“ ... a group [of investors] heeding the lessons of Graham, Bab-son and Nicholson has at least one leg up on the crowd and a bet-ter than average opportunity to generate exceptional returns.”

But not if you ignore the lessons. Heeding matters. Heed the les-sons well.

Nicholson didn’t say “Buy and Hold.” He counseled buy and hold -- for as long as it makes sense to do so. It’s a critically im-portant distinction. This month, we’ll take a closer look at the role of strategic selling in portfolio design and management but first, a recap of the foundations covered so far:

1. It All Starts With Ownership. Own It.

In most cases, effort to understand the realm of long-term invest-ing is rewarded with incrementally higher returns. Take responsi-bility and behave with a pride of ownership.

2. Invest Regularly. Imagine Success.

As we’ve suggested the advantage gained from “investing regu-larly” wanes with the passage of time. Hence, we can only assume that the regular investment becomes one of time and attention.

3. Embrace Strategic Selectivity.

Strategic selectivity is captured in two dimensions:

(1) Leadership quality. At MANIFEST, quality is characterized by four components: Financial Strength, Consistency of Profitability and Relative Growth and Relative Profitability.

(2) Projected annual returns (PAR): Forecast returns for all companies are constructed from consensus estimates for growth, profitability and pro-jected P/E ratios.

4. Seek and Maintain Sufficient Overall Growth

Nicholson counseled an overall average sales growth of 10-12%. We sim-ply are less likely to achieve superior returns without seeking, discovering and owning a sufficient number of medium- and small-sized companies.

Expected Returns Editor: Mark Robertson, Manifest Investing LLC Volume XVIII, No. 5 Results, Remarks and References Regarding Investment Initiatives May 2010

In This Issue...

Abbott Labs (ABT) ........... 3

Fund Feature ................ 4

M* Large Growth Index (JKE)

Screening Results ........ 6

Tin Cup Model Portfolio ... 7

www.manifestinvesting.com

Time-Honored Path to Success (Part 3)This month, we continue our closer look at what we do, why and how we do it ... and why (and how well) our championship approach to investing works. It starts with tak-ing ownership and a commitment to invest regularly. Our learn-by-doing investing ex-perience naturally progresses from discovery and a boost from investing regularly to the maturity of strategic selectivity (the reality that both projected returns and quality mat-ter) to careful design and portfolio management that must necessarily include prudent diversification and the willingness to embrace selling opportunities.

Pieces of Our Relative Return Advantage (cont.) We capture a cost advantage by becoming self-directed investors. During the early years, investing regularly also provides a performance boost. During this period, the joys of strategic selectivity (seeking excellent companies at attractive forecasted returns) is added to our arsenal. Portfolio design evolves into management. An incremental advantage is gained by diversifying into small-, medium- and large companies as we maintain the overall sales growth forecast for the portfolio. Our attention focuses ever more on holding the best -- for as long as it makes sense to do so.

2 - Expected Returns - May 2010

5. Embrace Strategic Selling.

This one proves to be a little more challenging than most. Virtually all of our community practitio-ners will be quick to admit that it seems like we’re a whole lot better at discovering and buying stocks than selling them.

Or for that matter, building a logi-cal notion on when to sell them ...

But the answer and road map -- as it turns out -- isn’t really as elusive as it seems. Nicholson suggested that nearly 90% of our selling decisions should be based on a simple condition: making the portfolio better.

This is the basis of our portfolio-cen-tered decision-making emphasis and the guidelines deployed by Tin Cup. It can also be thought of as a current day implementation of the Challenge concept. What is the weakest ex-pected return in the portfolio? Can it be replaced with a good fit with better return expectations? Think “survival of the fittest.” Challenge the weakest holdings during a continuous cam-paign of making the portfolio better.

