Perspective On Investing

Old School Investment Strategy "Kills It" In Volatile Markets

How about structuring portfolios to achieve personal goals… and other time tested approaches

by Steve Selengut

Mr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at

The Working Capital Model (WCM) may be a “new to you” cocktail of investment strategies, disciplines, and processes, but it’s actually been around since the early 1970s. It structures portfolios to achieve personal goals, and assesses individual security performance based upon how well each achieves its pre-defined purpose. Growth purpose securities are expected to produce “reasonable” realized capital gains as quickly as possible; income purpose securities are expected to provide consistent income, constantly.

Each security type can achieve its purpose without spectacular market value appreciation, and in practically any economic, interest rate, or stock market environment. And, just to get your attention, it’s users were able to sail through the last three major financial market meltdowns, pretty much unscathed. Don’t Google it yet, it’s not there as a standalone “product,” but it is a methodology that anyone can master if they choose to invest the time.

The WCM employs elements of other investment strategies, such as trading, dividend investing, and value investing, while embracing market and interest rate cycles and these core investment principles: quality, diversification, income, and profit taking:

  • every security must have a history of generating regular income
  • no individual investment should ever approach 5% of total capital
  • all equities must be Investment Grade Value Stocks; all CEFs must have at least five years of fundamentals to examine to assess relative quality (An IGVS is B+ rated by S & P, dividend paying, a stock of a profitable entity, and traded on the NYSE.)
  • no reasonable profit (an amount that will vary with cyclical conditions) should be left unrealized, and the quicker the profit is realized and compounded, the better
  • illiquid or restricted securities are avoided, as are automatic dividend reinvestment programs
  • below age 40, at least 30% of the capital must be in the income bucket; 40% by age 50; 60% or more above age 60
  • non performing securities are released at sector or market highs

All portfolios become retirement portfolios… eventually

Assuming that nearly all portfolios become retirement portfolios eventually, WCM investing facilitates long term planning by assuring that income is growing throughout the lifetime of the investment portfolio. It minimizes financial risk within the portfolio by focusing on the fundamental quality of selected securities, several different means of diversification, and consistent growth of both “base income” and invested capital. Disciplined profit taking rules are the fuel that keeps the income growth accelerating.

  • Working capital is the total cost basis of all the securities and cash within the portfolio; it is called “working” capital because every security within the portfolio produces some form of regular income, and each has profit potential. Every security is for sale, all of the time. Absolutely no exceptions, ever.
  • Working capital is increased by realized income (including capital gains) and deposits; it is reduced by withdrawals and realized capital losses.
  • “Base income” is the total income produced by the portfolio, without including capital gains.
  • Base income grows constantly because a fixed percent of every income dollar or deposit is directed to the income “bucket”.

Once an investor learns to focus on portfolio working capital instead of portfolio market value, he or she can treat cyclical changes in the economy, interest rate expectations, and the stock market as opportunities instead of problems. Market value becomes a tool to use in buy and sell decisions while the calendar year is totally removed from the decision making process.

Grow Wealth Slowly

WCM investing is a “grow wealth slowly” process that recognizes the inherent uncertainty of markets and welcomes the opportunities that it provides, while taking multiple steps to minimize financial risk. Simply put, volatility creates opportunity; disciplined quality, diversification, income, and profit taking rules allow investors to take advantage of volatility in a risk minimized environment.

Note that risk minimization refers to “financial risk”, the risk that companies will go out of business causing their securities to become valueless. Market risk cannot be minimized since it is really not a risk at all, but a “certainty” feature of all marketable securities… Typically, the more income a security provides, the less volatile it will be. But, and be totally aware of this, price volatility is the natural state of the financial markets.

Note that the WCM is non judgmental. Higher prices in high quality securities are “good”, and we sell our winners out of love; lower prices in our selection universe are also “good”, and we buy new positions or add to old ones when prices fall. So, yes, you will be buying and selling the same securities over and over again as you grow both the working capital and income in your portfolio.

Cost Based Asset Allocation and Diversification

Asset allocation is a portfolio planning tool, not an investment strategy. It should never be “adjusted” for market conditions of any kind; it should always be adjusted for changes in personal goals, objectives and time frames. WCM asset allocation keeps it fine tuned with every investment transaction throughout time.

Based upon a myriad of personal considerations, conclusions, plans, and expectations, plus a general assessment of financial risk tolerance, most individuals/families should be able to determine how much of their investment capital should be invested in growth purpose vs. income purpose securities. WCM asset allocation includes just these two, purpose defined “buckets” of securities… cash is always a part of the equity, or “growth” bucket.

Each security type can achieve its purpose without spectacular market value appreciation, and in practically any economic, interest rate, or stock market environment. And, just to get your attention, it's users were able to sail through the last three major financial market meltdowns, pretty much unscathed; But don't Google it yet...

