The Good Business Portfolio: Update To Guidelines, August 2018


This article gives my 11 guidelines for company investment selection for the Good Business Portfolio (my IRA portfolio). The intent of these guidelines is to create a portfolio that is a large cap balanced portfolio between the different styles of investing. Income investors take too much risk to get their high yields. Bottom fishing investors get catfish. Value investors have to have the foresight to see the future. You see from the guidelines below that I want a portfolio that is defensive provides income and does not take high risks. I limit the portfolio to 25 companies, more than this is almost impossible to keep track of. At present, there are 24 companies and one open slot in the portfolio. I have added to some of the guidelines and moved guideline 1 to position 11 guideline, only because of many comments that it is a silly guideline. The order of the guidelines is not an indication of their importance. I have bolded key parameter changes from the previous version from over two years ago; there are no significant changes to my method.

Guidelines (Company selection)

1. Capitalization should be at least $10 Billion (share price times the number of shares outstanding)

2. The company should have a dividend of at least 1.0% on a yearly basis, and the dividend should have been increased in 8 of the last ten years.

3. Cash flow should be strongly positive. This allows dividends to increase, do share buybacks, and purchase of other companies to expand the company business. You can’t make cash up by accounting tricks like WorldCom and Enron.

4. The company should be listed on a major exchange NYSE or NASDAQ. No over the counter and pink sheets. No venture capital.

5. The company business should be understood. Don’t invest in business models or products you don’t understand. Would you buy the whole company if you could is the question. If yes the company can be bought (Peter Lynch). As an example, I don’t understand Alphabet (GOOG). If you can understand how Alphabet will continue to grow, then you can buy it, except that it violates guideline number 11.

6. Never invest in the following class of companies;

  • Airline operations business (poor business model). They should charge a price that they can make money on.
  • Banking small and large (you can’t tell what assets are worth).
  • BDCs (too much debt and bad businesses). High dividends are not worth it. It’s better to have a real company like McDonald’s (MCD), that has an iconic product.
  • Basic material and commodity companies should be avoided unless you are an expert in this sector. I tried, and both of my companies were disappointments, so this is not an area for me but may be good if you understand this sector.
  • Do not invest in foreign national companies. Too much risk of the developing country economy, exchange rates, and country taxes.

7. S&P CFRA rating should be at least 3 or better. Consider selling when its rating drops to 2 or 1.

8. Remember you are not buying stock; you are buying shares in a company. Consider yourself an owner; you are. This idea may seem silly, but it’s one of the best in this list, very important. As an owner, do your homework, read about the company every few days and check prices at least once a week. Having a list of your investments on your favorite financial site like Seeking Alpha or home page will help.

9. The compound annual growth rate for the next three years should be projected at least 7% per year.

10. The total return should beat the DOW total return over a period of good and bad markets. The period starts on January 1, 2014, and ends with the moderate year of 2018 to date. 2017 was a good year, and 2015 was a losing year.

11. Never buy any company or security that has more than three letters in the symbol. I know this eliminates just about all mutual funds, Apple (AAPL), Microsoft (MSFT), Intel (INTC) and a lot of other large-cap good companies, but it also eliminates the small-cap startups and many others that are not good investments for a retirement portfolio. This guideline is only to limit the number of companies to be studied for The Good Business Portfolio. The only exception to this guideline is the purchase of a high-grade corporate investment grade bond fund.

These are guidelines and not rules. They are meant to be used as filters to get to a few companies where further analysis goes deeper before adding the company to the portfolio. So it’s alright to break a guideline if the other guidelines indicate a Good Company Business. I’m sure this eliminates some really good companies, but it gets me a short list to work on further. There are too many companies to even look at 10% of them.

Portfolio Performance

The performance of the portfolio created by the guidelines have in the long run beat the DOW average for over 25 years giving me a steady retirement income and growth. The table below shows the portfolio performance for years 2012-2017 and YTD of 2018.


DOW Gain/Loss

Good Business

Beat Difference


























2018 YTD




In a great year like 2013, the portfolio did fantastically. In a normal year like 2014, it beat the DOW by a fair amount. So far this year the portfolio is doing about even at 0.18% total return below the Dow average gain of 2.75% for a portfolio gain of 2.57%.