It also seems logical to embrace selling guidelines that are reflec-tive of the difference between a core

and non-core holding. It seems to be common sense that we’d expect more return (during purchase) of a non-core holding while at the same time being less tolerant. From that perspective, why should we hold a non-core company that is projected to underperform the general market (e.g. PAR < MIPAR). Yet, for a core holding -- more tolerance (lower PARs) seems justified. As shown in

Case Study: Efficacy of Selling Decisions. This is a list of companies sold from the Solomon Select tracking portfolio. In this case, red numbers are “good” reflect-ing a situation where continuing to hold a position would have resulted in a nega-tive impact. As shown, 60% of the decisions mapped here underperformed the market after being “sold.” The potential for improved long-term performance is anything but imaginary.

the accompanying chronicle, if our policy were to sell MCD when PAR approached money market rates, we’d have witnessed only a couple of events that fit that description over the last 15+ years. (See 1998-99.)

In fact, selling MCD at the second collision with a PAR of 0% -- and holding the high-quality mutual fund, Jensen (JENSX) while await-ing the opportunity to repurchase MCD (in 2003) delivers an end result of 20.9% per year versus a strict buy-and-hold result of 12.6%. Think about it. How many times have you ridden a surging stock up and all the way back down. In this case, $100 invested in MCD grew to become $1830 versus $539 for a oblivious deployment of buy and hold.

The accompanying chart is a danger-ous exercise in potential humility -- checking for what happened after selling. I think an overreaction to the recessionary impact on the discretion-ary stocks (BBBY, WSM & URBN) is worth further contemplation -- but this kind of humility (and positive impact) we can all live with. Sell. Strategically.

Extended Chronicle for McDonald’s (1994-2010). This longer term perspective on McDonald’s (MCD) displays a relatively stable PAR over the years and a continously excellent quality rating. The exceptions were the drift to a PAR approaching zero in 1998-99 and the swoon in price that led to PARs greater than 20% during 2002. Investing $100 in MCD back in 1994 (over paying because the PAR was less than 10%) and holding it until today would now be worth $539, an annualized total return of 12.6%. Selling it just once (during the 1998 surge) and buying it back in 2003 could now be worth $1830 ... or an annualized total return of 20.9%! Think about it. Not exactly fre-netic selling, is it? 1 sale of a core stock and 1 repurchase over 15+ years. Realize the difference.

(To Be Continued)

Solomon’s Select: Abbott Labs (ABT)

May 2010 - Expected Returns - 3

Abbott Labs (ABT): Profitability Trends. Despite some challenges, Abbott managed to deliver some historically-high margins in 2009 and the outlook for 2010 and 2011 is pretty favorable.

Our community is very familiar with Abbott Labs (ABT) as the company ranks #32 in the MANIFEST 40. Abbott has long been regarded as a “rock” of stable growth and profitability and resides as a core holding in many portfolios.

Abbott manufactures and markets pharmaceuticals, medical devices, blood glucose monitoring kits, and nutritional health care products. Products include prescription drugs, coronary and carotid stents, and nutritional liquids for infants and adults. Abbott generates slightly less than 60% of revenue from pharmaceuticals. (Source: Morningstar)

Growth

Morningstar forecasts revenue growth of 6% over the next ten years. Value Line pegs growth (per share) at 7.5% for the next 3-5 years and the top line forecast would check in closer to 5%. We’re using a 8% sales growth forecast for ABT.

Profitability

The trailing 5-year average for net margin is approximately 17.3%. Value Line has a 3-5 year projected net margin of 20%. Our projected net margin is 18%.

Valuation

The average projected P/E for the Drugs (Diversified) industry is 19x. The 5-year historical average P/E is 17.3x for ABT. Based on analyst consensus P/E forecasts and historical trends, a P/E of 12-22x is feasible. The current P/E was 13.4x at the time of selec-tion. For our study, we’ve used a projected average P/E of 17x.

Expected Returns, Quality & Conclusions

Based on a price at the time of the study of $50.75, the projected annual return was approximately 16%. ABT has a debt-to-capital ratio of 39% and an effective interest rate of 4.42% contributing to a consensus financial strength rating of 96. Morningstar rates Abbott a strong buy with a price-to-fair value ratio of 74.6% (based on a fair value of $68.) S&P has a fair value estimated at $58.20 and has a “buy” rating for Abbott.

97.5% of CAPS All-Stars see “outperformance” for ABT.

The pipeline includes some efforts in the areas of oncology and a variety of neurological and pain ailments. Research & development represented 8.9% of net sales for 2009 and they seem intent on easing pain. That makes me feel better.

