Dividend Data for DIYers

Here is a table adapted from Barron's 6/15 issue, page M47, showing the quarterly year-over-year dividend payouts of stocks comprising the Dow Jones Industrial Average:

Company/Ticker	March 2014	March 2015
Am. Exp. (AXP)	.23	.26
Apple (APPL)	a	.47
AT&T (T)	.46	a
Boeing (BA)	.73	.91
Caterpillar (CAT)	.60	.70
Chevron (CVX)	1.00	1.07
Cisco (CSCO)	.19	.21
Coca-Cola (KO)	.305	.33
Disney (DIS)	Nil	Nil
Du Pont (D)	.45	.47
Exxon (XON)	.63	.69
Gen Elect (GE)	.22	.23
Goldman Sachs (GS)	.55	.60
Home Depot (HD)	.47	.59
IBM (IBM)	.95	1.10
Intel (INTC)	.225	.24
John&John (JNJ)	.66	.70
JPMorgan(JPM)	.38	.40
McDonalds(MCD)	.81	.85
Merck(MRK)	.44	.45
Microsoft(MSFT)	.28	.31
Nike(NKE)	.24	.28
Pfizer(PFE)	.26	.28
ProcGamble(PG)	.6015	.6436
3M(MMM)	.855	1.025
Travelers(TRV)	.50	.55
UnitedHealth(UNH)	.28	.375
UnitedTech((UTX)	.59	.64
Verizon(VZ)	.53	.55
Visa(V)	.40	.12
Wal-Mart(WMT)	.48	.49

Note that all except Visa increased their dividend.  Apple replaced AT&T, so their dividend experience isn't shown.  Overall dividends amounted to $103.65 compared to $91.94 a year earlier.  The yield increased from 2.22% to 2.25%.

For reference purposes, the yield on the 10-year Treasury is approximately 2.40%.

Dividend Aristocrats

real aristocrats

Dividend aristocrats have increased their dividends each year for the past 25 years.  There are presently 51 aristocrats in the S&P 500.  Here are the first 10 dividend aristocrats shown with ticker symbol, dividend yield, and P/E ratio.  The P/E ratio is based on the trailing twelve-month earnings:



MMM     2.60%     19.95
AFL        2.30%      9.31
ABT        2.30%     23.66
APD        2.50%     25.56
ADM       2.32%    21.00
 T            5.40%     10.24
ADP        2.50%    26.26
BCR        0.60%    17.27
BDX        1.90%    24.15
BMS        2.80%    18.65

A complete list can be found at

S&P 500 Dividend Aristocrats .

The yields and P/E ratios were obtained at

Yahoo! Finance  (just put ticker symbol into quote box )

The reader will  note that the issues are a bit pricey.  For comparison purposes, the weighted P/E on the overall S&P 500 is 19.63.  The fact that  many aristocrats have a higher P/E reflects their solid performance.

To see this go to the useful site at

S&P Dow Jones Indices

Source: S&P

 Here you can see that the aristocrats achieved a 5-year annualized return of 23.23% versus 20.43% on the overall S&P 500.

If you do the same exercise for the 1-year period ended 3/28, you'll find the aristocrats underperformed, 17.65% versus 20.89%.

These results point up an important point regarding investment approaches:  there is no single "no brainer" approach to investing.  This is important to keep in mind today because you'll see articles that tout dividend investing as an approach that always outperforms.

Investment Approaches

As an advisor, I talk to a lot of people about how to go about investing.  I understand that many people have difficulty relating to the typical approach that sets up a benchmark and then constructs a portfolio that seeks to outperform a benchmark they are not familiar with.  Many times there is the unasked background question concerning the performance of the benchmark:  what if it gets hammered?

Then there is the investment approach du jour:  manage to meet goals.  With this approach, portfolios are constructed differently for those seeking to finance a college education, leave an inheritance, or meet basic retirement needs.  To me, this approach is a bit wishy-washy and enables investment managers considerable leeway to produce poor performance.

Another way is suggested with the dividend approach and is welcomed by not only those in or near retirement but also the young.  The dividend investing approach has the goal of creating  passive income, and passive income is what you need in retiring - either early or normally.

I find that those who have dabbled in real estate relate to this way of viewing investing.

From the perspective of dividend aristocrats, the passive income approach is especially attractive in that dividends are consistently increased.  Consider this:  the yield on the 10-year Treasury note is 2.70%; and, if bought today, is locked in for the next 10 years.  Look back at the list above, and you'll find issues with yields above 2.70%.  If bought today and dividends are increased, yield at cost can rise significantly!

