Commentary on Berney's Model Portfolio
I find myself spending considering time educating individuals that an Index is simply a mathematical average. It represents the best of the worst and the worst of the best. To do better than the Index, one need only eliminate those stocks that contain the characteristics of the poor performers. If we can reduce the number of poor performers in our portfolio, we will, by default, beat the Index.
The effort to eliminate the poor performers is an art and not a science. The art allows for numerous different concepts of investing to co-exist.
It has been my experience of analyzing portfolio performance that about 1/3 will achieve returns greater than the Index, about 1/3 will achieve positive performance but less than the Index, and 1/3 will achieve negative stock performance. Morningstar's Stocktools has a universe of 7,486 companies with a one year stock performance record. At the end of February, 37% of this universe beat the Index for one year, 29% yielded positive performance but less than the Index, and 34% provided negative returns.
The results do not very greatly when we look at the performance of these companies over 5 years. Of the 4,373 companies that had a five year stock performance record, 33% beat the Index, 43% provided positive returns but less than the Index and 24% had negative stock performance over 5 years (ouch).
If we look at the 30 DJIA stocks, 10 (our 1/3) beat the Index in 1996.
It's amazing how consistent these ratios seem to exist in the investment world.
As you will see in the next post, Berney's Model Portfolio is beating the Index 19% to 11% for the period since the creation of the portfolio on 11/21/97. What makes the performance of this group of 15 stocks so outstanding is that 9 of them (60%) are beating the Index. Returning back to premise of the portfolio's creation, I again note that, if we eliminate those stocks with the characteristics of the poor performers, we dramatically enhance our ability to beat the Index!
Enjoy!
Berney |
