Dow Value Portfolio: Final Tally for 1997
GADR's 1/18/98 Update mentioned that we were too lazy to precisely
calculate the 1997 total returns on the Model Dow Value Portfolio. It
would have required 18 separate calculations, at 18 separate prices,
that assumed reinvestment of a total of 16 dividend distributions and
2 stock spin-offs.
Happily, the Wall Street Journal (keepers of the various Dow Jones
Averages) did the calculations for us, in a special supplement to
their issue of 2/26/96. Our estimates were just a bit high in some
instances and just a bit low in others. The final tally of total
returns on the Dow Value Portfolio for 1997 are:
AT&T 53.2%
Boeing -7.1%
GM 19.4%
IBM 39.3%
---- ----
TotRet = 26.2%
The 10-year annualized return on AT&T was 16%, a bit less than our
estimate. And, Vanguard's S&P 500 Index Fund returned an annual
average of 17.8% over the same span. Nevertheless, our point remains
intact: The worst 10 years of AT&T's history produced total returns
to its investors not much less than those provided by the best 10
years of the S&P 500's history. Ergo, for the long term
buy-and-hold-investor, it's hard to go wrong with AT&T.
The total return on the 26 Dow components that were not chosen was
21.0% (as the Dow was constituted at the time our selections were
made). This constitutes a 5% divergence from our benchmark. We
believe this is due to employing a Value Investing methodology (See:
web.idirect.com that can
identify wide mispricings even in the most closely followed Index of
them all. If so, our methods can find even wider mispricings in less
closely followed stocks.
If the Efficient Market Hypothesis is correct, we were "lucky coin
tossing monkeys" in 1997, and the divergence between the Dow Value
Portfolio and the DJIA will narrow over time. As they say, "Time will
tell."
In the meanwhile, if your own investment portfolio did not earn an
overall return of 26% or better in 1997, cost-inefficient
diversification might be the reason.
Most of the portfolios we have reviewed contain too many mutual funds
to overcome the cost advantage of Indexing. Mathematically, there is
no way to beat Indexing with a collection of mutual funds that contain
as many or more stocks than the Index itself, while at the same time
these funds charge higher management fees than an Index Fund does.
There is a remote possibility of picking a mutual fund that will
outperform Indexing over the long haul. But, there is virtually
no possibility of picking a collection of mutual funds that
will do so.
There is only one rational way we know of to attempt to beat Indexing:
Concentration in a handful of undervalued common stocks. (Buffett
would concur.)
If that much concentration is too daunting a prospect, then the only
economically rational alternative is an Index Fund. |
