back start next


[start] [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [37] [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] [52] [53] [54] [55] [56] [57] [58] [59] [60] [61] [62] [63] [64] [65] [66] [ 67 ] [68] [69] [70] [71] [72] [73] [74] [75] [76] [77] [78] [79] [80] [81] [82] [83] [84] [85] [86] [87] [88] [89] [90] [91] [92] [93] [94] [95] [96] [97] [98] [99] [100] [101] [102] [103] [104] [105] [106] [107] [108] [109] [110] [111] [112] [113] [114] [115] [116] [117] [118] [119] [120] [121] [122] [123] [124] [125] [126] [127] [128] [129] [130] [131] [132] [133] [134] [135] [136] [137] [138] [139] [140] [141] [142] [143] [144] [145] [146] [147] [148] [149] [150] [151] [152] [153] [154] [155]


67

contrarian stocks (the Value Line Survey, for example, presents tables weekly of the hundred lowest P/Es, price-to-cash flow, price-to-book value, and highest yielding stocks of the 1,700 companies in its universe). Two other statistical data base providers. The American Association of Individual Investors (1-800-428-2244) and Investors Alliance (1-800-804-5577), also offer disks of company information that allow screening, for a minimal fee.

To select contrarian stocks on your own, some simple rules should suffice. First, take a broad market index, like the S&P 500, for which the current P/E ratio, price-to-cash flow, price-to-book value, and dividend yield can easily be found from a variety of sources. The current P/E ratio of the S&P 500, in December 1997, is about 24.2, its price-to-cash flow 18.1, price-to-book value 5.4, and yield 1.6%.

Pick well-established companies. A rule of thumb might be to use a 20% discount or more from the S&P 500 for any of the first three measures and a yield of at least 1% above the market for the fourth. The deeper the discount from the S&P 500, the further into contrarian territory you go.

There is nothing magical about picking the bottom 20% by any one of the first three measures. It was simply a good cut-off point for a computer. As we found in virtually all of the contrarian studies, this group outperformed the market consistently.

A simple method should work fairly effectively if you do not have the actual quintiles for these strategies. How do you find the ratios themselves? The Wall Street Joumal, Barrons, and the financial sections of most major daily newspapers will have the P/E ratio right next to the stock, calculated on latest 12-month reported earnings. It is a relatively easy matter to run down the column and find stocks at a 20% discount from the market muUiple (or more or less, as you choose). Yield is also found daily in the financial section of any large newspaper. Once again, you can compare it with the average yield of the S&P 500, which is readily available from a number of sources. As indicated, price-to-cash flow and price-to-book value can be obtained at low cost from Value Line or a variety of other services.

Realistically, there are a number of approaches to contrarian strategies in addition to the eclectic approach that I favor personally. All are strongly documented statistically. While I dont believe contrarian investing need necessarily be the final answer to stock selection for everyone, it has consistently performed better in both good and bad markets. It is the only system I know of that effectively and systematically checks investor overreactions-by far the largest and most important source of investor error.



What Contrarian Strategies Wont Do for You

Whether you opt for the eclectic contrarian strategy, or you take the contrarian bit between your teeth and attack the market without any form of security analysis, keep in mind that the strategies are relative rather than absolute. This means that they wont help you decide when to get in or when to get out of stocks. Whether the market is high or low, you will receive no warning signals to sell in the first place or buy in the second.

What contrarian strategies should do is give you the best relative opportunities for your capital. Which means that in a rising market, your stocks ought to do better than the averages, and in a falling market they should decline less. As we have seen, the long-term retums of holding contrarian stocks through bull and bear markets are breathtaking; the longer the period, the more impressive the results. In chapter 13, we will provide some impressive evidence that owning stocks has been the best way to go, not only for the past decade but for the past 200 years.

Alternatives to Contrarian Strategies

Mutual Funds

Perhaps you wish to participate in the stock market, but do not want to make your own investment decisions. Or perhaps your capital is too limited to get a fully diversified contrarian portfolio.

With limited funds, the best approach would seem to be to purchase a mutual fund with a broad portfolio. There are a large number of sources to help you in the selection process including Lipper, Momingstar, The Value Line Mutual Fund Service, Forbes, and Barrons* These will provide you with quarterly information on the funds performance and its record over the number of years it has been in public hands. Select a fund that has a strategy you are in tune with, and that has outperformed the market for a significant period. This will narrow the bewildering number of funds out there to a handful. Also, make sure the manager who built the record is still mnning the fund. Table 9-3 gives you the retums of some of the better value mutual funds through bull and bear markets in the last five and ten years. The results are taken from the Momingstar Mutual Fund Survey.

For the investor who, having read about the difficulty of outperforming markets, decides an index fund is the best choice, thats easy too.

* Forbes ranks funds at least through two bear markets to get its bear-market rankings. The As are the top 5% relative to all stock funds, the Fs the bottom 5%.



Table 9-3

Best Performing Value Funds: 5- and 10-Year Ranhngs As of 12/31/97

Company

Asset Size ($Millions)

5-Yk Retum

10-Yk Retum

Davis NY Venture

4,462

22.0%

21.1%

Kemper-Dreman High

Return A

3,170

22.0%

19.8%*

Fidelity Destiny II

3,693

22.4%

21.1%

Mutual Shares

7,755

20.0%

17.4%

Sequoia

3,468

23.0%

19.4%

Vanguard/Windsor II

23,545

20.7%

18.2%

*Return for Kemper-Dreman High Return Fund since inception, 3/18/88. Sources of data: Lipper Analytical Services

Vanguard, for example, provides a low-cost index fund that replicates the S&P 500 and another one that replicates the Russell 2000 (small cap-smaller market value companies).*

Closed-End Investment Companies

A broad portfolio also can be acquired by purchasing a closed-end investment company. These companies, unlike mutual funds, do not continuously issue and redeem shares: their number of shares outstanding is fixed. Most of the larger closed-end funds listed on the New York Stock Exchange trade at a discount from the value of their assets. Table 9-4 indicates the average discount over the last five years.

The discounts, provided weekly in The Wall Street Joumal, Barrons, and The New York Times, usually vary between 5% and 15%. If the discounts are larger than average, as they tend to be during a market decline, it is often a buying opportunity.

Foreign and Country Funds: Myth and Reality

Until recently, foreign markets were the rage. Billions flowed into China, the Pacific Rim, and Latin America, while more conservative investors bet on the European and Japanese markets. Should you get into the act? Maybe, but you have to be careful.

* For information, contact The Vanguard Group at 1-800-860-8394 or at www.Vanguard. com.



[start] [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [37] [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] [52] [53] [54] [55] [56] [57] [58] [59] [60] [61] [62] [63] [64] [65] [66] [ 67 ] [68] [69] [70] [71] [72] [73] [74] [75] [76] [77] [78] [79] [80] [81] [82] [83] [84] [85] [86] [87] [88] [89] [90] [91] [92] [93] [94] [95] [96] [97] [98] [99] [100] [101] [102] [103] [104] [105] [106] [107] [108] [109] [110] [111] [112] [113] [114] [115] [116] [117] [118] [119] [120] [121] [122] [123] [124] [125] [126] [127] [128] [129] [130] [131] [132] [133] [134] [135] [136] [137] [138] [139] [140] [141] [142] [143] [144] [145] [146] [147] [148] [149] [150] [151] [152] [153] [154] [155]