As we enter into a new decade, it is worthwhile to look at the past decade to review which strategy worked best during the worst investment environment.
Value Line (www.valueline.com) is one of the most respected investment research firms, and its “Value Line Investment Survey” is the most trusted and used US stock market database, which is available from most of public libraries. Since June 30, 1961, Value Line created an “Value Line Composite Index” to cover around 1700 companies (out of 8000+ companies traded in US exchanges.) On February 1, 1988, Value Line began publishing the “Value Line Arithmetic Average” of the Composite Index, which can be found using symbol ^VAY on Yahoo finance page.
Unlike all the other static indices, Value Line Arithmetic index is interesting because from its web site, we know (1) it requires stocks in the index to have “Annual Net Income: at least $5-10 million preferably, but not necessarily growing.”; (2) “Vacancies constantly occur within our approximately 1,700 stock universe. Sometimes a company’s earnings will deteriorate to such a degree that we believe investors have lost interest. If that happens, we will discontinue coverage.”; (3) it re-balances very frequently since it is an arithmetic index.
Using Yahoo chart, let’s compare ^VAY with other popular US indices over the last 10 years.
^VAY is clearly on the top, with almost average annual 8% return without any leverage, followed by MDY (midcap 400 stocks), ^RUT (Russell smallcap 2000 stocks), ^DJI (Dow Jones large cap 30 stocks), ^GSPC (large cap SP 500 stocks), with ^IXIC (Nasdaq, around 2500+ stocks) last.
In the chart below, let’s compare ^VAY with some popular sectors and asset classes with long enough 10-year historical data. Once again, ^VAY is the top leader, followed by oil, real estate, retail, pharmaceutical, biotech, internet, with semiconductor last. Yahoo does not have long enough data on commodities index, but based on last 10-year GSCI futures data, commodities performance is about the same as oil. In addition, based on inverse Dollar Index futures data, past 10-year return of buying foreign currencies is around 25% , which is not a bad investment since it does not lose money over the decade.
How does ^VAY compare with major emerging countries BRIC? The chart below shows only Brazil beats ^VAY for the past decade, with almost average 15% annual return, China ties with ^VAY for the 2nd place, followed by India, with Russia last. As one can see from the chart, BRIC countries are wildly volatile, it would be very difficult for any investor to invest in them without emotion.
Let’s also compare the most famous investors of the past decade in the following chart. ^VAY again is the clear leader, Warren Buffett’s BRK-A is the second, followed by Bill Nygren’s Oakmark Select Fund (OAKLX, 10-year 5-star fund), David Herro’s Oakmark International (OAKIX, 10-year 5-star fund, fund manager of the decade), Bill Gross’ Pimco Total Return (PTTRX, 10-year 5-star fund, fund manager of the decade), then last is William Danoff’s Fidelity Contrafund (FCNTX, 10-year 5-star fund).
The performance comparison may be a little bit surprised, but it makes absolute sense. Since companies traded in US exchanges pretty much cover any sector/country/asset, and ^VAY is designed to include only companies from all sector/country/asset making money at current market condition, it is natural for ^VAY to outperform the static indices and funds that does not sell losers.
Although Value Line database has been available for a long time, and for the past decade, the simple, boring, and labor intensive strategy has been outperforming any sector, country, or asset class, it is too easy for investors to get lost in all the news, hype, fear, and greed to adopt this strategy.
Of course, we are in a secular bear for the last decade, so how does ^VAY fare during the last secular bull market? Yahoo only has long enough historical data for a few indices, and following is the comparison since the inception for ^VAY. Clearly, during secular bull market from 1988 to 2000, earning does not matter that much. Just buy any stock that moves quickly will make money. Nasdaq is the top, with average 20% annual return, followed by Dow Jones 30 stocks, SP 500 stocks, with ^VAY comes in last, with annual return only 12%. However, the consistent advantage of ^VAY becomes clear once the secular bull market ends.