A few years ago, I developed a theory that a portfolio of great companies-companies that can last forever-can outperform the S&P 500 in the long run even if they are mature companies with slower revenue growth than other companies.
Since it will take a long time to test this theory, I decided to create a hypothetical portfolio and test it against the S&P 500 using the past 10 years of data.
The portfolio is based on these:
- Invest a total of $10,000 in five great companies that can potentially last forever: Disney, Coke, Pepsi, McDonald's and Nike. The initial contribution is around $2,000 for each stock.
- Hold the stocks from Dec. 31, 2003 to Dec. 31, 2013.
- Stock splits are adjusted and dividends are reinvested for the stock portfolio. Dividends are also reinvested for the S&P 500 Total Return.
Here are the results:
In terms of annual returns, the stock portfolio greatly outperformed the S&P 500 during the 2008 Financial Crisis (-9.50% vs. -36.92%) and during the 2011 Debt-Ceiling Crisis (11.81% vs. 2.11%). But the stock portfolio underperformed the S&P 500 in other years, except in 2007. This is because the stock portfolio consists of great companies that have been around for many years. They are mature companies that may have lower revenue growth than other S&P 500 companies. But they are strong and stable and are less susceptible to market downturns.
In terms of trailing total returns, the stock portfolio outperformed the S&P 500 since inception (8.97% vs. 7.36%), but underperformed in the past 5 years during economic recovery and bull market periods. Since the portfolio consists of great companies that have been around for many years and have great economic moats, I believe that it will outperform the S&P 500 in the long run, but will likely under-perform the S&P 500 in a bull market.
This portfolio strategy works well for those who want to invest in strong and stable companies that have the potential to last forever. They may not perform as well as other high-growth companies, but they are less volatile and tend to perform better than the S&P 500 during market downturns.