Portfolio companies and position management

The 25 companies and their percentage in the portfolio and total return over a 55-month test (starting Jan 1, 2014) period will be shown in the second quarter review to be published in about three weeks when the present earnings season is over. I chose this time frame since it included the good year of 2017, the moderate year of 2014, the losing year of 2015 and moderate year of 2018 to date. The DOW baseline for this period is 54.51%.

For a link to the first quarter review of the Good Business Portfolio, please see my article The Good Business Portfolio: 2018 1st Quarter Earnings and Performance Review for the complete portfolio list and performance.

I limit the portfolio to 25 companies and let the winners grow until they reach 8% – 9% of the portfolio, and then I trim the position. I start the companies at a base percentage of the portfolio of 1% and add to the position if they perform well during the next six months. At 4% of the portfolio, I stop buying and let the company percentage of the portfolio grow until it hits 8% then it’s time to trim.

Recent Portfolio Changes and Comments

  • On July 12th bought a small starter position (0.1% of the portfolio) in Simulation Plus (SLP) a small software company that helps test/simulate new drugs before they are released. This is a very speculative investment and should be watched carefully.
  • On June 20th closed out covered calls and sold KHC position, I needed some cash. I got a better price using the calls but missed some of the recent gains.
  • On June 8th sold KHC July 57.5 calls against the position and will make 4% if the KHC price remains the same. The calls are now in the money, and I may move them up and out when the time value is small.
  • On May 14th, I trimmed the position of Eaton Vance Enhanced Equity Income Fund II (EOS) from 9.2% of the portfolio to 8.9%. I still like EOS and don’t want to overweight this fund which is high in technology companies.
  • On March 29 increased position of American Tower (AMT) to 0.8% of the portfolio, I will continue adding to this position as cash is available.
  • On March 29 sold entire position of L Brands (LB), it does not look good for the company going forward.
  • On March 23 increased position of Freeport-McMoRan (FCX) to 2.4% of the portfolio and will add to this position as cash is available.
  • On March 16 increased the position of Digital Reality Trust (DLR) to 2.4% of the portfolio. I want to get this company to a full position of 4%.

The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The four top companies in the portfolio are, Johnson & Johnson (JNJ) is 7.5% of the portfolio, Eaton Vance Enhanced Equity Income Fund II (EOS) is 8.5% of the portfolio, Home Depot (HD) is 10% of the portfolio and Boeing ( BA) is 13.5% of the portfolio, therefore BA, EOS, and Home Depot are now in trim position with JNJ getting close.

Boeing is going to be pressed to 14% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 Million in the first quarter of 2017, an increase from the fourth quarter. The second quarter saw deferred costs on the 787 go down $530 Million a big jump from the first quarter. The second quarter of 2017 earnings was fantastic with Boeing beating the estimate by $0.25 at $2.55. The third quarter of 2017 earnings were $2.72 beating the expected by $0.06 with revenue increasing 1.7% year over year, another good report. The first quarter earnings for 2018 were unbelievable at $3.64 compared to expected at $2.64. Farnborough Air Show sales in dollar value just beat out Air-Bus by about $6 Billion, and both companies had a great number of orders. The second quarter earnings beat expectations by $0.06 at $3.33, but the good report was hurt by a write off expense on the KC-46 which should start delivery in October of 2018.

JNJ will be trimmed at 9% of the portfolio because it’s so defensive in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line and Mr. Market did like it. JNJ has announced a dividend increase to $0.90/Qtr which is 56 years in a row of increases. JNJ is not a trading stock but a hold forever, it is now a strong buy as the healthcare sector remains under pressure.


The 11 guidelines give me a balanced portfolio of good companies that are large-cap and can grow their revenues, earnings, and dividends for years. They have the staying power to fix whatever goes wrong. In each case, the company has the size and good management to fix the problem. The portfolio has growth companies, defensive companies, income companies and companies with international exposure giving it what I call balance. Of the 24 companies in the portfolio, three are underperforming the DOW average in total return. All three companies are being hurt by the strong dollar since they are multi-nationals and have a large portion of their income coming from foreign operations. I have written separate articles on the individual companies in the portfolio. Please look at my list of articles if you are interested.

Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions on the companies are my own.

Disclosure: I am/we are long BA, HD, DIS, JNJ, MO, PM, MCD, EOS, GE, ADP, IR, HPQ, OHI, MDLZ, TXN, ABC, FCX, KHC, AA, DHR, SLP, DLR, AMT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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