The old saw is you can’t beat the market!!! But in fact people do it every day. I bought BTC @ $275 3 years ago and am up 1250%. The old saw is invest in low cost index funds…. Studies have shown low cost index funds beat actively managed funds bla bla bla. True enough but actively managed funds do not constitute the universe. What if you don’t invest in “funds” but invest in stocks? The old saw says: diversity, diversity I tell ya! It’s your savior!
Looks to me like diversity isn’t cutting it. The arrows are pointing into the ground. Notice the YTD return is -0.79%. I was reading an article on the Dobermann’s of the Dow which is a screen of the old Dog’s of the Dow. The dogs theory was a value play on the Dow stock universe. When picking you don’t screen 3800 stocks you screen 30. The 30 are the best run companies in the world. The 30 are adequately diversified and cover all sectors well. The 30 have killer management. The 30 if they flunk get kicked off the team and sent to the hinter land to be replaced by creative destruction. The 30 are analyzed 10 ways to Sunday so there isn’t much in the way of catastrophic surprises. It took GE nearly 20 years to get the boot after Jeff Immelt choked it to death for most of those years. All of this implies much risk management is done for you.
The The Dogs screened share price and yield on the 30 stocks once a year andyou bought the 10 lowest priced highest yielding stocks. I did a calculation once and found over 40% of the Dogs return was based on dividend, only 60% on capital appreciation. It’s a value play because you are buying stocks cheap, buy low sell high. Sometimes cheap stock means out of favor sometimes trouble is brewing and the Dogs screen doesn’t sniff that out.
The Dobermann’s OTOH are screened for Free Cash Flow, as in a river of revenue, and Return on Equity which is a measure of productivity and quality. This gets to some extent to not what is the cheapest stock but what is the best bang for the buck stock of the 30. The choices are winnowed by screening and elimination until 10 remain. You buy those 10 every year, replacing those not still on the list from last years purchase. Not very expensive to own either @ 5 bucks a trade if you turn over all 10 stocks once a year it’s $100 even on a $5M portfolio. So how’s it work out?
510% better than the index over 20 years. It paid off 17 of those 20 years. Not Bad!
I put the issues into the EF calculator at equal percentages
17.56 expected return @ 16.18 risk A lot more return and a little more risk compared to S&P 500! I then decided to look at adding a bond fund. Right now I’m in VBIRX so I added that in a 50 bond/50 stocks AA
It tamed things down considerably. This would be a good portfolio to weather early retirement. It has reasonable return and pretty low risk and is cheap to implement and re-balance. This portfolio is not on the efficient frontier so I let the calculator do it’s work and create a portfolio on the EF
With the same 50/50 bond stock mix, the return is now almost 9% and the risk is virtually the same. The calculator picked only 7 stocks and the bond not 10 and a bond and it adjusted the % of each stock in the portfolio to park me on the EF.
The S&P YTD is down -1.35%
When I did a weighted analysis of the 7 stock 1 bond EF portfolio, it’s YTD return is +4.54%, compared to the venerable S&P 500’s “well diversified” -1.35%. I’m thinking strongly about pulling the trigger on this for a couple hundred K next year and see how it does. It’s 50% in bonds which are safe, and 50% in super well managed stocks which though volatile are also safe. HD MRK and VZ are not going out of business. I have some Roth money just begging for this since I can trade to my delight and incur no penalties. The low risk is what attracts me most given the market turbulence and if Bond yields go up good deal, I’m in short term paper and will see the benefit of that. I can’t see much downside.
Here are asset statistics and correlation statistics
Note the good degree of non correlation between these companies
THIS IS NOT INVESTMENT ADVICE just my latest musings