Value vs. Growth, & the Russell Indices

If you've been reading my posts for more than one day, you've probably figured out that I lean more on the side of value investing and avoid growth investing like the plague. Well, the folks who put out all of the various Russell Indices statistics have a handy-dandy tool over at their website called the Russell Index Returns Calculator. This tool lets you specify which Indices you wish to analyze, and then allows you to output all of the annual historical returns into an Excel spreadsheet format.

I took all of the data for any Russell Index that had returns for 1994-2005 (that's as far back as this particular tabulation went on the Russell website), and compared the average annual returns for the various strategies over an 11-year period. You can view the results for yourself at :
Russell Index Comparison.

The conclusions are quite obvious. Out of the 6 total growth indices, 5 sit right near the bottom of the performance tabulation, and only one beat out any other value index! 6 out of the top 9 performing indices over the 11-year period analyzed were value indices.

Kind of makes those of us who still pay financial advisors want to sit back and scratch our heads and wonder, why pay someone like that over 1.0% or more in fees per year, when exchange traded funds like :
(DSV), (IJS), (IWD), (IWN), (IWS), (IWW), (JKL), (VBR), and (VTV), (in no particular order) can easiliy replicate the performance of the value indices mentioned above, and for fees that usually hover around only 0.3%!

On a side note, I just found out that The Million Dollar Portfolio was mentioned at The Daily Blog Watch with James Altucher at TheStreet.com, for the post The Davis Strategy, on the Davis Family investing book
The Davis Dynasty: 50 Years of Successful Investing on Wall Street
Thank you James Altucher!

15.6% Return in 9 weeks

Once again I utilized the Stock-Trak website to track my stock-picking performance over a 10-week timeframe (though somehow this challenge came out to be 9-weeks). Not only was I competing against myself and the S&P 500 Index, but also against 175 other virtual investors! No matter, I came away yet again soundly trouncing the S&P 500, with a 15.6% return in 9-weeks! The kicker was, this time I limited myself to only investing in undervalued securities with some ties to the healthcare sector.

I have updated the Historical Portfolio Performance data in the toolbar to your immediate right, to show the new data. This now includes data for the Fall 2005 Performance, Winter 2006 Performance, and new Summer 2006 Performance, as well as a new comparison of the Summarized Total Performance for the three competitions.

Just in case you're a little suspicious, here is a look at the actual ending graph generated by Stock-Trak: 2006 Summer Stock-Trak Challenge.

I know some of you are just dying to see which undervalued healthcare securities I invested in, so without further ado, the ending portfolio allocation, for the Summer 2006 challenge.

You too can get performance like this, and the best way to start would be to rifle through some of the recommended books in the previous post. However, the quickest path to success would be to start with The Little Book That Beats the Market, then head over to The Magic Formula , try out some screens, and utilize Benjamin Graham's good ol' The Intelligent Investor to investigate your newfound companies some more...

Enjoy!

End of Summer Reads

Here are the last of the summer financial reading books I told myself I would finish and finally did. I don't believe I'd mentioned any of these on this blog yet:

The Little Book That Beats the Market - Joel Greenblatt

The Magic Formula really seems like a great way to strategize for value, if not at the very least serve as one of the best screens for value out there.

Predicting the Markets of Tomorrow - James P. O'Shaughnessy

O'Shaugnessy has some good tips for Portfolio Allocation in this book, but leans a little bit too far towards the growth sector. I did like his idea of having growth simply as an emotional hedge for the average investor who would get upset during those few unlikely short-term periods where growth may well outperform value briefly.

What Works On Wall Street - James P. O'Shaughnessy

This book is simply a huge tome of back-tested data. O'Shaughnessy utilizes Compustat to confirm most of what we already knew statistically: Go with low price/book, low price/earnings, etc. Small companies outperform large companies over the long run, but with greater standard deviations along the way... However the book is a good reference tool to have on the financial bookshelf.

Mosaic: Perspectives on Investing - Mohnish Pabrai

Succinct, beautifully written chapters on the essence of value investing. I especially liked his chapter on "Buffett Succeeds at Nothing", for the thesis is truly a great lesson for investors of any background.

Fortune's Formula - William Poundstone

An interesting book that reads almost like a spy-caper or investigative piece about the mob, recommended by Charlie Munger.

Monkey Business - John Rolfe & Peter Troob

Hysterical. If you have any friends who are debating going into investment banking, or indeed any field related to high-finance, get them this book.

More Books reviewed at the following posts:

Summer Reading, and an MBA

The Davis Strategy

Time Travel Investing

21 Trading Rules

Speculation Will Never Disappear

Buying Value and Selling Hysteria

Latest Read: The New Market Wizards

Some Great Financial Reads