That always seems to be the million dollar question. "Do you use a stock picking strategy for your longer term holdings? You do? Why bother? You do know that nobody beats the market, right. Do you know that 80% of fund investors do not beat the S&P? Why wouldn't you buy a low fee index fund and get out of the way?"
Fair enough. Who can argue with that? We always know what investing in the S&P 500 would have gotten us, versus investing with a mutual fund manager. Plus you get a lot of popular stocks and a lot of the big names you hear in the media: Apple, Citigroup, Exxon/Mobil, GE, IBM, Microsoft. Seems like the way to go, right?
It's definitely well known (and true) that the decision to be in the market is definitely the majority of the battle, and explains a good portion of returns for those who are successful. But I also believe there is a lot of wisdom out there that makes a strong case for having a stock selection strategy other simply buying the market itself -- a couple of extra percentage points on your return over a period of many years can make the difference between being good and being rich.
Whether you like it or not, investing in a market index like the S&P500 is a strategy. That strategy is: Buy the 500 largest capitalization stocks in the market, make the size of each position proportional to the stock's market capitalization... and then reinvest and rebalance over time as the situation changes.
There are lots of other strategies put forth by a lot of the some of the greatest investors of our time ( the "market masters") that when backtested, seem to have done significantly better over long periods of time than buying the S&P 500 index, at least when you test these strategies back over the last 50 years or so. Why not take the advice of these gurus when picking stocks?
If I am going to buy a stock for an investment (that is, something I plan on holding for more than a week), I am certainly going to attempt to use those strategies that have proven some success. Whether or not that success continues, I do not know. But I certainly plan on using what I know.
How do I tap into the thinking of the market masters? You can start by reading books by them and/or about them....here are some books to start with.
Some Investing Books from the Market Masters
Super Stocks, and The Only Three Questions That Count, by Kenneth Fisher. Fisher manages over $50 billion, was the pioneer of the price to sales ratio as a criterion for picking stocks. He does not think with the herd and debunks all kinds of commonly accepted thinking in his books. For example, buying stocks while P/E ratios are low must be better than buying them high, right? Read the book to debunk this myth and others.
Security Analysis, and The Intelligent Investor, by Benjamin Graham. Two classics. Security Analysis is the bible for value investors. Graham is ultraconservative; in fact, he is so conservative it is tough to find stocks these days that meet his criteria (maybe that should tell us something about today;s market!)
The Little Book That Beats The Market, by Joel Greenblatt. Short, simply written read by one of the country's most successful hedge fund manager (Greenblatt averaged over 40% a year in his hedge fund picking undervalued stocks). A great, simple system for picking value stocks while spending very little time doing it.
John Neff on Investing, by John Neff. Neff managed the Vanguard Windsor Fund for years, a pure value investor who shares his thinking into how to find those really undervalued, beaten down opportunities.
How to Make Money in Stocks, by William O'Neil. A classic for momentum investors from the creator of the CANSLIM system and founder of Investors Business Daily; timeless rules on how to make (and not to lose) money in the stock market. O'Neil's track record is incredible.
What Works on Wall Street, by James O'Shaughnessy. O'Shaughnessy has done a fantastic job on research going back to 1950 (through 1996), backtesting every strategy you can think of, in most cases debunking a lot of the ones that get the most press. He has proven out stock picking strategies that are a great combination of growth and value, and outperform over the long run. I love the approach because it is backed up by good, solid data.
One Up on Wall Street and Beating The Street, by Peter Lynch. Over his 13 year tenure as the manager of Fidelity Magellan Fund, he was the top-ranked fund manager (and probably the most famous). In Beating The Street, Lynch takes the reader step by step through his process of selecting stocks for the Barron's roundtable in which he participated in.
Winning on Wall Street, by Martin Zweig. Zweig was an academic and a very successful fund manager. The insights he provides are tremendous. Very rigorous methods for finding growth at a reasonable price (as an aside, if you look at the past 10 years worth of performance data on the Zweig stock screen on the AAII site, the results are jawdropping). Also has some solid thinking on how to take macroeconomic variables into consideration when investing (economy, inflation, interest rates, fed policy, etc).
Data Sources
Where do I get the data in order to pick stocks which meet the guru's criteria? Everything you need is on the internet. Here are some sources I use.AAII. I cannot say enough good things about AAII (American Association of Individual Investors). I got an AAII lifetime membership for $360 and it is the best money I have ever spent. The website has stock screens for most all of the strategies of the market masters above which alone is worth the price, and the AAII Journal and Computerized Investing publications are great resources that give practical advice (not hype) to the individual investor for making money in stocks. http://www.aaii.com/
Magic Formula Investing. The companion to The Little Book that Beats the Market. This site has the database with the top 100 picks using the magic formula from the book at any point in time. And it is FREE, all you have to do is register. http://www.magicformulainvesting.com/
Value Line. I subscribe to Value Line -- it is expensive ($299/yr), but worth it. Value Line comes with a weekly publication that ranks its database of 3,500+ stocks -- uses a scale from 1 to 5 in three areas: Timeliness, Safety, and Technical. It has all kinds of historical data on earnings, balance sheet, multiples, ratios, etc.....and the website has a very powerful screening tool which allows you to access and export the data. http://www.valueline.com/
Validea.com. This is a pretty cool site. For $299 / yr, you can access a database of all stocks and see how they do using some of the screens of the market masters. validea.com grades each stock on how it does against the formula. The founder of the site wrote a very interesting book about Market Gurus. http://www.validea.com/
wsj.com Online version of the Wall Street Journal. You have to be a subscriber to the Journal to get access to this, but it is well worth it (I love reading the paper as well). http://www.wsj.com/
Yahoo! Finance. Best source of free data on the internet for stock data...news, quotes, charts, research, analyst data. finance.yahoo.com . Their free data is better than most of the sites you have to pay for. Enough said.
No comments:
Post a Comment