V.12:11 (474-479): Louis Navellier Of The MPT Review

V.12:11 (474-479): Louis Navellier Of The MPT Review
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Louis Navellier Of The MPT Review

Modern portfolio theory (MPT) uses statistical analysis, screening and ranking of stocks to decide what and where to invest. Louis Navellier, money manager and publisher of The MPT Review, specializes in using this method for selecting stocks that will outperform the market. Stocks & Commodities asked Navellier for details on how he goes about selecting stocks and designing portfolios.

Q: So tell us about your early days and how you developed your approach to analyzing stocks and managing money.

A: Sure. I've always been interested in the markets, even before I was in high school. By the time I got to college, I was already testing various methods to screen stocks based on reward and risk. In college I was a finance student, and I had the good fortune to be taught by some professors who also worked for Wells Fargo Bank.

Q: When was that?

A: The late 1970s. At that time, because of the connection with the professors, we were able to use the computers at Wells Fargo to run screens of stocks for us. That was very valuable, because this was before the personal computer revolution and there weren't very many other computer sources available. I had the opportunity to test my ideas on Wells Fargo's computers, and it turned out that some of my screens worked out pretty well. The bottom line is, by that time I had pretty much made up my mind that a high-alpha stock strategy was the key to outperforming the markets.

Q: Could you define a high-alpha stock strategy?

A: High-alpha stocks are stocks that demonstrate better monthly returns independent of the stock market. We regress or statistically compare the returns of individual stocks to the returns of the broad market. The returns of the stock that are correlated to the market are referred to as the beta , while the returns of the stock that are independent of the returns of the market are referred to as the alpha. A stock with a positive alpha theoretically is outperforming the market based on its own merits and hopefully will continue to do so (Figure 1). A stock with a negative alpha, however, would be a stock to avoid because it is underperforming the market based on its own merits.

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