Epiphany Investing

Searching Out the Optimal Portfolio of “Revelation” Stocks

Marketocracy’s “Epiphany Fund” (EPIP) Under Construction

Posted on | September 8, 2008 Time: 7:23 am |

Several years ago I set up a few funds on Marketocracy.com to track various portfolios and strategies. It was and continues to be a valuable site, one I highly recommend for novice and DIY investors alike.

I quicky settled in on one fund to focus my attentions on; the site makes you maintain strict management guidelines in order to have your funds count for inclusion in the site’s ranking process. I wanted to have a fund that could compete for the long-term (5 years and up) performance leaderboard. For a while I was on a great pace, as I beat the snot out of the S&P 500 for the first two years or so.

Twisting In the Wind

And then I did what young, income-hungry (and shortsighted?) finance professionals do - I walked away from the daily management because it wasn’t paying me a dime in the present. While it did wonders for my turnover ratio and frictional costs (0%, $0 commissions), I really wish I had looked over the holdings more than once between 2005 and 2007. What can I say…the opportunity cost just didn’t hit my radar. The Epiphany Fund was left to the un-due dilligenced whims of about three years of earnings results.

I’m a little consoled that over 5 1/2 years, the fund managed to eke out a small annualized gain over the S&P (just under 2% currently), even though my 3 yr. performance on down is horrid. Since I’m not completely out of the running for long-term supremacy (and already have a long history with this fund), I’m going to give it some life support by tracking the same holdings that will comprise the Epiphany Investing Secular Trends Portfolio.

Long title I know, but for now I’d rather err on the side of proper conceptualization over brevity and “catchiness”. The goal of the fund will be to:

  • Respect - but not be a slave to - sector representation in broad market benchmarks.
  • Arrive at each holding through top-down and bottom-up analysis; both ends must support thesis. I wrote an article on Investopedia which details my logic on this target.
  • Hold a concentrated portfolio, ideally between 15 and 20 positions. While I can appreciate the magical ~30 number from a mathematical perspective, I would rather overweight the best than search for middlers. Besides, many mid-cap and larger companies are naturally present in multiple industries or sectors, so there’s a lot of inherent diversification just by investing in some of the bigger names.
  • Keep beta below 1 and turnover below 50%; frictional costs will be faithfully recorded as will hypothetical capital gains.

In order to maintain the integrity and control in the most effective way, I’ll be creating a page from our main site that will present stats and trade history. With all due respect to the folks at Marketocracy, I’ve had some issues in the past with incorrect ledger transactions and such…I’d rather live or die objectively based on my actual results, and I’ll use my trusty .xls handiskills to keep track of the portfolio for the time being.

I will write up a post that outlines the initial sector guidelines in conjunction with the kickoff of the fund. Given the uncertainty in the markets right now, I am thinking that cash is going to be cozying up on the big couch for a while as positions are vetted.

I’m looking forward to putting forth a transparent effort to gather alpha and seek out stocks that can inspire an epiphany.

Ryan Barnes

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