Abbott Labs (ABT): Sales History & Trend. The forecast for 2010 and 2011 includes some acquisitions. When looking at continuing opera-tions -- a sales growth forecast of 6-8% seems to be reasonable.

Abbott Labs (ABT): Valuation Trends. This 2 1/2-year look at month-ly P/E ratios for Abbott displays a “tendency” to settle out in the 15-17x range going forward. We’ve used a projected average P/E of 17x.

by Cy Lynch

The challenges facing retirement plan investors don’t appear to be getting any easier. Discovering a reliable mutual fund and achieving supe-rior returns continues to be elusive. Starting with the January 2009 issue of Expected Returns, we converted this fund feature to another “nest egg” demonstration, maintained as a model portfolio and managed using MANIFEST tools and resources.

The Methodology and Focus

The MANIFEST methodology is unique because of its forward-looking emphasis. The projected returns for the individual holdings of funds are analyzed and used to compile a projected return for a universe of funds. In that spirit, our emphasis in the study of funds is not on where the fund has been (trailing re-turns) but where it seems to be headed.

for the Herd (total stock market) during the same period. Accuracy has taken a hit (to 50%) recently as the broad healthcare funds’ relative performance suffered since the healthcare legislation passed. Vanguard Technology (VGT) continues to be the best performer on a relative return basis.

Decisions

Overall PAR for the Hoard portfo-lio (10.9%), quality (excellent at 69) and financial strength (81%) all exceed our targets. However, projected sales growth of 8.4% is below our target range of 10-12% and we will seek to boost that with this month’s selection.

Broad healthcare funds have the highest PARs for all funds tracked by MANIFEST. This month’s Solo-mon Select is Abbott Labs (ABT), indicative of favorable prospects for the sector. With over 35% of the Hoard portfolio in such spe-cialty funds, it’s prudent to search more broadly, however.

Few mutual funds have a reason-able chance of beating the mar-ket, particularly when measured by broad market index funds,

Fund Analysis: Hoard vs. Herds

Accumulate M* Large Growth Index (JKE)

4 - Expected Returns - May 2010

May 2010 Fund Manifest. Top funds ranked by the same combination rating (PAR & Quality) combined with a dash of recognition for historical perfor-mance.

Results (May 1, 2010). The average selection for the Hoard has outperformed the total stock market benchmark by 6.7% during its holding period. Accuracy dipped to 50% as the healthcare components have underperformed over the last couple of months.

Results

The Hoard’s relative return since incep-tion (January 2009) is +6.7% based on its total return of 34.3% versus 27.6%

such as Vanguard Total Stock Market Index Fund (VTSMX). VTSMX’s current PAR is 10.9%, 3.7 percentage points above cur-rent MIPAR of 7.2% and higher than all but two of the funds in our “Leading Fund Findings.” As discussed more below, it is best to focus our “shopping” on funds with potential returns greater than that of VTSMX when its PAR is more than MIPAR + 3 points as it is now.

Last month’s feature, iShares Morningstar Large Growth In-dex (JKE), has a current PAR of 11.4%, among the highest of all covered funds and .5 percent-age point above that of VTSMX, and is our selection again this month. Quality remains excellent (72.0) and Financial Strength is very solid at 85.9. Projected sales growth for JKE is well above aver-age at 10.6%, so accumulating it will raise overall portfolio growth.

The Lost Decade Myth

Much ado has been made lately about the so-called “lost decade.” While broad market indices, like the S&P 500 (large cap) and Wilshire 5000 (“total market”), are at substantially the same levels as at the start of the 21st

May 2010 - Expected Returns - 5

Hoard Dashboard (May 1, 2010). Our $29,333 ($1833/month) invested so far is now worth $38,500. Because VHT is 19.1% of total assets, we accumulate -- the second highest ranked (by PAR) -- more shares of the JKE exchange-traded fund.

iShares Morningstar Large Growth Index Holdings (May 1, 2010). JKE measures the performance of stocks issued by large-capitalization companies that have exhibited above-average growth characteristics as determined by Morningstar. The companies are all traded on American stock exchanges.

