The Portfolio Manager
The American Association of Individual Investors, a non-profit educational foundation established in Chicago in 1978, provides educational and research services for the individual investor. The association has consistently held that individual investors can and should outperform the market indexes and most mutual funds. As a demonstration of an investment strategy, the Shadow Stock portfolio was created in 1993. John Cloonan, PhD. and his associated security analysts at the institute have demonstrated that a portfolio of small company stocks, diversified by sector or industry, offers significant returns for the risks assumed. The AAII notifies its members, including BenefitWorks, of periodic changes in the make-up of the portfolio.  

The Place of a Micro-Cap Portfolio
The Stock market is dominated by large, institutional investors, such as mutual funds, investment bankers and brokerage firms. The stocks that perform best over the long run - small and less liquid issues, are too small for institutional investors. The best opportunity for outperforming institutional investors is by fishing in ponds where they don't go - the micro-cap issues. Are investors more apt to experience losses with small-cap stocks? The following chart demonstrates that volatility diminishes with longer holding periods.

Time Frame and Losses (19126-2008)
Percentage of Holding Periods that Resulted in Losses
Holding Period (Years)	S&P 500	Small Stocks	Corporate Bonds	US Gvt. Bonds	T-Bills
1	29%	31%	20%	25%	0%
3	16%	19%	10%	11%	0%
5	14%	13%	4%	8%	0%
10	4%	3%	0%	1%	0%

The table includes all possible holding periods indicated over the past 83 years. For instance, the 3-year holding period includes 1926 through 1928, 1927 - 1929, etc. Purchases are made at the beginning of the year and held through the time period indicated. Source: Ibbotson Associates "Stocks, Bonds, Bills and Inflation" 2009 We see from the chart above that if a participant purchased small company stock and held it for a five year period; he would have had a loss 11 times since 1926, or about 13% of the time. By buying and holding for ten years, he would have had a loss only 3% of the time. Risk, as measured by the chance of loss, goes down as the holding period gets longer. Is the risk of loss associated with stock ownership rewarded?

Average Annual Compound Rates of Return (%)
	S&P 500	Small Stocks	Long-Term Corp Bonds	Treasury Bills	Inflation (CPI)
Last 10 Yrs	-1.4%	6.4%	6.5%	3.2%	2.5%
Last 20 Yrs	8.4%	9.8%	8.7%	4.2%	2.8%
Last 30 Yrs	11.0%	12.7%	9.4%	5.8%	3.8%
Last 40 Yrs	9.0%	10.6%	8.5%	5.9%	4.5%
Last 50 Yrs	9.2%	12.6%	7.2%	5.4%	4.0%
Growth: What $1 invested Would Have Grown To
Last 10 Yrs	$0.87	$1.86	$1.88	$1.37	$1.28
Last 20 Yrs	$5.02	$6.49	$5.30	$2.28	$1.74
Last 30 Yrs	$22.89	$36.12	$14.81	$5.43	$3.06
Last 40 Yrs	$31.41	$56.26	$26.13	$9.90	$5.82
Last 50 Yrs	$81.50	$377.50	$32.34	$13.87	$7.11

Historically it is evident that common stocks provide exceptionally high long-term returns compared to "safer" investments, and that small company stocks have a place in the portfolios of long-term investors.

The Investment Strategy
Stock purchases must meet these criteria:

• Price-to-book value ratio of less than 0.80;
• Market capitalization must be between $17 million and $200 million;
• No bulletin board or pink sheet stocks will be purchased;
• The firm's last quarter and last 12-months' earnings from continuing operations must be positive;
• No stock on foreign exchanges or ADRs will be purchased because of different accounting and/or withholding on dividends;
• No financial stocks or limited partnerships will be purchased;
• The share price must be $4 or greater;
• Any stock that was sold within two years will not be rebought;and
• Price-to-sales ratio must be less than 1.2.

Stocks are sold if any of the following occur:

• The stocks price-to-book ratio goes above three times the initial criterion;
• Market capitalization goes above three times the initial maximum criterion;
• If last months' earnings from continuing operations are negative, the stock is put on probation; if a subsequent quarter has negative earnings prior to 12-month earnings from continuing operations becoming positive, the stock is sold;
• After two years, sell if not qualifying as a buy currently (But do not sell until there is a qualified stock to buy.) The two years should be measured from the last time the stock qualified, not from when you purchased it.

Portfolio Expenses

Because this is a Model portfolio, it carries none of the usual mutual fund sales commissions, selling concessions, administrative expenses and fund manager costs. Through TD Ameritrade transaction costs are $9.95 regardless of the number of shares, and BenefitWorks charges .0004583 monthly, or 55 one-hundredths of one percent of assets annually to unitize the portfolio and maintain the daily NAV (net annual value, or share price) calculation. The average "no-load" managed mutual fund charges 1.4% of assets. Mutual funds purchased through insurance companies or banks may have additional fees.

Portfolio Composition (October 30, 2009)

Company	Market Cap ($ mil)	Price-to-Book Ratio
Aerocentury Corp	35.6	0.95
Alamo Group	159.8	0.83
Allion Healthcare, Inc	184.3	0.97
Avalon Holdings Corp	10.2	0.26
Books AMillion Inc	167.9	1.59
Cascade Corp	277.6	1.20
Ennis Inc	428.9	1.42
Flexsteel Industries, Inc	56.4	0.53
Greenbrier Companies	173.7	0.95
Hastings Entertainment	43.2	0.42
Jackson Hewitt Tax Svc	157.7	0.71
Srarrett Ls	66.0	0.46
Marlin Business Svcs	95.3	0.65
MedCath Corp	169.5	0.45
Oyo Geospace Corp	23.8	1.35
Paragon Shipping Inc	189.2	0.47
Rcm Technologies Inc	36.5	0.59
Saga Communications	51.3	0.87
Shoe Carnival, Inc	220.0	1.05
Standard Mtr Products	252.2	1.49
Standex International	208.6	1.18
Surewest Communications	167.0	0.63
Tufco Technologies Inc	12.9	0.35
Twin Disc Inc	123.4	1.15
Willis Lease Finance Corp	107.4	0.60