[Investing] Can This Method Beat An Index Fund?

A repost from my investment blog.

So, it is well known that Warren Buffett, my idol, has won a bet with some hedge fund bet. He even commented that money spent on plumbing is better than on a hedge fund.

Anyway, from my previous posts, I have been sharing alot on the Formula Investing. Can this approach beat the Index Fund approach?

Just a short recap, since May last year, I picked some 20 stocks using a hybrid of my methodology and Formula Investing. The constituent stocks have equal weight in the portfolio.

Since now it has been over a year, I shall assess the portfolio's profitability.

Here's the results:

Since monitoring* the stocks in May 2016, Sim Lian Group has been privatised. From the results, the total portfolio worth is $11.6, up 19% from $10.05. If the price at which Sim Lian Group was "sold" is included, which is $0.94, the percentage goes up to 28.3%!

*There wasn't much effort to monitor actually. I just picked and recorded the price into a spreadsheet, and waited.

Seems promising eh?

However, do take note that these figures are purely capital gains - they do not include the trading costs, or any dividends. If the costs and dividends are included, that percentage would be well about 12%.

How would the STI index and gold fare, for the sake of comparison?

Let's look at how the STI performed in the similar period:

May 2016: 2791
May 2017: 3231

Figures approximated from Yahoo! Finance. It is a 15.8% gain. Generally an index fund would perform slightly worse, and this is excluding any costs and dividends paid.

Let's now look at how Gold performed in the similar period:

May 2016: 1215
May 2017: 1253

Figures (in per oz) approximated from goldprice.org. It is a 3.1% gain. Just look at the chart, gold seems to have gone through a roller coaster ride though. But that is none of my business because I'm only interested in stocks.

It does seem that there's some promise my hybrid approach. This is expected because 1) the Formula Investing approach picks up a portfolio of stocks that are already efficient (per stock dollar value) to begin with, and 2) my methodology adds a more stringent criterion to the selection process mete out by the Formula Investing approach.

In retrospect and theory, I should be able to pick out the stocks such that it optimises my returns, right? By this, I mean I could apply the principles of Modern Portfolio Theory to maximise my returns.

In my opinion, the approach is allready satisfactory without using the MPT. Could I do better? I may get a friend who is interested in MPT to help me find out, but personally I do not like complicating simple things.

The Formula Investing method looks promising now, but it does not guarantee returns every time. In fact, it is meant to be iterative process over a long period of time (say 20 years or more).

I will continue to assess this portfolio. I hope to come out a 2017 portfolio soon, so stay tuned! Meantime, I will still blog about the usual stuffs - value investing, accounting, determining stock value, etc.

Oh, and please read the Disclaimer.

~ZF