The Real Question

Sunny autumn landscape

Originally posted Wednesday, September 21, 2016

Welcome to Autumn! We enter the fall season following the most beautiful summer I remember in my 25 years in Syracuse. It was also a strong period for the stock market with the S&P 500 up a healthy 6.74% through September 15th. The top performing sectors were Utilities and Energy, while Financial Services and Healthcare lagged behind. The portion of the Broad Market which Morningstar classifies as US Value, increased by 10.21% while US Growth Stocks increased by only 2.19%. In general terms “Value Stocks” are characterized by solid fundamentals based on analysis of price earnings ratio, yield and other factors. Growth Stocks are characterized by higher earnings growth rates, higher price earnings multiples, and typically lower dividend yields. The top 5 positions in Morningstar’s Value Index are Exxon Mobile, AT&T, J.P. Morgan Chase, Wells Fargo, and Proctor and Gamble. The top 5 positions in their Growth Index are Amazon, Facebook, Alphabet (Google), Home Depot and Comcast. 1

Last month I gave a speech at a Michael Roberts Associates event, where I made a case for over-weighting “value” stocks in investment portfolios. My contention is that over time by focusing on Value Stocks, particularly higher dividend payers and dividend growers, you can enhance your overall investment return. I also made a case for patience and trading less frequently. This month I provide hard numbers to bolster my assertion:


From 1972 through March 2015, a $10,000 investment in a basket of dividend only paying stocks in the S & P compounded into $465,000…15 times as much as non dividend payers.2


From 1964 through 2009, if one bought only the cheapest tenth of stocks ranked by P/E Ratio, the compound annual return was 16.3%…5 points better than the market overall. Each dollar invested that way would be worth seven and a half times more than one passively invested, and an astounding 85 times more than the opposite strategy of buying only the most expensive tenth of stocks.3


In a study by Economists Brad Barber and Terrance Odean, who examined the trading records of 66,465 households with accounts at a discount brokerage, there was a direct inverse correlation between trading frequency and returns even before considering commissions. They sorted investors into 5 groups or quintiles according to how often they traded. They found that the difference between the most and least frantic traders was a massive negative 5.7 percentage points annually! Another finding by the same researchers examined the subsequent returns of stocks that investors bought versus ones they sold. The average difference between them was negative 3.3% annually, not including transaction costs.4

The real question is… In retirement would you like your income to come from quarterly dividends, which are paid in cash or from some hoped for appreciation you can get by selling off your stocks at increasingly higher prices?

As always we welcome your questions and thoughts on this topic and would be happy to discuss it with you. Until then, we wish you all a healthy and happy fall season.

The views in this article do not indicate any recommendations of individual securities
1“Heads I win, Tails I win” Spencer Jakab 2016 Portfolio/Penguin division of Random House LLC p. 226.
2“What Works on Wall Street: The classic Guide to the Best-Performing Investment Strategies of All Time”
3James P. O’Schaughnessy 2012 New York McGraw Will p. 84-85
4“Heads I win, Tails I win” Spencer Jakab 2016 Portfolio/Penguin division of Random House LLC p. 210