Found this on another site. http://www.bloomberg.com/personal/0206/jun.ss.dorfman.lo.pdf A good argument for keeping things simple?
The page does not exsist. Your link is wrong. Keep It Simple, Stupid! is the greatest rule for trading and it should be used in many other areas, for example tax system also should be simple Keep things as simple as possible.
THE INDOMITABLE ROBOT An incredibly simple stock-picking method nets a 267 percent gain B Y J O H N D O R F M A N I created a stock-picking robot. Now I feel like a parent whose child is outdoing himâproud but a trifle annoyed. The robot, which lives in my basement and uses Bloombergâs equities database, compiles its official Robot Portfolio at the start of each year, though Iâve updated it to April 1 for this story. It assembles a 10-stock portfolio using a method that is simplicity itself. It begins with all the U.S. stocks having more than $500 million in market capitalizationâabout 1,800 candidates. Then it discards those that have total debt greater than common equity, lopping off 600 issues or so. From the remaining 1,200 stocks, the robot selects the 10 with the lowest price-to-earnings ratios. (The P/E is the stock price divided by the past four quartersâ per-share earnings.) Thatâs it. Any graduate student in finance could design a more sophisticated stock-picking model. Even a bright high school student could create something less naive. But look at the robotâs results. In 1999, when the S&P 500 Index rose 19.5 percent, therobotâs picks advanced 40.3 percent. I smiled and was pleased. In 2000, when the S&P 500 declined 9.1 percent, the robot surged 67.7 percent. I was delighted, but a bit discomfited. I had been very proud of the 30.9 percent gain I obtained for my clients that year, yet the robot had done much better. In 2001, the S&P 500 had an even worse year, falling 11.9 percent. The Robot Portfolio bucked the trend again, rising 23.8 percent. In March of that year, this magazine featured the robot in a cover story. Now things were getting a little ticklish. A few clients suggested that I give the robot the reins. At the start of 2002, the robot picked a portfolio heavy in out-of-favor energy stocks. (I heartily agreed.) It also included Providian Financial (PVN), which extends credit to people with short or weak credit histories. I have never been a fan of that business, and I thought a recession was a terrible time for it. Lo and behold, through the end of the first quarter, Providian was up 113 percent. The Robot Portfolio as a whole had gained 26 percent, against a 0.3 percent gain (including dividends) for the S&P 500. From January 1, 1999, through April 1, 2002, a $1,000 investment in the robot would have grown to $3,674. Why does such a simplistic model do so well? There are several explanations. A statistician might point out that the sample size in the robot experiment (three years and a quarter, only 10 stocks a year) is statistically insignificant. A value investor like me might say the robot does well because it is a at the beginning of 1999, V A L U E I N V E S T I N G pure embodiment of value investing, searching for bargains among ugly-duckling stocks. A psychologist could argue that the robot does well because it is emotionless and has no fear of embarrassment when it recommends stocks that âeveryone knowsâ are no good. Certainly, Providian is a good example of that. In past years, so were such beaten-down shares as Ensco International (up 114 percent in 1999), HealthSouth (up 204 percent in 2000), and Navistar (up 51 percent in 2001). But enough theory. Letâs talk stocks. In January of this year, 6 of the robotâs 10 picks were in the energy sector: Amerada Hess (AHC), Devon Energy (DVN), Sunoco (SUN), Tesoro Petroleum (TSO), Valero Energy, and Vintage Petroleum (VPI). Today, those same stocks have gained between 1 and 30 percent, though most are still not expensive. The United States will likely experience spot shortages of energy during the next five years, so I believe the long-term prospects for these companies are excellent. Two more of the robotâs official 2002 selections were home buildersâStandard Pacific (SPF) and MDC Holdings. The risk here is that as the economy recovers, interest rates will rise, choking off home buying and hence home building. Already, the Federal Reserve has signaled that it is probably finished with its regimen of rate cuts. However, my feeling is that it will likely be 2003 at the earliest before higher rates begin to pinch home purchases. Meanwhile, housing stocks are quite cheap. The robot filled the remaining two slots with Providian Financial and SureWest Communications (SURW). I was a fan of neither; both have done well. But in my judgment, SureWest made the list by dint of extraordinary earnings, while Providian still looks risky. When I set the robot in motion again in early April, it picked only 2 of the original 10âValero Energy and MDC Holdings. The other eight are newcomers, mostly because the stocks in the initial group have appreciated in price. Still, the robot continues to love the energy sector. Its latest selections include Houston Exploration, Marathon Oil, Occidental Petroleum, and refiner Ashland. I like these for the same reasons I liked the other energy companies mentioned above. Iâm especially keen on Marathon Oil, now independent of U.S. Steel for the first time in 20 years. I believe that subsidiaries often show better performance once they are cut loose. Iâm also a fan of Occidental Petroleum, a Los Angeles-based international producer of oil, natural gas, and chemicals that had revenue of close to $14 billion last year. I think its CEO, Ray Irani, is being more candid and complete in talking with investors than his predecessor, Armand Hammer, was. Occidental sells for only eight times earnings and offers a 3.4 percent dividend yield. I own the stock for most of my clients. The shares, at around $29, are trading close to their 52-week high of $31, but from a valuation standpoint, they appear to have room to grow. PNM Resources of New Mexico produces and sells electricity and natural gas. The stock is cheap because earnings have fallen on thinner profit margins in wholesale power, from $4.52 cents a share in 2001 to an estimated $2.85 this year. A pair of title insurance companies, Fidelity National Financial and LandAmerica Financial Group, made the April list, each with a P/E ratio of 7. The peril for these firms, like the housing stocks, is that if interest rates rise, fewer people may buy homes, and there will be less need for title insurance. But here again, the stocksâ low prices probably discount the risk, and then some. Rounding out the robotâs latest selections is Alexander & Baldwin, a shipping and real estate company that carries goods to and from Hawaii and owns land there. Hawaii has been in a prolonged economic slump as a result of the chronic Japanese recession and the decline in U.S. travel after the September terrorist attacks. At 8 times earnings and 1.6 times book value (corporate net worth per share), this stock strikes me as a bargain. A few of my clients have the entire Robot Portfolio incorporated into their holdings. Such has been the power of the tin man. Letâs see if his good fortune continues. ∂ John Dorfman, president of Dorfman Investments in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or its clients may own or trade investments mentioned. T I N M A N â S N E W P I C K S The Robot Portfolio contains stocks with at least $500 million in market capitalization that have rock-bottom P/Es. This year, the roster is dominated by beaten-down energy stocks. P/E RATIO YTD RETURN ALEX Alexander & Baldwin shipping and real estate 8 4% ASH Ashland refining 8 â2 FNF Fidelity National Financial title insurance 7 7 THX Houston Exploration oil and natural gas 7 â8 LFG LandAmerica Financial Group title insurance 7 19 MRO Marathon Oil oil and natural gas 6 â3 MDC MDC Holdings home building 7 13 OXY Occidental Petroleum oil and natural gas 8 13 PNM PNM Resources electric and gas utility 7 9 VLO Valero Energy refining 6 29 All data as of 4/1/02. SOURCE: Bloomberg.
Does anyone know where one could get a historical database that includes company earnings and debt-to-equity ratio? It would be nice to verify the author's claims and see how well his methodology worked in previous years. -blueberrycake
Now that's an interesting play on cap, pe and d/e. Using the Russell 3000, here's the low 33: ACAS BJ BZH CC DD EDS FAF FNF GET GHVI HRC INGR JBX LAF LEN LFG MDC MO MTG NLY NX OCA ORH ORI PCP PHM PMI PR RDN RJR RYL SGR THC Chuck