- The performance of 100 stocks selected in 1993 compares favorably with the performance of an index fund over the last twenty years.
- Within the 100 stocks, large stocks have performed well more consistently than small stocks.
- Investors who favor a buy and hold strategy may find large stocks more suitable for that purpose.
Last year I wrote an article titled 1993's 100 Best Stocks: How They Fared. In it, I describe how I tracked down the returns of all 100 of the stocks listed in Gene Walden's 1993 book The 100 Best Stocks to Own in America, and found they compared favorably to the S&P 500 index fund (NYSEARCA:SPY). You can read the details in the original article, but since then I've made two advancements. First, I've updated the data to run through March 31, 2014, so we are up to 20 years and three months. Second, a commenter on my original article raised the question of weighting. SPY uses market-capitalization weighting, but the approach I used in evaluating the 100 stocks was to weigh them equally. How much, if any, of the performance difference could be explained by this?
To find out, I revisited old filings for the 100 stocks. If you are interested in the details, I've posted the spreadsheet I used on my website (indeed, it's the only thing on my website at the moment). I recorded revenue, net income, EPS, and book value data for each company for the fiscal year ending in 1993. I then estimated shares outstanding by taking the ratio of net income to EPS, and in turn multiplied this by the share price as of 12/31/1993 to get an estimate of the market cap. Small caps generally outperform large caps, so I assumed the cap-weighted performance of the 100 stocks would be worse than the equal-weighted performance. I was wrong.
Returns for Portfolios made up of 1993's 100 Best Stocks (equal-weighted unless otherwise specified)
# of stocks
Rate of return
All 100 stocks, equal weighted:
All 100 stocks, market-cap weighted:
All 100 stocks, revenue weighted:
All 100 stocks, income weighted:
All 100 stocks, book-value weighted:
25 largest stocks by market cap
50 largest stocks by market cap
Stocks with 25+ years of dividend increases
Stocks with 10+ years of dividend increases
Stocks with 5+ years of dividend increases
Stocks with a 1993 current yield of 3% or more
Stocks with a 1993 current yield of 2.5% or more
Stocks with a 1993 current yield of 2% or more
SPY (S&P 500 ETF):
The equal-weight version of the 100 stocks portfolio outperformed the index by 135 basis points. Market cap weighting increased the gap by another 76 basis points to over 210 basis points, and size-based weighting on any factor other than market cap added about 20 additional basis points of performance. Small percentage differences can become quite large when compounded over twenty years. To match the equal-weighted IRR of 10.67%, the S&P index (holding SPY's dividends constant) would have needed to close at 2524.02 on March 31, 2014. To achieve 11.43%, it would have had to close at 2970.55. Gold, which closed at $391.75 on December 31, 1993 and pays no dividends, would need to have surpassed $3,000/oz. to match the equal-weight version of the 100 stocks, and passed $3,500/oz. to match the cap-weighted version.
It seems most of the outperformance of large stocks was concentrated in the top quartile. Here are the 25 largest stocks out of the 100, by market capitalization (market cap and P/E are as of 1993):
Market cap (millions)
Procter & Gamble
Johnson & Johnson
American Home Products
Banc One Corp
I found the consistency with which the largest stocks on the list generated satisfactory returns remarkable. Each of the top 24 stocks had greater returns than 10-year T-bonds, which I estimate returned just over 5% for the same period. By contrast, the ten smallest stocks on the list had returns that were all over the place:
Market cap (millions)
The Olsten Corp
Crompton & Knowles
Federal Signal Processing
A. Schulman Inc
International Dairy Queen
The precise method Walden used to pick his stocks is still a little murky to me, as he doesn't go into a ton of detail on it in the book. I can tell you there is no mention of return on assets, equity, or invested capital, margins, profitability or even debt. He doesn't describe growth plans or prospects or discuss recent acquisitions or management. There are few stocks with exorbitant P/E ratios - Home Depot was the only one out of all 100 that was over 40, and only one other was over 30 - but he didn't really seem to seek out low ratios either. The four metrics listed in the book for each company are revenue growth, earnings growth, dividend growth and stock price appreciation; he includes the last five years for each metric. According to the narrative, a history of earnings growth was the single most important factor he used. And I do think there was an element of luck in that every one of Walden's 22 largest companies returned 8% or more; after 22, there was a noticeable drop-off in performance (#26 by size was Toys "R" Us, the largest company on the list that had a negative rate of return). In any case, the strategy he used seemed to perform the most consistently for very large stocks.
Joe Ponzio wrote the following in F Wall Street (emphasis mine):
It's important to keep in mind the size of your business. Businesses are like boats - small ones are nimble and can turn very quickly. Large companies are like barges that turn slowly. Both can move very quickly if they've got the time to get up to speed.
If you are looking to trek across the ocean (i.e., intending to buy and hold a stock for many years) you will want to be in a barge. They are more secure in the open waters, and they are safer when the waves are crashing. If you are looking to take a short trip (i.e., intending to buy and sell stock frequently) small boats can quickly change direction and motor from location to location, but at a cost - they are more vulnerable in volatile waters and can get crushed if they run head-on into a barge. Both large and small boats can get you to where you are going…
This particular set of data supports that concept nicely: A strategy to buy and hold individual companies seems to be best served by large stocks.