Think about the dividend approach like this:  suppose you had a basic annuity with an insurance company whereby you pay them a certain amount and they pay you a specified amount for as long as you live.  This is known as a single premium immediate pay annuity (the income stream is similar to Social Security).  Once you make the payment, there is no underlying value to worry about.  Similarly, in  investing in a portfolio  of dividend stocks, you can ignore the underlying value of the portfolio.  If it goes up, it can be considered gravy; but what you really care about is the income stream.

Caveats

Like all investors, the dividend investor should diversify.  Buy Pfizer or Merck - don't buy both.  Buy AT&T or Verizon - don't buy both.  In 2008, the non-diversifier could have easily gotten hammered by the finance sector--caveat emptor.  The big risk in dividend investing is that dividends will be decreased!

Dividend stocks are in competition with the bond market.  They are substitutes for the marginal investor.  A sharp rise in interest rates would likely cause a greater discrepancy in performance between dividend stocks and non-dividend stocks than noted in the 1-year performance results reported above.

Creating a strong portfolio of dividend paying stocks requires some research and understanding that higher yields means greater risk.

Disclosure:  I hold stocks mentioned above for myself and for clients.  This post is for educational purposes.  Investors should do their own research or consult a professional before making investment decisions.

Create an Income Stream Versus an Annuity

An ongoing conundrum in the financial community is why single premium immediate pay annuities (SPIA) aren't more widely accepted?  After all, they go a long way towards avoiding running out of money in old age (the number one fear of retirees), no matter what the market does.  Furthermore, used intelligently, SPIAs can be used to enable a retiree to take on a bit more risk in the other assets they own.

So what's not to like?  First off, retirees lose control of the money.  For example, suppose the retiree comes home and finds a leak in the attic crawl space?  The roofer guy is going to come out and tell the retiree he or she needs a new roof!  Where do you get the money from?  Hint:  not the annuity. Secondly, though useful, today the timing may not be right with interest rates close to historically low levels.  With the yield on the 10-year Treasury note at 2.50% and the Federal Reserve printing money akin to Anatasios Arnaouti on steroids, many feel that higher yields will be available down the road. Thirdly, most people would rather wallow in their own fear of a market collapse than talk to a silver-tongued insurance agent who has been trained to sell you products that will destroy a retirement portfolio faster than you can get out a high-powered electronic microscope to read the fine print.

So, does it leave the retiree at the mercy of the usual portfolio approach trying to beat the market?  Not necessarily.  Some are constructing a sort of hybrid portfolio whereby the allocation to fixed income is replaced partially with high dividend stocks.  This is not a couch potato approach in that it does require some time on the part of the DIYer but could pay high dividends (sorry, couldn't help it) if done correctly. And, as a matter of fact, a whole industry of bloggers (see below)  has arisen to help the DIYer in this endeavor.

 DIVIDEND PORTFOLIO EXAMPLE

To see one way to approach this, let's look at an account I recently set up.  We began with the usual important first step of doing an asset allocation.  This is for a couple in their 60s.  Income will become important to them shortly.  The allocation was 50/50 stocks/fixed income.  The stocks portion was invested in low-cost diversified index funds.

The twist came with the bond portion.  Instead of bond funds, the fixed income portion was invested in dividend stocks that have a dividend of 3% or greater.  It was decided that the dividend stock positions would be less than 5% of the overall exposure in the dividend sector, making each position less than 2.5% of total assets.  Importantly, it was agreed to carefully look at diversification - the last thing you want is to load up on bank stocks, energy stocks, etc.

With these specifications, here is a partial listing of the  portfolio that was constructed:

Source: Schwab

CLICK TO ENLARGE
You'll notice that NLY is in for a lesser amount.  It is a riskier issue with a yield in excess of 11%.  Its purpose is to juice up the yield of the portfolio a bit with the understanding that its dividend is considerably less secure compared to the other holdings.


The thing to get your head around is that, in one sense, you really don't care about the prices of the stocks.  After all, if you had put the money in an annuity, you would be dealing with an income stream!

Having said this, if prices move higher and this is a taxable account (which, in this case, it is), you have some options.  You can realize long-term gains if you find better replacements and can actually take advantage of tax-harvesting by capturing losses.

Once set up, the next step, which takes all of 30 minutes, is to do an Excel sheet showing dividends received:

The portfolio will be comprised of approximately 20 stocks.  The bottom line is to seek to have income increase over time.  This, of course, won't happen with a bond.  Buy the 10-year Treasury note and you'll get a fixed interest payment every 6 months for the next 10 years.

