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The dack.com Investment Strategy
A super-cap value strategy with a contrarian twist.
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The dack.com investment strategy is simple: buy value stocks among the fifty largest US and foreign companies. It's a combination of two investment philosophies that have proven their worth over time:
Choose Value Stocks Over Growth Stocks
Growth stocks trounced value stocks in 1998 and the beginning of 1999, but since 1970 value stocks have beaten growth stocks by an average of four percentage points per year - 20% to 16%. | Value beats growth, with less risk. |
(Value represented by the 100 companies with the lowest P/Es among the 500 largest companies, growth represented by the 100 companies with the highest P/Es). Value's superior performance has come with a lot less risk than high-flying (and hard-falling) growth stocks, and value holds up much better than growth in a down market. Value certainly has fallen out of favor recently, but long-term investors will be rewarded by sticking with it.
Choose (Really) Big Stocks Over Small Stocks
Small-cap stocks have actually outperformed large-cap stocks since 1926, but in most of those years big stocks beat small stocks. | Big beats small, except off the bottom of a bear market. |
Small-caps' big gains have come from just seven spectacular years, (1933-34, 1943-44 and 1975-77), all of them huge bounces off major market bottoms. Without those seven years, small stocks have lagged big stocks by 1.5% per year since 1926, and with much higher risk. Focus on small stocks only off the bottom of a bear market (something that's nowhere in sight), and until then reap bigger returns by investing in large-cap stocks.
Finding the Right Stocks
Armed with a stock-picking strategy, you'll need to identify the stocks that match the aforementioned investment criteria. A handy tool I use to identify value among the largest foreign and domestic stocks is MarketGuide's free online stock-screening application called NetScreen. Once you figure out how to use the app, you can create stock screens based on dozens of criteria. I, of course, identify stocks with very large market capitalizations and low P/E multiples, and add various other criteria such as high EPS growth rate, strong cash flow, low debt, and high dividend yield.
dack.com Investment Corollary
Software like NetScreen uses cold, hard data to identify stocks that match one's investment criteria. This is helpful, and should an important part of your stock selections, but it doesn't take into consideration one criterion that makes a stock's price move: investor attitude. | Use bad news to your advantage: buy stock when shares are "on sale." |
Contrarians can use this to their advantage, buying discounted shares in great companies when they've suddenly become unpopular or gone out of favor with the investing masses. So, once you've identified a handful of stocks that meet your investment criteria, be especially alert when one of these companies is being sued, poorly handles a PR problem, or receives an unusual amount of negative coverage in financial publications. This is typically a good time to buy, or add to an existing position.
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| an old-school contrarian |
It's much easier said than done, but Baron Rothchild left us with some timeless investment advice:
"Buy when the cannons are booming and sell when the violins are playing."
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