PALO ALTO, Calif. (CNN/Money) -
Charles Schwab has always done well by following the most important rule of marketing: Keep it simple.
The San Francisco brokerage and money-management Goliath plans to offer its customers a new computer-generated ratings system for some 3,000 stocks. Each stock will get a letter grade. No ambiguity. No conflicts of interest. Just a letter -- A through F -- that everyone can understand.
The idea holds a lot of promise. Investors can't possibly be confused by an 'A' or a 'B'. Ditto a 'D' or 'F.' Obviously, a 'C' is a judgment call; 'E' isn't an option, in the classroom -- or for Schwab.
The company says the system will be purely systematic -- that is, a computer will crunch through all sorts of data on the companies, and arrive at a grade. Schwab has had this rating system in the works for months, ever since it bought the software firm Chicago Investment Analytics in late 2000. (For more on Schwab's plans, read Fred Vogelstein's analysis of the brokerage in Fortune from last fall.)
Of course, what's good about Schwab's system -- its objectivity -- also is a drawback. Picking stocks involves being subjective. It requires factoring in intangibles, like the management team, products and competition.
Also to Schwab's detriment, it isn't being all that forthcoming about just what inputs go into the stew that spits out the grades. Speaking to CNN/Money, Schwab company spokesperson Morrison Shafroth offered four variables the model looks at: P/E ratios; analyst estimate revisions; stock price volatility; and free cash flow growth. The company has not revealed the other 20, said Shafroth.
A perusal of the Web site for Chicago Investment Analytics yields a bunch of mumbo-jumbo about short- and long-term factors, cyclical and group effects and the like. It seems Schwab doesn't want the secret sauce explained.
What's more, Schwab intends to grade on a curve, ending up with an equal number of 'As' and 'Fs'. But that suggests the market should have an equal number of winners and losers each day as well as each year.
What you'd ideally like is more stocks to buy when the market is moving up and more to sell when it's moving down.
Clever Schwab clients will take the new ratings with a grain of salt. They'll use the lists as tip sheets to identify stocks to buy or avoid. In today's back-to-the-future choppy markets, that's about the best anyone can ask for.
What Gates is buying
The Wall Street Journal reported Friday that the Bill and Melinda Gates Foundation had purchased a bunch of pharmaceutical stocks, perhaps in coordination with its drug-research causes, or, more likely, because it saw them as good investments.
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RECENTLY BY ADAM LASHINSKY
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Whatever the intent, the timing seems good. Big Pharma has been beaten down and nine of the new holdings reported by the foundation and Cascadia Investment, Bill Gates' personal fund, are big drug companies. These include Pharmacia (PHA: up $0.83 to $42.23, Research, Estimates), Eli Lilly (LLY: up $1.59 to $65.00, Research, Estimates) and Bristol-Myers Squibb (BMY: up $0.43 to $30.47, Research, Estimates).
Gates' personal investment manger, Michael Larson, also appears to be dabbling in emerging market funds. According to a comparison of SEC filings for March 31, 2002 and Dec. 31, 2001, Larson has added small stakes (worth between $1.5 million and $4.7 million) in three garden-variety mutual funds.
Two invest in India -- the Morgan Stanley India Investment Fund and Jardine Fleming India Fund. The third is the Greater China Fund, run by UBS Global Asset Management. Each fund has outperformed the major U.S. indices in the past year, which may well be what attracted the money manager to one of the world's richest men.
Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at adam_lashinsky@timeinc.com.
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