High Returns with Little Effort
Don’t get me wrong — indexing is a great strategy. Indexing will beat active mutual funds any day of the week. But there are basic strategies to beat an index over the long-run — ways to enhance the return of a basic index by overweighting certain stocks.
In Contrarian Investment Strategies: The Next Generation, David Dremen shows that buying low P/E, low P/CF, low P/B, and low P/Div stocks outperforms the market index substantially.
The outperformance of the strategies over a market index vary, but any one of these strategies has outperformed the market over the long-run and there is no reason to believe that these strategies will not work in the future. The best strategy — the low P/E ratio strategy — has outperformed the market by an average of almost 4% over the study period. The worst strategy — a low P/Div ratio (or high yield) — still outperformed the market by almost 1% per year.
So, whether you are a mutual fund investor or select individual stocks, you should put a higher weighting in stocks that have a low P/E, low P/CF, low P/B, and low P/Div. Doing this will increase your odds of outperforming over the long-run. So forget all of the amazing growth stories and invest in a cheap, boring stock and laugh all the way to the bank.
With only a little more effort, you can increase your odds of beating your neighbors index fund. And, of course, trounce his actively managed fund as well.