... continued on page 8

6 - Expected Returns - May 2010

Manifest - Screening Results

Sweet ‘16’: A Simple, But Powerful, HuntThe screening results shown here represent the results of a quick “hunt” for high return poten-tial, high quality companies with a stable and steady track record.

Overall Market Expectations

The median projected annual return (MIPAR) for all 2400+ stocks followed by MANIFEST (Solomon database) is 7.7% (5/1/2010.) The multi-decade range for this indicator is esti-mated at 0-20%. Worth a Closer Look Now

We repeat. It’s often good to see either recent Solomon Select features or Tin Cup favorites on this list. But it’s our hope, of course, that prices will soar and drive their PARs lower -- making room for new companies on the list.

Four-time Solomon Select feature (and Michigan stalwart) Stryker has performed quite well over the last year or so ... but still resides near the top of this list. Oracle has been very good to many members of this community and makes a return appearance. It seems like there are still plenty of candidates from the healthcare sector, if you or your club has been avoiding the sector for a while. For the infrastructure hounds, the newly-formed industry,

Sweet 16 Screening Result for May 2010. Screening Criteria: PAR between 12.7-17.7%; Quality > 65; CASPI > 95%; Financial Strength > 70 (B++); EPS Stability > 60. Growth: Sales growth forecast. Financial Strength: Consensus financial strength based on survey. P/E Avg: Projected average annual price-to-earnings ratio in 3-5 years. EPS Stability: Annual EPS growth variations, including forecast years. * - Expanded Coverage. Note: Financial firms use Book Value and Return-on-Equity (ROE) instead of sales and net margin.

Technical Services, delivers a couple of community favor-ites for further study.

Morningstar has a strong buy rating on Beckton Dickin-son (BDX) and buy ratings on Stryker (SYK) and Sanofi-Aventis (SNY). S&P has a buy rating on Stryker, Oracle (ORCL) and Beckton Dickinson and strong buy ratings on Jacobs (JEC) and Medtronic (MDT).

May 2010 - Expected Returns - 7

Tin Cup Model Portfolio

Sell Cardinal Hlth (CAH), Buy Abbott Labs (ABT)

Our “Tin Cup” model portfolio is a standing feature intended to demon-strate the MANIFEST portfolio design and management approach. Our mission is to maintain the portfolio design characteristics within defined ranges and deliver superior long-term returns. All buying and selling deci-sions are detailed here.

Total assets are $807,645 (5/1/10) and the net asset value is $197.18. The model portfolio gained 0.53% during April 2010 (Wilshire 5000 checked in at +2.17% for the month.) Tin Cup has generated a +40.2% total return (annualized) over the trailing 12 months vs. +41.2% for the total stock market.

Portfolio Characteristics

With MIPAR at 7.7%, our target for the minimum overall portfolio PAR is at least 12.7%. The overall portfolio PAR is 13.6% on 5/1/2010. Quality and finan-cial strength are sufficient at the current levels of 78.7 (Excellent) and 91%. EPS Stability is 87 for the portfolio. Sales growth is acceptable at 10.8%.

Decisions

The dashboard has been sorted by descending PAR. The overall portfolio PAR is OK, but we’re always looking to maintain or boost it.

We can’t add to Goldman Sachs be-cause the GS projected annual re-turn is greater than our sweet spot (MIPAR+10%) and most of the other attractive companies are already full positions. Abbott Labs (ABT) is the highest rank company in the Solomon database based on the combination of PAR and quality at this time. Cardinal Health has the lowest combination rat-ing in the Tin Cup portfolio at this time. That sounds like a switch made in heaven. Let’s hope Abbott Labs is the medicine the doctor ordered if/when there are choppy waters ahead.

Tin Cup Dashboard: May 1, 2010. The holdings are ranked by PAR (last column on the right.) Cardinal Health (CAH) is sold and Abbott Labs (ABT) will be added to the portfolio.

Dashboard Diagnostics: Tin Cup (AFTER). We’ve been conducting group therapy and performing an assessment of club portfolios in our Dashboard Di-agnostics series. (The web-based meetings are held on the third Wednesday of each month. Check the MANIFEST Forum event schedule or bivio.com for details and registration information.) The assessment includes a before and after analysis of key characteristics versus their target ranges (or “dipsticks”). In this case, Tin Cup is shown to be on target in all three key areas of portfolio design: forecasted sales growth, quality and overall projected annual return. The switch from Cardinal Health to Abbott Labs raised the PAR (from 13.6% to 13.9%) without disturbing the already-sufficient quality and sales growth characteristics of the portfolio.