Individual corporate common stocks (equities) are always included in the growth purpose bucket, no matter how large their dividends appear to be. And, and no matter how high quality the individual companies are, equities are always more risky than all forms of income purpose securities, even those that “trade” as though they were equities.

Corporate and government debt securities, and corporate hybrid securities like preferred stock, are income purpose securities that always have less financial risk than “same company” equities. The income bucket is kept as close to fully invested as possible, all of the time, to maximize the compounding of dividends and other portfolio income…but the reinvestment is always a selective, purposeful, decision making process.

Closed End Funds (CEFs) are available that fit nicely into each bucket based on their debt vs. equity content. Their income production is far superior to similar ETFs (Exchange Traded Funds), and they are as easy to trade as individual equities.

  • During long stock market rallies, when few individual stocks are at bargain price levels, equity CEFs provide a market presence with high income and broad sector diversification in a vehicle that can be invested sensibly in anticipation of future market corrections (i.e., smaller positions are taken).
  • Income CEFs take diversified portfolios of generally illiquid securities and place them in liquid portfolios that multiply the income while facilitating whatever real time trading opportunities the cycles provide.

If a security doesn’t fit into one bucket or the other, it is likely to be more speculative than the WCM deems acceptable. For example, new issues are unrated and never pay dividends, zero coupon securities don’t pay regular dividends, mutual funds are “managed” by hoards of inexperienced unit holders, etc.

How did WCM portfolio growth buckets do during the dot-com-crash? No mutual funds, no IPOs, no NASDAQ… no problem

WCM diversification decision making is simplified because it doesn’t change with fluctuations in the market value of the securities inside the portfolio. By focusing on “cost basis” in a collection of high quality, income producing, investments with a 40% growth asset allocation, the investor always knows where new deposits and income should be applied.

  • 40% of the new money, after allowing whatever cash is needed for scheduled withdrawals or fees, is used to reduce cost per share on existing holdings or to add new positions, and
  • 60% of the income or deposit is similarly invested in the income bucket.
  • This simple process raises the current yield of securities added to, while reducing per share cost and increasing both overall portfolio yield and total income.

The compound earnings impact of selective income reinvestment differs dramatically from that of automatic reinvestment programs… where there is no effort either to reduce cost basis or to increase individual security current yield. Selective income reinvestment also increases the likelihood of more frequent capital gains opportunities. Right?

Yes, by reducing cost per share.

Evolution of the WCM Portfolio

The income purpose bucket of WCM portfolios has evolved from individual fixed income securities and Unit Trust vehicles to a diversified collection of long operating (average over ten years) income Closed End Funds managed by a dozen or more institutional money managers.

These managed portfolios are significantly more “liquid” and income productive than the fixed income securities they contain. They may be held for long periods of time, but positions can be added to when prices fall and profits may be realized when prices rise… difficult at best with individual income securities.

  • At the moment, there are nearly 100 income CEFs with a history of dependable dividend payments ranging from 7% to above 10%. Well diversified portfolios producing 8.5% and above are relatively easy to construct.
  • More than half of these CEFs have provided reasonable profit-taking opportunities in 2019 alone.

Over the past ten years, during an unprecedented rally in the equity market, the “growth bucket” of WCM portfolios has also evolved. Equity CEFs have replaced all but a handful of the 400 IGVSs, MLPs, and REITs that, as recently as 2008, were the primary growth creators in WCM portfolios. These CEFs are also diverse, general and sector specific, portfolios that generate significant income while providing capital gains opportunities with every spate of market volatility.

WCM portfolios contain approximately 70 primarily equity portfolios with dividend payments in excess of 7% and an average payment rate of nearly 9%. About one third of these have provided reasonable profit opportunities during 2019.
So how does the overall performance of a 50% growth/50% income, $100,000 Working Capital Model portfolio, yielding 8.5% shape up over a three year period, irrespective of what’s happening in the world economy or the financial markets… with no capital gains of any kind?

This scenario produces $28,930.22 of new capital and an ending working capital of $128,930..22
Now let’s say we are able to take an average of just 2% profit on all the securities in the portfolio just once per year, spread out equally throughout the year.

This scenario produces $35,799.25 of new capital and an ending working capital of $135,799.25… a better than 11% annual working capital growth rate at a lower degree of financial risk than (I’ll wager) most of you have in your portfolio today.

Summary WCM Bullet Points

  • So long as income exceeds withdrawals and losses, your WCM portfolio performance will be some degree of this:
  • Working capital in both investment buckets is constantly growing.
  • Cost per share of positions is constantly decreasing.
  • Yield on invested capital is constantly growing.
  • No reasonable profit has gone unrealized.
  • Performance evaluation is personalized.
  • Total income is constantly growing.
  • Asset allocation is on auto-pilot
  • Market volatility is welcomed.
  • Financial risk is minimized.
  • Market risk is managed

So now you can Google it: Working Capital Model – Selengut