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The movement of a portfolio's funds into and out of the stock market and the weighting of how much - on a percentage basis - is invested in a security is called capital allocation.
Because Corona Investment is able to screen so many stocks, we are able to pinpoint many potential good issues. In fact, we use several prepared screens that include the leading stocks. We keep close tabs on stock of companies that will (1) show "accelerating earnings growth" in coming quarters, (2) carry an Investor's Business Daily Relative Strength rating over 90 plus an IBD Earnings per share rating over 90 too and (3) issues with a Relative Strength of 97 or above.
The 90 Relative Strength rating indicates that a stock has outperformed 90% of all issues the past 12 months. It is a leading issue. The 90 Earnings per share rating shows a company whose earnings growth the past 12 months is better than 90% of all companies.
TTD's research has shown that companies breaking out from basis with a potential for accelerating earnings, and/or a 90-90 RS and EPS rating, or just a 97 RS, can turn into tremendous winners. We monitor this list very closely. Corona also uses a propriety method of tracking accumulation and distribution. We call it "tick volume." It measures especially big block trading in a stock. It is extremely helpful in finding stocks that are basing and showing big accumulation. They could be very successful breakouts.
Generally, our capital allocation strategy is to put a minimum o f5% into one stock and no more than 10%.
For instance, in an account with $100,000, if we were fully invested in the stock market the minimum number of stocks we would own for the portfolio would be 10. In that case, we would have a 10% of the portfolio's money in 10 different stocks. The reason we diversify in that manner is to spread risk.
If we were to invest the minimum amount of 5% in each stock, we would hold 20 stocks with a $100,000 portfolio. In practice, we often buy a 5% position in a stock. If it works well then we will add another 5% making a total of 10%. Therefore, an account with $100,000 in most cases will have some stocks that have a 5% position or perhaps a 10% position. It will all depend on the action of the individual stock.
We avoid an initial heavy concentration in one stock due to the risk. A heavy concentration of say 20% or 30% in one stock, while offering the possibility of a big gain if it works, also opens up the chance of an unpleasant surprise.
Since Corona Investment Management does the research and market timing and portfolio construction for clients, it is wise to use a low-cost broker. However, one must make sure that good execution is possible. Slippage should be avoided.
Our two-step method of investing in a stock - which is used in most cases - provides a degree of safety in that the stock will have to prove itself before we become more aggressive. The percentage of allocation may be less per stock for accounts over $1 million, depending on the client.