Consistency and Diversity
(TMF Sheard)
LEXINGTON, KY. (July 20, 1998) -- I'm beginning to sound like a broken record on a couple of Workshop-related topics, but so be it. Today I'd like to talk again about consistency and diversity. For consistency, I'll focus on the Keystone approach to large-cap growth stocks. And regarding diversity, we'll talk about spreading risk.
Keystone is again showing in 1998 that it's a remarkably consistent performer as a group, even with a few individual stocks soaring or plummeting. As you probably know, Keystone's screening rules identify thirty large-capitalization stocks, and for investors looking to pare that number down, I rank the stocks by relative strength using their previous six-month total returns.
But even simply buying all thirty stocks would have provided a much better return over the last twelve and a half years than that recorded by the Standard & Poor's 500 Index. From January 1, 1986 through July 15, 1998, the S&P 500 Index (with dividends reinvested) has returned an annualized gain of 18.0%. (The Beating the Dow 5 model has returned 18.9% and the High Yield 10 model 18.8%.)
The Keystone 30 model, however, has returned 22.1% a year over that period. A $10,000 investment in the S&P 500 Index beginning in 1986 would now be worth $80,100. But invested in the Keystone 30 each year, the total (excluding taxes and trading costs) would now be up to $122,200.
And with each more concentrated portfolio (25 stocks, 20 stocks, etc.), the annualized returns continue to rise. The following table records those annualized gains from 1/1/86 through 7/15/98:
Keystone 5 30.1% Keystone 10 27.3% Keystone 15 25.3% Keystone 20 24.4% Keystone 25 22.7% Keystone 30 22.1%
BTD 5 18.9% BTD 10 18.8% S&P 500 18.0%
That same $10,000 in the Keystone 5 would have grown to $271,900.
As for the consistency of the returns, look not at the good years where Keystone soared, but at the weakest years. The High Yield 10, which is supposed to be a great defensive model in weak markets, lost 10.0% in 1990 while the S&P 500 lost 3.2%. Yet the Keystone 10 lost only 1.0%.
In 1994, when the S&P 500 made only 1.6%, the High Yield 10 managed to gain 2.4%, yet the Keystone 10 gained 11.3%. The Keystone 5 model has only lagged the S&P 500 Index in a single year since 1986, in 1988 when it gained 8.5% to the index's 16.8%.
Even within a single year, the returns are remarkably consistent. Here, for example, are the returns for the groups so far in 1998:
Keystone 5 33.9% Keystone 10 45.0% Keystone 15 36.0% Keystone 20 36.4% Keystone 25 37.0% Keystone 30 38.3%
And within those reasonably steady returns are some individual shockers. Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> is, of course, shooting straight up again this year, gaining 166% so far. But on the flip side, Cendant <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %> is down 54%, which brings me to topic number two -- diversity.
People tell me I'm diluting returns and boosting trading costs by recommending a 20-stock portfolio, but I disagree. First of all, even if I simply bought all 20 stocks at the beginning of the year, it would be hard to argue with a 12.5-year compounded return of 24.4%, and there are ways to boost that return (margin or staggered purchases).
But by having 20 stocks, a big mistake in one stock like Cendant doesn't kill one's year. Even in a more concentrated 15-stock portfolio this year, Cendant hasn't hurt the returns seriously, gaining 36% so far. In a 20-stock portfolio, that effect is even further reduced.
So for me, the ideal balance is where one can maintain market-beating returns and yet have the diversity of enough stocks to limit the per-stock risk of any one holding. On those scores, Keystone has done admirably since 1986. Now if someone can find a source of December 31 market cap data each year from 1965-1985, I'll flesh out the history even further. Unfortunately, I haven't found such a source yet. The search continues.
Check out the latest file updates for the Workshop:
New Rankings
| 1998 Returns
| New Database
[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]