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Tuesday, June 18, 2013
Last year, a man named Jim O'Shaughnessy discovered a simple investment strategy that turned $10,000 into $1.84 billion.
This strategy has trounced the stock market for decades. Even better, it has always done so with less volatility than the stock market. To me, that sounds like a "Holy Grail" investment...
O'Shaughnessy went looking for what investing strategies worked best. He tested hundreds of different investment strategies all the way back to 1927 using the world's most in-depth U.S. stock database.
Then he wrote a book called What Works on Wall Street: The Classic Guide to the Best-Performing Investment Strategies of All Time.
One strategy in the book stood out to me above the others. It was simple... yet it delivered mind-blowing results – very high returns with low risks.
The numbers get silly... From 1927 through 2009, this simple strategy would have turned $10,000 into $1.84 billion.
I call the strategy simple because O'Shaughnessy built it using just two criteria: price momentum and "shareholder yield." In short, he concluded, "Price momentum married to high shareholder yield gave us one of the best-performing long-term strategies we've seen." (The actual study is on page 457 of O'Shaughnessy's book.)
The criteria were remarkably simple...
The term "shareholder yield" may be new to you. But it's not complicated. O'Shaughnessy defines it as dividend yield plus stock buybacks. Basically, if a company pays a 3% dividend and buys back 6% of its shares in a year, its shareholder yield is 9%.
You pay taxes when you receive dividends, but you don't pay taxes when a company buys back shares. It's like a "stealth dividend." In recent years, companies have spent more money buying back shares than paying out dividends.
In other words, the term "shareholder yield" describes how much of a company's cash flow it's using to give back to shareholders. That's what's important. The more a company is giving back to shareholders, the higher the return shareholders have made over history.
The magic is in combining shareholder yield with the trend. O'Shaughnessy sums it up...
Buying stocks with great price momentum or high shareholder yield ALONE works quite well, but we've seen that combining these factors... generates significantly higher returns at lower levels of risk.
My friend Mebane Faber of Cambria Investment Management is a great number-cruncher. He was interested in O'Shaughnessy's ideas, too.
In fact, he just wrote a book called Shareholder Yield, A Better Approach to Dividend Investing. Inside, Meb explains why this strategy is incredibly important today...
Three decades ago, no companies really bought back shares. But in 1982, the government made it easier for companies to buy back their own stock. Once that happened, Meb says, "stock buybacks went from nearly nothing to either equaling or surpassing cash that was paid out as dividends in the late 1990s."
Meb crunched a lot of numbers. And he actually discovered a way to improve on O'Shaughnessy's amazing results. In short, Meb's system beat both O'Shaughnessy's system and the stock market... earning 16.8% a year since 1982, versus 15.5% for O'Shaughnessy's system and just 11% a year for the market.
And best of all, thanks to Meb, we can invest in this strategy with just one click of the computer mouse. His company recently launched the Cambria Shareholder Yield Fund (NYSE: SYLD).
SYLD is based on the principles of buying stocks with the highest shareholder yield. His fund follows the principles of O'Shaughnessy's amazing strategy the closest of any I've seen. I highly recommend you check it out...
Read more about the power of "stealth dividends" here. And see another one of Steve's favorite "one click" ways to profit off them here: The "Stealth Dividend" Strategy Is Still Delivering.
Last year, Steve shared a simple investing lesson from Jim O'Shaughnessy's book. "It's nothing weird or bizarre," Steve writes. "It's a simple idea. And the results seem too good to be true... but they are true." Get the full story here: The Simplest Successful Investment System You Can Imagine.
THE MARKET IS BULLISH ON ROBOTS
America's urge to speculate in high-growth "story stocks" is alive and well. For proof, all we need to do is look at shares of iRobot...
There aren't many "slam dunk" guarantees one can make about technology investment. It's a sector that changes monthly. One year's big success story is another year's big bankruptcy. But one trend we can count on is the increasing use of robots to manufacture cars, work in labs, and perform heavy military duties. As machines get lighter, faster, stronger, and smarter, the robotics market will mushroom in size.
One of the few "pure plays" on robots is iRobot (IRBT). Although most folks have never heard of it, the $1 billion market cap company is one of the world's largest robot-makers. Some analysts even call the company "the GM of robots." It has a huge potential market to grow into over the coming decade.
As you can see in today's chart, investors are piling into this great "story stock." Shares of iRobot have climbed from $18 in late 2011 to $37. Yesterday, they surged more than 7% to reach a new 52-week high. With a rich price-to-earnings ratio of 37, iRobot is not cheap... but the market is willing to "pay up" for good growth stocks right now.
In The Daily Crux