Louis Navellier

Since launching his first newsletter in 1980, the ground-breaking MPT Review, Louis navellier's operation has grown to include some 50 professional analysts and support staff at his headquarters in Reno, Nevada, where his money management operations, for individuals, pension funds and institutions, oversee assets in the billions. His overall success is nothing short of astounding.

Louis is a graduate of California State University, with an MBA in finance. But even in high school, Louis was interested in the stock market and had been testing various methods of screening stocks based on risk and reward. The chance to actually test his revolutionary ideas regarding stock screening came through fortunate circumstances in college.

Keep in mind, that in the 1970s, long before the PC age, access to "computers" was extremely difficult to come by. However, by chance, Louis' college professors had contacts at Wells Fargo Bank and were able to arrange computer time for him test his screening theories. Louis notes, "It turned out that some of my screens worked out pretty well."

The investment stratetgy that grew out of his early screening theories has over time proven to to succeed far beyond doing "pretty well." In fact, according to the Hulbert Financial Digest, Louis now maintains the #1 performing model portfolio of any financial newsletter monitored over the past 25 years. 

To better understand his investment strategy, we need to go back in time. As long as man has had assets of any sort, there has been a need to balance one's desire to grow those assets while also insuring against undue risk. 

In Cervantes' 1712 classic, Sancho Panza counsels Don Quixote on protecting his savings: "It is the part of a wise man to not venture all his eggs in one basket."  But it wasn't until the 1950s that this adage was converted to a statistical system to quantify how best  "venture one's eggs."

Louis service was orginally called MPT Review, with the initials standing for modern portfolio theory. Without going too far off course, modem portfolio theory traces its roots to Harry Markowitz' 1952 doctoral thesis at the University of Chicago. Both Markowitz and William Sharpe, who later expanded the theory, shared the Nobel Prize for this work in 1990. The theory qualified risk and attempted to show the value of diversification on reducing the overall risk of a portfolio.

Modern portfolio theory was indeed a revolution in the financial arena, leading to an entirely new way to look at portfolio construction. In the post-modern portfolio theory era, investors could not just look at individual stocks. Rather, MPT required an analysis of how multiple stocks interact within a portfolio. As an example, a jump in oil prices might hurt one company or sector while concurrently benefiting another.

Understanding these relationships, or correlations, is critical in developing "efficient" portfolios. MPT also included the development of what is called an efficient frontier, a plotted graph with which one can determine the highest possible return relative to a given amount of risk. The end result is known as portfolio optimization, from which one can calculate the risk, return potential and risk correlations.

Thankfully, Louis Navellier and his team take care of all the analytical work involved in this rather complex investment approach. His newsletters - which we will look at later on - provide easy to implement portfolio recommendations that incorporate modern portfolio and a host of sophisticated optimization strategies.  

And his unique - indeed, revolutionary - Portfolio Grader is a system that is not only used within his stock selection process, but is one that is offered to his own subscribers who wish to apply a similar analysis to their own holdings.

Importantly, Louis he has never not just followed the modern portfolio theory crowd; he has turned what had previously been considered a purely academic exercise into successful and actionable stock market applications. 

Louis explains, "After much testing and research, my team and I found that the market rewards stocks with a specific mix of characteristics." Since 1977, he has been studying and refining his techniques to keep in sync with the changing market environment. 

In other word, his system is designed to isolate those stocks that have performed the best relative to the specific factors that have recently been in favor by the overall market. Says Louis, "We constantly test and retest stocks to see what the market is currently rewarding. Basically, we're looking for the ‘magic formula’ for winning stocks. Since this changes frequently, we have to do lots of analysis."

To find the stocks with these characteristics, he has developed a 3-step "bottom-up" stock selection process that begins with a universe of some 9,000 actively traded stocks and narrows this list down to his recommended favorites. Navellier's system is rather complex and is based on numerous proprietary systems.

He explans, "At the core of our system is our stock database. At Navellier & Associates, we've built a very large database that contains dozens of variables on thousands of stocks. We look at every combination of statistics you can imagine."  Let's walk through the various steps that he employs:

The first step is a proprietary reward/risk analysis that continually tests stocks to see what variables the stock market is currently rewarding. 

This step analyzes a stock's alpha, which measures excess return independent of the market. It also measures volatility, which looks at a stock's standard deviation, or statistical risk. He then develops a reward-to-risk ratio by comparing alpha and volatility. Louis explains,"This step punishes even top performing stocks that take on risk." Only the top 500 stocks (or about 5%) ranked by Reward-to-Risk survive this first step.

The second step involves a detailed analysis of the underlying fundamentals associated with the stocks that passed step one. He follows numerous metrics, and it is important to note that at any given time he will give greater consideration to certain variables.

A third step in his overall investment strategy involves a stock-allocation process that uses "quadratic modeling" techniques. Essentially, this means that after screening to find stocks that pass both the quantitative process (step 1) and the fundamental screening (step 2) criteria, he uses an asset-allocation model to structure well balanced, diversified portfolios, based in large part on his background in modern portfolio theory.

By the time Louis has finished these steps, only one half of 1% of the 9,000 stocks in his database make the cut. And the stocks that do make the grade become those issues that are considered for inclusion in his portfolios. 

Impressively, as we've seen since his earliest attempts to develop a computerized screening program back in college, Louis analytical procedures have continually been refined and enhanced. From his initial pioneering work in modern portfolio theory, through the development of his PortfolioGrader database, Louis has spent the past 25 years bringing the most sophisticated analytical tools to individual investors. 

By chance, I found myself seated next to Louis on a flight returning to Florida from Las Vegas after a Money Show. With my usual journalistic inquisitiveness, I took this as a chance to gain some personal insights into his work and asked him why he continued to publish newsletters for individual investors when he had attained such success with his mutual fund and money management operations.

His response echoed a sentiment that I frequently hear from many of the very best in the advisory field. He said, "People need a lot of help when its comes to investing. That's the main reason I keep publishing. It's one thing to manage money. But I really enjoy knowing that I can help investors learn how to do that themselves." 

In my mind, that is the mark of a true advisor. The importance that so many of the best advisors place not just on providing specific buy and sell advice, but on educating their readers in the investing process is, in my view, the greatest under-recognized value offered by financial newsletters.

In describing his overall investment strategy, with its goal of constantly upgrading each portfolio to reflect only those stocks with the greatest current potential, he says, "We run our portfolios like a sports team. In the end, we keep just the best stocks in any portfolio, just like we'd keep only the best players on a team." In the "sport" of investing, Louis Navellier and his team are indeed a winning franchise.