8 - Expected Returns - May 2010

(c) Manifest Investing LLC 2005-2010. All rights reserved. All efforts are made to use factual and timely sources believed to be reli-able. No warranties whatsoever are implied. This publication and affiliated services represent an educational demonstration. NO INVESTMENT RECOMMENDATION IS INTENDED. Manifest Investing LLC has no affiliation with Value Line Publishing, Inc. but is a business partner with the National Association of Investors Corp. (NAIC) and bivio.com. The managers and members of Manifest Investing LLC may directly or indirectly hold shares in the companies or mutual funds that are reviewed in this publication. Web site: http://www.manifestinvesting.com

Contact Us You may write us at Manifest Investing LLC, P.O. Box 81120, Rochester MI 48308. If you prefer e-mail, contact us atmanifest@manifestinvesting.com. Every effort will be made to answer your questions individually. Your inquiries, comments and recommendations tell us what you want to see and we’ll do our best to provide it.

Another Look at a Lost Decade. There’s another message on this chart (beyond the powerful nudge that size diversifica-tion matters) and that’s the reminder that cycles are real. In this case, the large companies that form the S&P 500 have indeed suffered something of a “lost decade.” We now expect them to serve as an oasis or two as we navigate the next wave of market corrections and bear markets. Since they’ve taken several years off from stock price advances -- while earnings continued to trudge along -- their returns are becoming collectively more at-tractive ... leading to that oasis known as defensive stocks.

Fund Feature

A Lost Decade and Current Opportunity? (cont.)

Century, it hasn’t been a lost decade for everyone. MANIFEST’s Tin Cup Portfolio, Warren Buffett, Ron Muhlenkamp, Ken Heebner and others all have sub-stantial positive returns over the past 10 years. Nor has my personal portfolio, and those of other MANI-FEST advocates, stayed flat.

Most market indices are weighted by market capi-talization. Consequently, the holdings in corre-sponding funds and ETFs (even the broader market funds) are predominately made up of large, blue-chip holdings. So great is the effect of cap weight-ing that VTSMX’s price movement and return sub-stantially tracks that of the Vanguard’s 500 Index Fund (VFINX).

In other words, portfolios of mostly large-cap, blue chip stocks have “lost” the last decade. Let’s turn to what fund investors can learn from that state of affairs.

An Additional Buying Threshold?

I’ve followed with interest the “discrepancies” be-tween MIPAR and the PARs for broad index funds from the beginning of MANIFEST’s mutual fund cov-erage in late 2005. At first, I was puzzled that they didn’t move in sync. I reasoned that VTSMX is the “total market” and MIPAR is calculated on a signifi-cant sampling of stocks constituting the “market,” so they should be about the same, right?

As current Hertz commercials say, “not exactly.” As time passed and we moved through a series of market cycles, I began to notice a pattern. VTSMX’s PAR exceeded MIPAR while the latter was in the low teens or below (i.e., most of 2005 to late 2007 and since mid-2009 or so). In contrast, when MIPAR moves into the mid-teens and higher (i.e. during the latest bear market), VTSMX’s PAR tended to trail MIPAR.

At least part of the reason is that market index

funds are cap-weighted (impacted mostly by the blue-chips) while MIPAR is not. Investors gener-ally tend to favor blue chips as bull markets age and when the bear takes hold. That’s why PARs for funds favoring such stocks (like VTSMX) were less than MIPAR when it was relatively high above 12% or so. Conversely, blue-chips fall into relative disfa-vor in earlier phases of rising markets and PARs for VTSMX and similar funds tend to exceed MIPAR.

We’ll explore this more at another time, but suf-fice it to say that fund investors would do well to use potential return for broad market funds (e.g. VTSMX) as a buying threshold along with MIPAR. Under current market conditions, JKE, a high qual-ity fund of large companies with relatively higher potential sales growth looks particularly attractive.