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Step 3: Stock Pickers

driving down stock prices so their expected returns are high enough to attract investors. That is difficult for most investors to grasp since they prefer to believe growth stocks are better investments than value stocks. After all, investors looking for a stock tip want to hear the name of the next Apple, not the next JCPenney. As you will see in Step 8, the data indicates that investors should be interested in great investments (value stocks), not just great companies (growth stocks).

fortune “kookIe” I analyzed Fortune’s “Ten Most Admired Companies” (2001)55 as a whole portfolio and as individual companies, comparing them to 10 index portfolios for the 17-year period from January 2001 through December 2017. The results of the study are shown in Figure 3-6, indicating the equal-weighted (across the nine remaining publicly traded companies) “Fortune Most Admired Portfolio” underperformed many of the index portfolios — getting about the same returns as Index Portfolio 75 which has 25% fixed income. Despite the fact that the “Fortune Most Admired Portfolio” carried comparable risk to the riskiest Index Portfolio 100, $100,000 grew to $336,000 for the time period vs. $409,543 for Index Portfolio 100. The story is even worse for the “Fortune” tellers. Four of the ten companies took on significantly greater risk than the Index Portfolio 100, but earned returns lower than the Index Portfolio 40 which contains 60% fixed income. Important to note, one of the “Ten Most Admired Companies,” Dell Computer, ceased to exist as a public company and reverted to a private company in 2013.

Index Funds: The 12-Step Recovery Program for Active Investors  

This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...

Index Funds: The 12-Step Recovery Program for Active Investors  

This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...