Keep It Simple Strategy

Average stock market returns over time

The Dow Jones Industrial Average’s had a beginning date of May 26, 1896. Through May 25, 2018, the Dow’s average annual return has been 5.42%.  For the 25-year period ending January 6, 2012, the Dow had an average annual return of 7.55%. For the 91 years prior to 1987, the average annual return was about 4.3%.

While the S&P 500 index began in 1926,  It wasn’t until 1957 that the index took on its current format of including 500 stocks. Average annual returns for the index from 1957 through the end of 2018 were about 7.96%. 

For some years the benchmarks will decline, and for some years the benchmarks will rise.  There can be a great deal of fluctuation from year to year, but historically, average returns over various stretches of time have been respectable, much better than investing in CDs. 

The Basis For A Strategy

Consider the fact that the return for each year is the result of the pluses and minuses contributed to the Index by each of the stocks in it.  An index return of 10% could theoretically be the result of each of the 500 stocks rising 10% for the year.  However, it is much more likely that some of those stocks declined, canceling out the performance of some of the stocks that rose.  There may even be more declining stocks than rising stocks.  Now what do you think the average returns would be if an investor always had the strongest stocks in his portfolio, and there were never any weak ones to cancel out the performance of the strong ones?  If half rose 20% and half were unchanged, the average return would be 10%.  However, if the half that were unchanged were omitted from the portfolio, the return would be 20%.  What would the return be if a person invested only in the strongest 10% and never had anything else in his portfolio, if he focused only on the strongest 50 and ignored the other 450?

Imagine what the annual returns and averages might have been had an investor ranked the stocks according to their strength and invested in the top ten or twenty out of the top 50 of the 500, and always had the strongest ten or twenty in his portfolio, never having any stocks ranked lower than the top 10% of the 500. 

The Strategy

Each week we rank all the stocks in a database of about 500 stocks and provide the subscriber with a list of the top 50 in strength.  Every week the stocks in the database are re-ranked and the new list is posted.  The investor can use the list in several ways.

He might select the top ten out of the fifty for investment if he thinks they are suitable.  Each week, he could replace any that fall out of the top ten or twenty with the stocks that replaced them in the top ten.  Variations on this strategy are possible.  For example, he could keep the selected stocks until they fall out of the top 50 and then replace them with those in the top ten that he does not have.  Or, he could make these adjustments once a month or once a quarter rather than once a week.  Another approach is that he could pick and choose whatever catches his fancy from among the top twenty, and replace them when they fall out of the top ranks.  An alternative sell strategy would be to sell those stocks that close below their lowest closing price of the previous 10 or 20 days, on the rationale that such stocks would probably no longer be in an uptrend. 

These strategies depend on a strength algorithm that finds more persistent strength than what is found by the Relative Strength Index (RSI).  We have such an algorithm.  It is the same algorithm that is used in The Valuator, the “Strongest Stocks” subscription, and the “Strongest ETFs” subscription.  The other part of the strategy requires a universe of limited size but made up of respectable stocks (not penny stocks or new issues).  Because using this strategy on a list of several thousand stocks would probably mean excessive (and probably meaningless) turnover.  There would be too many candidates for each position a rankings would probably change too often on unimportant differences.

The List

For the list, we decided to use the stocks covered by The Valuator.  We prefer it to tracking all the stocks in the S&P 500.  To explain why, we should describe how they were selected. In the early days, The Valuator consisted of all the stocks included in the S&P 500.  Over time, we were unhappy with that arrangement because the managers of the Index would sometimes remove stocks from the Index that had excellent performance and outlook because of weighting and balancing considerations.  If they wanted one more stock in Finance, they might throw out a perfectly fine stock in Technology so the weightings would balance right for their model.  An added problem was that the replacements sometimes were relatively new issues!  That meant they did not have a trading history.  For The Valuator, that was a problem because we needed historical financial and trading data to create a customized valuation model for the stock.  When there is no multi-year earnings data and no multi-year trading data, there is no way we can determine how the market values each dollar of earnings for the company.  Therefore, when stocks in the S&P 500 were replaced by relatively new issues for which we could not build a valuation model, we ignored the switch and kept the stock that lost its position in the S&P 500.  Also, as companies merged, we replaced them with companies that had a strong stock, had a good record in Value Line, and that had sufficient history for us to build a valuation model customized for that company.  We did not want to add or subtract stocks because of balancing considerations, because those were artificial, having no bearing on the quality of the company or the attractiveness of its stock.   

Though The Valuator has recently changed from focusing on values derived from analyst estimates to a statistical model focusing on “Center of Gravity,” we still look for stocks with strength and a history when searching for new candidates.  At the very least, we want to see three years of trading history.    Look at the list.  It speaks for itself.

The Subscription

The Valuator tracks about 500 stocks (give or take a few).  Each week we provide a list of the strongest 50 stocks tracked by The valuator, arranged in the order of their strength as determined by the strength algorithm of The Valuator.  The lists also include the lowest closing prices for the previous 10 and 20 days.  Each week a new list is created and posted for subscribers.

The lists are not recommendations to buy or sell.  They are lists of stocks, having the highest ranking scores.