In 1991, Scott Burns, the long-time financial writer for the Dallas Morning News, created the "Couch Potato Portfolio" as a simple way to invest in the markets. His method ensured that an investor would do sufficiently well and yet the portfolio itself would be easy to maintain and inexpensive to own. Two funds were its only holdings with 50% going to a fund tracking the S&P 500 index and the remaining 50% to a fund mimicking the Shearson Lehman intermediate bonds index. The two funds in question: Vanguard's 500 Index and the Total Bond Market Index; hence the couch potato moniker. (To learn more, read How Portfolio Laziness Pays Off.)
I Give You The Coach Potato Portfolio
This could be the greatest portfolio since sliced bread. It might even give Burns' portfolio a run for its money. It centers on a severely wounded recreational vehicle company, Monaco Coach Corporation (NYSE:MNC), which is down more than 44% in 2008. The causes for its downfall are many, but the three major culprits are high gasoline prices, low consumer confidence and a general lack of available credit to buy these apartments on wheels. Everyone in the business is hurting, from industry leader Thor Industries (NYSE:THO) to the iconic Winnebago (NYSE:WGO) and all the way down to micro-cap Coachmen Industries (NYSE:COA). Overall industry sales in the first two months of the year were down 20.7%. For Monaco, the bright spot in an otherwise mess of a start to 2008 is its 8.5% gain in market share from its competitors. Here's hoping that when times do improve, the gains translate into greater profits.
Past, Present And Future
Monaco opened for business in 1968 in Coburg, Oregon, and in 2008 it is celebrating 40 years in business. Over the past four decades, it's evolved into a luxury motor home powerhouse, controlling 17% of the total Class A market. It went public Sept. 24, 1993 at a split-adjusted $2.60 a share. It then hit an all-time high April 26, 2004, at $28.17, and currently it trades at $4.02 as of June 17. Those holding the stock since the IPO will have achieved a compound annual growth rate of 3%.
While not exactly earth shattering, its reversion to the mean may indicate future gains are close-at-hand, but only if it starts making money again. Until then, it likely won't drop much further as it's already trading at a 10-year low to book value. Historically, it's traded as high as 3.3-times book value. (Learn more on calculating your portion of the shareholder pie, in Digging Into Book Value.)
Constructing The Portfolio
When constructing a portfolio, much like a sports team, you usually start with the most critical piece (the core holding) and build out from there. I'll take a company whose first quarter numbers are not for the faint of heart, Monaco Coach - with revenue down $69.8 million, an operating loss of $12.8 million and an earnings-per-share loss of 28 cents - and create a couch potato-like portfolio. The portfolio will be simple to maintain and produce above-average long-term returns.
To pull this off I need to ratchet down the risk in the remaining parts of the portfolio. I'll do so with one ETF and one mutual fund, both of which hold Monaco stock. The first, iShares Russell 3000 ETF (NYSE:IWV) mimics the Russell 3000 index, which is comprised of the 3,000 largest capitalized companies in the U.S. It's one of the broadest indexes available. Then, we'll add the Franklin Small Cap Value Fund. Why this fund in particular? Franklin Resources, its parent, is the third largest institutional stockholder in Monaco with 2.4 million shares.
Now it's crunch time. Here is where we allocate a certain percentage of the portfolio to each of the three investments. I'm fairly adventurous, so I would divide my portfolio equally among all three, rebalancing annually to retain this allocation. However, I love small-cap stocks and believe Monaco will someday reach its previous highs. Many of you might decide that only 10% should go to Monaco stock and 10% to the small cap fund with the remaining 80% allocated to the ETF. That's OK. Not only do you reduce your risk, you also reduce your fees, a major drag on investment performance. The important thing to understand is that investing can be simple, even when you're dealing with question-mark stocks. I guarantee you'll spend very little time managing the Coach Potato portfolio.
For more on portfolio construction, check out A Guide To Portfolio Construction and Major Blunders In Portfolio Construction.