Achieving Outperformance in a Low Return World
-
Font Size:
I recently re-read "Mission Possible", a book by Michael J. Oyster, CFA. Here are some key tools one can employ to outperform the market averages:
1. Asset Allocation - (not good in a bear market)
2. Indexing – Replicate performance of a particular market or asset class. It solves the main problem of active management: security selection.
3. Enhanced Indexing:
- Stock Selector (over or underweight certain names)
- Synthetic (using futures or swaps)
4. Small Cap and Value Bias (buy low and sell high) *
5. Protected Leverage – 1 S&P Futures Contract and 1 S&P 500 Put Option (long-term)
6. Costless Collar – Shorting a Call and Buying a Put
7. Covered Call Writing – Need for current income (short-term)
8. Buy 1 S&P 500 Futures Contract and 1 S&P 500 Covered Call. Spend 10% of the Option Income and reinvest the balance.
*Here are some fascinating statistics that can help one asset allocate by style:
- Small Cap Value returns from 1927-2004: 14.7%
- Micro Cap returns from 1927-2004: 13.0%
- Large Cap Value returns from 1927-2004 : 11.7%
- Large Cap Growth returns from 1927-2004: 9.5%
This tells us that Large Cap Growth companies are too large and too mature. Next, the risk premiums, over the long term, to achieve a better rate of return, goes down when you invest in value funds within the Small Cap Sectors. Next, a portfolio of 60% S&P 500 index and 40% Lehman Bond index from 1973-2004 will return an annual return of 10.4%. If you change the mix to 30% S&P 500 index, 40% Short-term Bonds and 30% US Micro Cap the return goes up to 11.8% per year. Now, if you further diversify into 30% to International (small and large and emerging), and 30% into US (small value and large value and S&P 500) the return goes to 13.1% per year with less risk than the first two portfolios.
Now look at the S&P 500 from a seasonal standpoint since 1950:
Historically, you would be rewarded for being long the market in November, December & January. You could achieve this with the purchase of S&P Index options or double long S&P market funds. Conversely, you might reduce holdings prior to Labor Day or at least put on 2 month hedges for September & October.
TickerSense looks at The Good, the Bad, and the Beautiful of a $1 investment in the S&P 500 under three different strategies back to 1966.
We are born brave, trusting and greedy – and most of us remain greedy.
– Muriel Strode.
Get Seeking Alpha Free Stock Alerts by Email!
Get Free Stock Alerts by Email!
-
Editor's Picks
-
Most Popular
- Bank of America vs. Banco Santander: Whose Dividend Is Secure?
- Fannie, Freddie, and Financing Models of Last Resort
- Fannie and Freddie: Let’s Call the Whole Thing Off
- China Digital TV: Red Flag Warning?
- Can Big Oil Balance Shareholder Interest Against National Interest?
- BioScrip Management, Board Should Be Shown the Door
- Full list of Editor's Picks »
- Attention Apple Investors: Analysts You Don’t Know But Should »
- 10 Top Dividend Stocks of the S&P 500 »
- Ford "Fire Sale": A Crystal Ball for America »
- Sirius and XM Satellite Merger Set for Approval; RBC Lowers Price Targets »
- LDK Solar: The Brightest Opportunity? »
- 7 Stocks I'm Buying Now »
- The Screws Tighten on Apple Investors »
- Credit Crisis Continues: Who's Buying Microsoft, Johnson & Johnson? »
- Sirius-XM Merger Decision Delay Is Unacceptable »
- Adding Wood to Your Portolio: A Worthwhile Investment »
- Stocks to Buy Before the Oil Bubble Bursts »
-
Long Ideas
-
Short Ideas
-
Cramer's Picks
- Has Embraer Hit Bottom?
- Notes on a Worst-of-Breed Rally
- More Pain for Petrohawk - Cramer's Lightning Round (7/7/08)
- ConAgra: Multi-Year Lows Spur Insider Buying
- Cash America: Up 16% on Higher Guidance
- Airline Stocks: Where Value Investing Takes Flight
- Bolt Technology: Charged for Growth
- Umpqua Holdings Revisited: Situation Stable
- NextWave Wireless: Benefiting From Blackberry Enabling HTML In Emails
- Recommending PriceSmart in Light of Sustained Store Momentum
- Full list of Long Ideas »
- Covering Down Some of My Short Positions
- What's Going on With uWink?
- Brokerage Stocks: Trouble on the Horizon?
- 5 Reasons Amphenol Will Have Trouble Exceeding Expectations
- Looking To Profit From the Market's Plunge
- Crystal River’s Q2 Write-Downs Could Bankrupt the Company
- Assurant Is A Compelling Short Sell
- Fuel Systems Solutions: Time to Take Profits
- GM an Unlikely Hero - Fast Money Recap (7/1/08)
- Pair Trade Visa and Capital One
- Full list of Short Ideas »
- More Pain for Petrohawk - Cramer's Lightning Round (7/7/08)
- Recession Season - Cramer's Mad Money (7/7/08)
- StanCorp a Safe Financial - Cramer's Lightning Round (7/2/08)
- Momentum Stocks Stalled - Cramer's Stop Trading! (7/3/08)
- Expecting a Lift for Pediatrix: Cramer's Mad Money (7/3/08)
- The Most Bullish Thing - Cramer's Stop Trading! (7/1/08)
- Exelon's Got Nukes - Cramer's Lightning Round (7/1/08)
- Prescription Prediction for Allscripts - Cramer's Mad Money (7/1/08)
- Rex Marks the Spot - Cramer's Lightning Round, (6/30/08)
- Medicare Bill Buys - Cramer's Mad Money (6/30/08)
- Full list of Cramers Picks »
Most Popular Feeds
-
ETFs
-
US Market
-
Long Ideas
-
Alt. Energy
- Full list of feeds »
Hedge Fund Jobs
Job Seekers:
- Search jobs by category
- Get job alerts by email or live feed
- Apply online
Employers
- See all recruitment options
- Get applications online or by email



This article has 1 comment: