock portfolio, it is free, just for the asking).

I didn't plan on writing about the Likely 11, but it just seemed to be a natural fit for this column. Why? When I'm talking with my clients or potential clients I'm not looking at what will happen tomorrow, next week or even next month. I'm now looking at where my portfolios will be come January 2011. Sounds funny to mention that, but it seems like only yesterday it was the fall of 2008 and I was talking about where I expect to be come Jan. 1, 2010. That is not that far away at all -- have you seen the Christmas stuff out at some stores already? Yes, I know it's early, but Christmas will be here before you know it.

Since June I've also been talking about the potential for a pullback or a correction, whatever you want to call it. I have been aware that it could happen but I have not changed my investments one bit because of it. I haven't sold one stock out of fear that it could decline as the correction comes. It's a good thing, because some of the companies I hold are up 100 percent since June. Did I know that was going to happen? Of course not, but it did, and I was invested in these fundamentally strong companies.

There is no doubt in my mind between now and January 2011 there will be some kind of a decline in my portfolio, the market or some of my stocks. But it is not going to keep me from investing into companies that I see are priced very well now and project out where they will be come January 2011.

You shouldn't let this stop you, either, from investing into the quality companies. And I do mean quality companies, not some stock you hear touted on air by some market guru. I'm talking about the ones that have been researched and have low debt, good cash flow and a strong equity position.

I'm talking about a company that I'm buying right now in my client's portfolio that trades around $25 per share has a forward PE of 13, has generated $19 billion in cash flow from operations over the last 12 months and $90 billion over the last five years. Yet this worldwide company is trading 10.7 percent below where it was five years ago. This stock may not go up 20 percent tomorrow or even next week. But any company trading at 13 times forward earnings and has averaged $18 billion a year in cash flow I think is worth holding for the next 15 months or so.

My clients have to understand that I will stay the course even with all the "bad news" out there. If they call me in panic they know at the other end of the phone line they will hear a calm voice that doesn't get too excited about this recent event or the drop in some stock. What keeps me on course as it has for many years is how well the business is doing, and if it is doing well, as investors, we will be rewarded.

Be prepared for a pullback, but don't sell, you could miss the long-term benefits.