Here's the bottom of the Excel spread sheet:

The arrows show that already the dividends have increased and, in fact, they will increase this month with the final payment due in.  The goal is to see them double approximately over the next several years.

Obviously, unlike the annuity situation, the investor has control over the assets.  If  the roof leaks or Aunt Maude in Stuttgart Germany kicks the bucket, the investor can sell assets to pay the roofer guy (or gal) or get on an airplane to Stuttgart.  A DOWNSIDE IS THAT THE YIELD WILL BE LESS THAN WITH AN ANNUITY, AT LEAST AT THE BEGINNING!  This is because, with an annuity, you are receiving an actuarial rate based on a group's mortality.

The newbie DIYer should be able to find on his or her brokerage site a history link that shows all cash flows that come into an account.  This is a convenient place to track your dividend receipts to put into your Excel spreadsheet.  In Schwab, it looks like this:

If this intrigues you in the least bit, you should realize you can go at it at whatever size you want.  For example, if your asset allocation calls for 40% fixed income, you could consider putting 20% of your fixed income allocation in dividend stocks and think of the allocation as your personal annuity!

The obvious question is how do you find good dividend-paying stocks without having to spend an inordinate amount of research effort? Actually, today this is easy because there are several really good blogs dedicated to finding good dividend payers.  Here are a few:

DIVIDEND GROWTH INVESTOR , DIVIDEND MANTRA, DIVIDENDS4LIFE .

Disclosure:  This post is for educational purposes only.  Individuals should do their own research or consult a professional before making investment decisions.

Understand the Case for Dividends

Source: www.capitalpixel.com

It's no secret that the Federal Reserve has been on a mission to push investors into higher-yielding, riskier assets.  By pledging to hold the federal funds rate - the rate at which banks lend reserves to each other - in a range of 0 - 0.25% ( the so-called "zero bound"), they affect rates on short-term, less risky assets across the board.

Naturally, investors have found their way to both longer-term riskier bonds as well as dividend stocks.

To examine the attraction of a dividend paying stock compared to a bond, let's consider common stock for Sandy Spring Bank (full disclosure:  I own this stock), which recently announced a dividend increase (ticker SASR), and the benchmark 10-year Treasury.

Here's the announcement for SASR:

Sandy Spring Bancorp, Inc., (SASR - News), the parent company of Sandy Spring Bank, announced that the board of directors has declared a quarterly common stock dividend of $0.12 per share payable May 16, 2012 to shareholders of record on May 9, 2012. This dividend represents a $0.02 per share increase over the dividend paid in the first quarter of 2012.
Source: Global Newswire

IMPORTANT DATES

Note the record date of 5/9/2012.  This is the date the stock has to be held.  Note the payable date of 5/16/2012.  These are the 2 dates shareholders need to know.  On 5/9, the stock will go ex dividend.

There are also simple rules that affect whether the dividend is qualified or not that income investors need to know to capture lower tax rates.  Essentially the dividend will qualify if it is a U.S. stock and is held for 2 months over the 4-month period beginning 2 months before the ex-dividend date.  If you are playing it close to the vest, just call a rep at your brokerage and ask.  The tax break is what pays you to take the risk!

Returning to SASR, the .12 quarterly dividend implies a yield of 2.69% ( .48/17.87).  At the previous dividend, the implied dividend yield was 2.24% (.40/17.87).  In contrast, the yield on the 10-year U.S. Treasury note is 1.93%.  The coupon yield is 2%.

In comparing the two, a primary consideration is that there is a good likelihood that the stock dividend will be increased over time whereas the payout on the bond will remain constant over 10 years. 

The risk, of course, is that SASR stock may move a lot lower over the next 10 years.  On the positive side, if it moves higher, it is pretty much gravy for the income investor.  In contrast, the 10-year Treasury price is known for certainty 10 years hence.  At maturity it will be par, i.e. $100 per $100 principal. 


If you are interested in using stocks to generate income, you may want to follow dividend bloggers like Dividend Growth Stocks or consider dividend ETFs like SDY or DVY.

Disclosure:  I and my clients hold stocks and ETFs mentioned above.  The intent of this post is educational.  Individuals should do their own research or consult a professional before investing.

Teach Your Kids About Stocks - Dividend Yields

In honor of Financial Literacy Month, we continue today with an exercise parents can do with their kids to learn about stocks.

