One investing myth that I have never understood is the notion that you have to "hold your house" and invest in contrarian stocks in order to beat the S&P 500 over a meaningful period of time. I appreciate the rationale behind such logic namely, when a sector becomes hated (say, like banks during and in the immediate aftermath of the financial crisis), it only takes reasonable performance going forward to generate outperforming returns because the mismatch between the beaten-down price and fair value becomes so great that outperformance over the medium term becomes a likely event.
Again, I appreciate that logic. It did not take a genius to figure out when Bank of America (BAC) was trading at $5 per share, it would do quite well following the recession if the company avoided bankruptcy or more punitive share count dilution. I didn't get in Bank of America until the $7-$8 mark, but I could understand how the stock's pricing was ripe for either strong outperformance going forward if it survived.
But while contrarian investing can be a signal of fertile investment ground, it is by no means necessary.
Let's review the total return performance over the past ten years of stocks that required no discomfort to own-they were the obvious stocks that increased intrinsic value on a regular basis, required no special skill or investing acumen to own, raised their dividends every year, and are the hallmarks of conservative portfolios across the country.
From July 2003 to July 2013, Coca-Cola (KO) returned 8.8% annually. The dividend went up every year, and the earnings per share increased every year except for the 2008 to 2009 stretch, when earnings went from $1.51 to $1.47 per share.
From July 2003 to July 2013, PepsiCo (PEP) returned 9.2% annually. The dividend went up every year during this period, and the earnings per share increased just about every year, with two exceptions: $0.13 per share drop-off in 2008, and a $0.06 drop-off in 2012.
From July 2003 to July 2013, Clorox (CLX) returned 10.1% annually. The dividend increased every year during that time period, and the earnings per share increased during every year in this time period except for 2011.
From July 2003 to July 2013, Procter & Gamble (PG) returned 8.8% annually. The dividend increased every year during this period, and the profits went up annually from 2003 to 2009, and then vacillated between the $3.50-$3.93 mark as the company worked its way through a series of strategic blunders and profit margin erosions mixed with weak volume growth.
From July 2003 to July 2013, Colgate-Palmolive (CL) returned 9.8% annually. The company increased its dividend every year during this time period, and never went more than 24 months without permanently increasing its earnings per share.
From July 2003 to July 2013, General Mills (GIS) returned 10.8% annually. The company paid out the same $0.55 annual dividend in 2003 and 2004, and raised it every year thereafter. Other than a $0.06 per share decline in 2005, the earnings per share increased every year over the past decade for the company.
From July 2003 to July 2013, Kellogg (K) returned 9.8% annually. Other than a penny per share decline in 2012, the earnings per share increased every year during this time period. As for the dividend, Kellogg paid out a $1.01 dividend in both 2003 and 2004, and raised it every year thereafter.
From July 2003 to July 2013, Hershey Chocolate (HSY) returned 12.8% annually. Other than 2007 and 2008, Hershey grew earnings per share every year during this time period. The company paid out $1.19 per share in both 2008 and 2009, and other than that, the company raised its dividend every year during this decade stretch.
From July 2003 to July 2013, 3M Company (MMM) returned 8.5% annually. The dividend went up every year during this period, and the earnings per share increased every year during this period except 2008 and 2009.
And what did the S&P 500 do over this time period? From July 2003 to July 2013, the S&P 500 returned 7.6% annually.
All of the companies mentioned above outpaced the performance of the S&P 500, and there was absolutely nothing contrarian about selecting any of these companies. These stocks populate index funds, pension funds, and trust funds across the country. They are about as obvious as it gets, and over the past ten years, they have beaten the S&P 500 index.
You would be hard pressed to find many three-year rolling periods where earnings per share and dividends per share did not increase for these companies. In the wild world of business, they are about as close to finding annual intrinsic value growth as it gets. You do not have to get the idea into your head that it is necessary to make uncomfortable and contrarian investments in order to succeed. These companies were all obvious investments in 2003. They were the big dogs then. Contrarian investing is not necessary in order to beat the S&P 500 index because the obvious blue chips sitting in plain sight have been doing it for the past ten years. Obvious investing can beat contrarian investing.