financial sophistication but because of simple errors in judgment. Quillian &
Taylor suggests building a portfolio using the Quillian Model. The Quillian Model
as described below provides individual investors with a logical framework of
The Quillian Model
• Only buy stocks in up-trends or in recognizable positive technical patterns.
Think long term but understand what actually happens over the long term.
For the example, consider long term to be ten years.
According to the Quillian Model:
• If 20 stocks, all in up trends, are picked at the beginning a long term
period. (10 Years)
• 5 will continue moving up at the same rate for the entire period.
• 9 will eventually falter and move sideways or slowly down or up.
• 6 will reverse direction and end up losing money.
• Over time, portfolio value increases, will be the result of a minority of the
stocks that make up the portfolio.
• Portfolio performance is greatly enhanced if money is appropriately
rotated out of poorly performing stocks and into ones that are steadily
The Quillian Model is not a guarantee that the future will unfold in a certain way
but instead a reasonable expectation that is based on observations of stock
The exact numbers might be different from those in the example but the principle
always applies. Over time, the majority of investment ideas turn out to be
bad. The successes of a few stocks, however, end up more than making up for
losses incurred in the others. Portfolio performance is greatly enhanced if the
stocks that begin to falter are eliminated and replaced with new stocks that are
already in up-trends. The Quillian Model is not a ridged prescription of any kind
but as a logical expectation. In order to be truly successful, any long-term
investment program must be adjusted in accordance with the simple principal
described in the Quillian Model. Stocks are good long-term investments but one
must realize that a minority of stock picks turn out to be profitable in the end.
Buy and hold is the best strategy but only when over time non-performing stocks
Investors are invariably hurt when they expect from the stock market more than
the stock market is capable of delivering. The Quillian Model provides portfolio
managers with a reasonable table of expectations.
Often the performance of stock averages is sited as evidence that stocks are a
good long-term investment. What is never mentioned is that the stocks that
make up the averages are constantly being changed. Looking at a 50 year chart
of the Dow Jones industrials makes an impressive case for a buy and hold
strategy. But what kind of performance would the Dow Jones Industrials have
had if none of the Dow stocks of the 1930 list had been replaced? Three stocks
have been rotated out of the list just since 1997. Look in the table below and
observe how the composition of the Dow Jones Industrials has changed over
Composition of the Dow Jones Industrials at Selected Time
1930 1956 1976 1997 2003
Allied Chemical Allied Chemical Allied Chemical Allied Signal 3M
American Can American Can Aluminum Co of A Alum Co. of America Alcoa
American Smelting American Smelting American Can American Express Altria Group
Bethlehem Steel American Tel. & Tel. American Tel. & Tel. AT&T Corporation American Express
Borden American Tobacco American Tobacco B Boeing Company AT&T
Chrysler Bethlehem Steel Bethlehem Steel Caterpillar Boeing
Eastman Kodak Co. Chrysler Chrysler Chevron Caterpillar
General Electric Corn Products Ref Du Pont Coca-Cola Citigroup
General Foods Du Pont Eastman Kodak Du Pont Coca-Cola
General Motors Eastman Kodak Esmark Eastman Kodak DuPont
Goodyear General Electric Exxon Exxon Eastman Kodak
Hudson Motor General Foods General Electric Procter & Gamble Exxon Mobil
International Harv General Motors General Foods General Electric General Electric
International Nickel Goodyear General Motors General Motors General Motors
Johns-Manvile International Harv Goodyear Goodyear Hewlett-Packard
Liggett & Myers International Nickel Harvester Hewlett-Packard Home Depot
Mack Trucks International Paper Inco IBM Honeywell
National Cash Reg Johns-Manville International Paper International Paper Intel
Paramount Publix National Distillers Johns-Manville J.P. Morgan IBM
RCA National Steel 3M 3M International Paper
Sears Roebuck Procter & Gamble Owens-Illinois McDonald’s J.P. Morgan Chase
Standard Oil of Ca. Sears Roebuck Procter & Gamble Merck & Company Johnson & Johnson
Texas Company Standard Oil (NJ) Sears Roebuck 3M McDonald’s
Texas Gulf Sulphur Standard Oil of Ca. Standard Oil of Ca. Philip Morris Merck & Company
U.S. Steel Texas Company Texaco Sears Roebuck Microsoft
Union Carbide U.S. Steel U.S. Steel Travelers Group Procter & Gamble
United Air Transport Union Carbide Union Carbide Union Carbide SBC Communications
Westinghouse United Aircraft United Technologies United Technologies United Technologies
Woolworth Westinghouse Westinghouse Wal-Mart Wal-Mart
Standard Oil (NJ Woolworth Woolworth Walt Disney Walt Disney
Here are a few more helpful tips:
Give up naive ideas about risk. Many investors automatically assume that
sticking with low P. E. stocks or stocks of large well established companies,
reduces risk. High dividends are often seen as indications of safety. No such
ideas hold water when empirical evidence is examined.
Understand the limitations of fundamental analysis. New investors often delude
themselves into thinking they know something special about a stock that the rest
of the world will eventually catch on, and the stock will go up. That kind of
reasoning only works on rare occasions. The speed with which information
spreads through the investment community is almost beyond comprehension.
Novice investors also typically believe that insiders and professionals have
superior information. They have an advantage only occasionally and in isolated
circumstances. The financial realm unfolds faster than even the brightest mind
can decipher information. Fundamental analysis is valuable for answering basic
questions concerning the financial stability of a company, and understanding the
broad scenario in which a company operates. Fundamental analysis can
successfully be used to eliminate stocks from consideration. For example, if a
stock is in a strong up-trend but is in horrible financial condition, it might make
sense to choose another stock instead. Fundamental Analysis will do little to
indicate the future direction of a stock price.