Bonds pay interest and stocks pay dividends. Bond interest is usually a fixed percentage of the principal amount and has to be paid as scheduled - otherwise a company may be forced into bankruptcy. Dividends on the other hand may or may not be paid and they can be increased or reduced.

If we put on the hat of the CFO (Chief Financial Officer) of a company we realize that he or she has a choice on what to do with profits earned by the company. They can be reinvested in the company  or they can be paid out in dividends to the owners, that is the stockholders.

As investors we are interested in the dividend yield of stocks for a few different reasons. Dividends act as a cushion when the stock market drops and are therefore stocks that pay dividends are generally considered less risky than non-dividend paying stocks. Dividends provide an income stream to investors who are in retirement and living off of their investments. Many dividend stocks today actually yield more than bonds and have the likelihood of increasing their dividend over time. Simply stated, investors would rather have a stock like Johnson & Johnson (ticker = JNJ) that pays a dividend of $2.28/share to yield 3.50% than the 10 year U.S. Treasury note that yields 2%.

Not only does JNJ have the higher yield but it also has the potential to raise the dividend payout significantly over the next 10 years, Keep in mind, however, that JNJ is riskier than the U.S. Treasury note - what we are describing here is the basic risk/return trade-off.

After reading the posts of the last 2 days it should be easy for you to find the dividend and yield of any stock. Just go to the Yahoo Finance site described in those posts and you'll find, for example, the yield discussed here:

Source: Yahoo

CLICK IMAGE TO ENLARGE  Take the dividend (2.28) and divide by price(64.20) to check the yield calculation. If you follow the procedure to get historical prices that we looked at on Monday you can actually see the quarterly dividend payouts. It would be a good exercise for a young person to write-up the process of getting the actual dividend payouts for a stock (Coca Cola say) for the last 2 years.

Investors, as you might imagine, keep track of which stocks have increased their dividend over a long period of time. These are called "dividend aristocrats".

Today dividend investors are fortunate because there are a number of good blogs devoted to dividend investing. They do excellent research and give the dividend investor good ideas. Here are a couple I follow:

• Dividend Ninja
• The Dividend Pig
• Dividend Growth Investor

To me one of the best ways for the DIY investor to participate is with dividend exchange traded funds. They provide you with immediate diversification. Some I use are DVY, SDY, and SCH . Using the method described yesterday  find the 5 top holdings in these funds and compare their yields.

Disclosure: I own some of the stocks and exchange traded funds mentioned in this post. It is intended for educational purposes only. Individuals should do their own research or consult a professional before making investment transactions.

Is Your Portfolio Down Over the Past 5 Years?

Potential clients are coming to me more often complaining that their portfolio is down over the past 5 years or so.  They wring their hands and express wonderment that they are essentially feeding a trough that is shrinking in size.  Some point out that they would have done better just putting their funds under a mattress.

Naturally this got me to go back and look at market performance for the past 5 years.  To do this, I used one of my favorite data sources--the BlackRock Sector Returns chart.  I first looked at the BlackRock diversified portfolio - one of my favorites because of its low volatility and nice fit for a wide range of risk tolerances and ages.  It is comprised of 35% Barclay's Aggregate Bond Index + 10% MSCI EAFE Index + 10% Russell 2000 Index + 22.5% Russell 1000 Growth Index + 22.5% Russell 1000 Value Index.  These indices are all well known and represent broad parts of the relevant markets investors should be invested in.  Furthermore it can be replicated with low-cost index funds.

So how did this portfolio do over the past 5 years?

2007 +6.0%
2008 -22.8%
2009 +20.8%
2010 +13%
2011 +1.8%

The portfolio increased by 13.7% over the period, for an average annualized return of +2.6%.  Admittedly not a great return, but at least it keeps up with inflation and is well ahead of the paltry rates on short-term Treasuries and money funds.  Importantly, it was not negative - like the returns experienced by the potential clients (many of whom added contributions over the 5 years!) who appear on my doorstep.

So how do they end up with negative returns? After all, someone, somewhere steered them towards high performing funds!  Actually, funds that were purportedly the "best of the best" at one point in time.

The answer is obvious to regular readers of this blog.  The impact of high-fee advisors putting clients in high-expense funds that trade aggressively has been explored on numerous occasions.  Research clearly shows there is no consistency to superior performance.  In fact, the odds are that the best-performing funds of the past 5 years will underperform over the next 5 years! It  reminds me of a young boy I saw at an Easter Egg hunt one time. T he kids would call out "there are eggs over here!" and he would run over.  By the time he got there, the eggs were gone.  Sad to say, at the end of the hunt, he had few eggs to show!

