Boring Stocks Outperform The Index By 400%
Being ‘contrarian’ can be tremendously profitable if you want to invest in the long term
As every year, Morningstar has produced its ‘Loved/Unloved index’, which consists of comparing those companies with the greatest hype against those that do not appear in the news, that have little ‘sexy’ businesses and in which the majority of investors don’t want to invest their money. As has been the case in the last 25 years, these ‘Unloved’ companies have far outperformed not only those ‘Loved’ companies but also the index itself.
Below we show the growth of 10k, starting in 1994:
The first question that we must ask ourselves is how the creation of these indices is carried out so that overfitting does not occur, for we must answer the following questions:
What do we call ‘Unloved’?
What weight do we assign to each asset class?
When do we rotate the purchases?
What percentage of allocation are we going to give to each asset class?
How many asset classes does the index have?
The original strategy is based on investing equally in the three main categories (US Large Cap Stocks, US Small Cap Stocks, Emerging Mkt Stocks, All US Bonds, High Yield Bonds, Cash, Gold, REITs …) that have had the greatest exit of cash flows and sell those positions after three years. This strategy is repeated every year and is maintained for the next three years. By holding positions for such a long period of time, they ensure that you have actually given enough time for those asset classes to bottom out and revert to the mean.
Without going any further, the term value investing, coined by Ben Graham and David Dodd, has its investment principles in buying those companies that were called butts and that is that, despite being close to ruin, the value of their assets was higher than its market cap.
This approach has a similarity to the type of investment that we make. Despite the fact that many people criticize our approach to having coverage on a constant basis, arguing that this constantly causes you to lose money. What people do not take into account is that this tail protection that we do benefits from buying that insurance that nobody wants at a bargain price and at the moment that an extreme market situation occurs, paying for those continued losses.
The most important lesson we could take is that the FOMO (Fear Of Missing Out) is one of the worst strategies that can be followed if what we want is to make money in the stock market in the long term. Psychologically it is difficult to buy those assets that fall day in and day out, but without a doubt, it has a much greater reward in the long term, which is what every investor should aspire to.
“In the short run, the market is a voting machine, but in the long run it is a weighing machine.” — Ben Graham
Our purpose is to convey to the individual investor simple strategies to have a covered, uncorrelated and asymmetric portfolio as possible so that any investor can implement this strategy for himself. One of the main strengths of this strategy is to be able to sleep peacefully each and every night and for this, we have between 40–60% of the portfolio invested in fixed income (other currencies, bonds, gold …) and the rest is invested in options or ETFs that make us benefit from any market situation
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.