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Beating the FTSE 100 Index
GillenMarkets website follow a strategy to investing in the FTSE 100 Index in the UK
Many private investors like to go against the crowd and buy out-of-favour stocks in the hope that they can catch decent recoveries and good gains.
The difficulty with approaching stock market investing in this way is that it assumes you know how to identify the three key risks that can lead to a permanent loss. The three risks include (i) The business risk - the risk that the company you buy will not be making the same level of profits in 3-5 years (ii) The financial risk - the risk that an inappropriate level of debt can undermine shareholder value and (iii) The valuation risk - the risk that you are overpaying for the stock (company) relative to its long-term earnings power.
As I describe in the book (above right), any of the above risks can, and do, lead to permanent losses and they are hard, if not impossible, for most investors to avoid.
But there is Another Way
However, it is possible to go against the crowd, to buy out-of-favour stocks and benefit from excess returns as such stocks recover. But before you attempt it, doesn't it make sense to adopt an approach to identifying undervalued stocks that has proven itself to have worked effectively over time, and the further back in time the better?
Beating the FTSE 100 Index
In the members area of the GillenMarkets website, among other approaches, we follow a contrary approach to investing the FTSE 100 Index in the UK. The approach dictates that you buy 15 stocks offering the best value as defined by either the dividend yield, price-to-earnings ratio or price-to-cashflow ratio. You select one stock from 15 different sectors represented in the FTSE 100 Index. Large stocks, as represented in the FTSE 100 Index, have a greater ability to survive downturns.
Since 1995, investing in a portfolio of 15 stocks in this way, using no forecasts whatsoever, and rebalancing just annually has delivered returns of between 11-12% per annum compound, compared to 7.5% for the FTSE 100 Index itself. These returns are before transactions costs and include dividend income.
The approaches have come through both the 2000-02 bear market and the 2007-09 global credit crisis. In other words, while these value-based portfolios would have declined with the market in each of these two particularly deep bear markets, they recovered fully, and more, with the markets. My point is that the approaches both ensure you buy good value and avoid the threat of a permanent loss.
Since GillenMarkets was launched in November 2009, I have invested €1,000 each month into the FTSE 100 Low price-to-earnings approach and tracked the progress of the portfolio each month for members. In other words, the website offers you a guiding hand in real time.
Since inception in November 2009, a total of €38,000 has been invested (38 months have passed since Nov 2009). Despite the severe volatility in markets in 2010, 2011 and again in 2012, this steady approach to obtaining value within the FTSE 100 using a time-tested approach has finally begun to pull away.
The chart below highlights the value of the portfolio at the 31st December just gone and compares that value to the equivalent investment in bank deposits. The portfolio had a value of €47,200 at end December. The same monies left in bank deposits would be worth €39,300 at end December. Not a spectacular uplift you might say? Perhaps, but given time I expect this portfolio to trounce bank deposits.
On a 5-10 year view, I expect the portfolio to substantially out-perform both bank deposit returns and the FTSE 100 Index itself. There will be ups and downs, as there has been in the past three years. But remember that volatility in markets is not the same as risk - risk is not knowing what you are doing, risk is adopting a flawed strategy, risk is not being able to deal with the business, financial and valuation risks and, finally, risk is trading or speculating in markets as opposed to investing.
This simple approach to investing in FTSE 100 stocks that offer the best value at the time of purchase overcomes a myriad of problems private investors face when selecting stocks. You do not need opinions from brokers about which stocks to buy - brokers are sellers and don't much care whether you adopt a good approach or not. We do!
Extrapolating These Returns
In my next Free Newsletter to you, I will extrapolate the likely returns from the above 'Live' portfolio on a 5, 10 and 15 year view. If you are someone who can invest regularly like this either for your pension or just ordinary savings, you should give serious consideration to following it. You don't have to invest €1,000 each time nor do you have to invest monthly - the approach is equally valid for smaller contributions and quarterly or bi-annual instalments. And using an online, low cost stockbroking account allows you to invest cheaply, very cheaply.
There will be bear markets along the way, but a crucial part of obtaining the superior returns that the stock markets deliver overtime is to understand that such volatility is not the threat. Volatility leads to temporary losses, not permanent losses. If you have confidence in your approach, then you are much more likely to get through volatile stock market conditions.
And Now a Bit of Marketing
The Gillenmarkets website has other approaches that you can follow. We cover funds quoted on the stock exchanges including ETFs and investment companies. Becoming a successful DIY investor will be easier with assistance from a website like ours.
These Free newsletters are part of our marketing. We hope you enjoy them, but we also hope that at some stage you'll consider joining our growing list of subscribers.
We offer a 14-day free trial to the website, which gives you access to the whole website for two weeks, and to two weekly bulletins from myself - published on a Saturday. Yes, you will have to enter your contact and credit or debit card details to avail of the free offer, but you will be alerted by email before the free trial is up, so that you have the option to unsubscribe before anything is charged.
GillenMarkets is the only website of its kind in Ireland, and there are but a handful in the UK. We are dedicated to uncovering value in markets and to ensuring you have a plan to follow. This distinguishes us from stockbrokers, banks and insurance product sales people.