Systematic Relative Strength

Ron Lieber of the NYT explains his surprise that some of the biggest winners over the last 30 years are not the companies that get all the hype:

This week, I asked Wilshire Associates to look back 30 years to the beginning of the big bull run in stocks and figure out which of the companies in its index of more than 5,000 American enterprises had performed best over that stretch.

My guess is that you haven’t heard of half of the Top 10.

Back in 1982, would you have staked your claim on Danaher, the conglomerate that comes in at No. 3? Or might you have waited a few more years, until it was loaded up with debt courtesy of Michael Milken, the onetime junk bond king?

What about Apco Oil & Gas at No. 4? Or Precision Castparts at No. 7? Or maybe the high-tech balloons made by Raven Industries at No. 8 would have been more your taste. Ever heard of HollyFrontier at No. 10?

You get the idea. To have earned the 21 to 26 percent annualized returns (including reinvested dividends) that these companies delivered to investors over the last 30 years, you would have had to pick them out, invest enough to move the needle in your portfolio and then be smart enough to hang on.

Let’s start with selecting the stocks. The top-performing stock on the Wilshire list is Home Depot. Was anyone pointing at that company back in the early 1980s and insisting that it was going to the moon?

“Oh no,” said Arthur Blank, one of Home Depot’s founders, when I asked him this week. “We had no idea that was going to happen. When we went public in 1981, we only had eight stores.”

Indeed, the best investments are often the ones that few people have heard of, and sometimes the companies like it that way.

One of the benefits of building portfolios based on relative strength ranks is that the amount of hype that a company receives has no impact on whether or not the company is included in the portfolio. Certainly, some on that list have received considerable amounts of attention, like Apple, but I think Lieber is right that many of the other names are off the radar of many investors. A relative strength ranking system is a true meritocracy where securities are added and removed from portfolios based on one essential criteria—performance of that security relative to all other securities in the investment universe.

Dorsey Wright currently owns a number of the securities listed above. A list of all holdings for the trailing 12 months is available upon request.

This entry was posted on Monday, June 4th, 2012 at 7:00 am and is filed under Markets, Thought Process. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.