On June 27, 1988, Forbes Magazine published an article by David Dreman, a New York money manager. This article helped me be a better investor, and it can help you.
It outlined a 25 year research project that compared the returns from the largest companies listed on the New York Stock Exchange. These companies were ranked based on their P/E ratios on an annual basis. The P/E ratio is calculated by dividing the earnings of the past 12 months by its stock price.
Over this 25 year period of both bull and bear markets, the stocks in the lowest P/E category averaged 17.3% versus 12.3% for the entire group. This strategy outperformed ordinary returns by a wide margin.
Of course, this is a historical study and does not imply similar results in the future. But, I was surprised to see how this bargain hunting method had higher returns than more glamorous approaches. This method had more consistency, less downside risk, and higher dividends.
I have kept the original article all these years, which you can see. Here is the article.
This study taught me the importance of value investing. It continues to be a core approach in building PCM portfolios today.
Here are 4 additional factors that lead to more consistent returns.
1. Rising dividends add safety and income. We prefer to own shares of businesses that increase their dividends on a regular basis. Numerous studies show how important dividends are to your total returns. Compounding dividends can be very important. Firms that pay no dividends can decline rapidly in bear markets. We recommend you avoid most stocks that do not pay a dividend.
2. Analyze the relative strength of each asset you own because the trend is your friend. When conditions are positive (about 70% of the time), PCM will hold mainly undervalued equities with rising dividends. When market conditions are bearish (about 30% of the time), we hold more cash and get defensive. It makes no sense to fight the major trends of the market. Buy and hold does not work. We have found it is best to own assets that are in positive trends and show relative strength.
3. Keep an eye on the Federal Reserve. Fed policies occasionally change from an easy money stance to a more restrictive one when inflation is rising. I have found it is critical to adjust portfolio asset allocations when the Fed is transitioning. Some assets like small cap stocks do very well when the Fed is in expansion mode but poorly when they are restrictive.
4. Keep your costs as low as possible. Many investors pay more when they invest than they realize. Wall Street is very good at hiding fees. We can help you reduce costs and eliminate surrender fees, etc.
We invite you to learn more. Our methods have been tested in good and bad markets. They can help you protect and grow your retirement savings with reduced risk. And, that’s what matters.
Protected Capital Management seeks to stay in complete compliance with all regulations. The following documents are available upon request:
PCM’s ADV Part 2A & 2B
PCM’s Code of Ethics Privacy Notice
PCM’s Disaster Recovery Procedures
PCM’s Advisory Agreement
The information on this website is meant to be educational in nature and not a specific investment recommendation or advice. Investors are reminded that past performance is no guarantee of future results and that investing in the stock market involves gains and losses and may not be suitable for all investors. Individuals should always conduct their own research before making investment decisions.
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