Model Portfolio teriksen:ESVF

As an investor, my goal is to beat the market by enough to make it worth the time I spend on research. In order to achieve this goal it usually means I am looking for undiscovered small or mid cap stocks that Wall Street isn’t following (for example, see my posts on Diamond Hill). In practice, this can be quite challenging at times. When I cannot find enough smaller names that have the right risk/reward relationship, I must either stay in cash or branch out into large cap names. It is hard to beat the market earning a couple percent on cash, so unless I am pessimistic about the market I must branch out into larger names.

When looking at a large cap name it is virtually impossible for me to know more than Wall Street does. My best chance for market beating returns is to look for names that are out of favor at the moment but still have excellent prospects. At the current time my ESVF portfolio has a handful of such names - Nike (NKE), Philip Morris International (PM), Microsoft (MSFT), Altria (MO), Prudential (PRU), and Proctor & Gamble (PG). Each of these names is currently about 3% of the fund. They aren’t likely to double in the next two years like the smaller names I like, but they should match or beat the market, and hold up fairly well in down periods.

I am no technology genius, but Microsoft (MSFT) looks attractive at its current price. At $27.50 per share it trades at less than 13 times analysts estimates for 2009. Granted they could screw that up by overpaying for Yahoo! or some other company, but I am willing to trust that management will make wise decisions. My preference is for Microsoft to continue to use the cash it generates to repurchase its shares.

I won't get rich with these holdings but they should outperform cash until I find additional small cap names to invest in.