The interesting observation here is not the eggs - it is the impact on portfolios during periods where market returns are not robust.

My job is to get clients invested in low-cost well-diversified funds.  For most clients, it is fairly easy to learn how to manage a portfolio structured along the lines of the diversified portfolio mentioned above. As far as I know, no one else offers to show the novice investor how to structure and manage a low-cost indexed portfolio.  This approach avoids high management fees, expense ratios, trading costs, etc.  It gives the best possible chance of matching the returns shown.  Alternatively, some clients have me manage the assets on an ongoing basis.  This costs 0.4% and would be subtracted from the annual returns. 

The bottom line is that investors who are scratching their heads and wondering about negative performance over the past 5 years should reconsider their investment approach.  They are like the boy wondering why he ended up with so few eggs.  Sadly, many are throwing up their hands in frustration and exiting the market completely - a mistake ,in my opinion!

Disclosure: T his piece is solely for educational purposes.  Individuals should do their own research or consult with a professional before making investment decisions.

Screening for Dividend Payers

Source: Capital Pixel

I'm an indexer.  I agree with Warren Buffet that most investors and individuals will do best by indexing the broad stock market.

Still, I belong to the "there is more than one way to skin a cat club" and, if an individual is willing to take the risk, has the time, expertise, emotional fortitude, and resources, he or she may outperform the market with a well-thought out/disciplined approach. Again, I would index at least 80% of the portfolio using it as an anchor for retirement assets and seek to outperform with the rest.

With this caveat in place, let's examine a popular theme and one way to approach it for investors.  The theme centers on the idea that a tsunami wave of retirees is just now beginning, and these retirees will move their assets to produce greater income, i.e. into the dividend sector.

McVey's Approach

Henry H. McVey heads up the asset allocation process at Kohlberg Kravis Roberts and incorporates this idea in what he calls his "Brave New World" thesis as described by Shirley Lazo in "Dynamic Duo."  He screens stocks according to the following criteria:  dividend yield between 2% and 5%, earnings growth between 5% and 15%, 12-month trailing return on equity rising, P/E below sector average, increasing payout ratio or a increasing dividends paid.  Thus, McVey is seeking dividend payers that should be able to increase dividends and offer value on a price basis.

Backtesting this approach achieved an average annualized  return of 11.2% versus 4.9% on the S&P 500 over the period 1/2004 - 11/2011.

The following table shows 10 of the stocks that made the screen (see the above article link for a more complete list):

Source 1/2/2012 Barron's

Click to Enlarge

I believe the approach has possibilities.  I would emphasize, however, that the results reported above were "backtested"!  Backtesting, as we know, can find the best coin flipper out of 30 people by running trials.  It doesn't help us, though, moving into the future.

A second caveat is that I am sensitive to the fact that I've seen companies implode over the past several years that I could never imagine having the problems they brought upon themselves.  These include GE, Ford, Fannie Mae, Merrill Lynch, and many others.  Some would, undoubtedly, have made this list in the past!  As a result, the backtested results suffer as well from what is called selection bias.

The bottom line is - proceed with caution.  This is an approach that has possibilities but has to be watched closely, IMHO!

Disclosure:  Post is for educational purposes only.  Investors need to do their own research before investing.  I hold some of the stocks mentioned above.

Create a Dividend Table (Part 3)

On Monday we saw how to find dividend information for exchange traded funds. By going to Yahoo! Finance and putting the ticker symbol into the quote box, we saw how to find the actual payment dates and payment amounts on a per share basis.  On Tuesday we created a table to calculate the weighted yield of a simple portfolio.

The final step is to take this information and put it into a table that shows payments expected throughout the year.

As shown, the table here is from Excel and just shows the first 4 months of the year.  In Excel, or whatever your favorite spreadsheet is, you can put in various formulas to update to calculate dividends based on number of shares and changes in dividends.  As usually happens, much of the work is in the setting up of the table,

Bonds are no problem.  They typically pay interest every 6 months, so they would have 2 payments at the appropriate times during the year.

To track payments as they come in, you want to use the "History" tab of your broker.  For example, in Schwab:

Source: Schwab

CLICK IMAGE TO ENLARGE Click and then, in the "Show" drop down box, select "Dividends and Interest" to get:

Source: Schwab

CLICK IMAGE TO ENLARGE For do-it-yourselfers who prefer individual stocks, there are several dividend bloggers who, in my opinion, do outstanding analysis and present many good ideas.  They look for companies that have the ability to increase dividends over time.

Two idea sources are:

http://www.dividendninja.com/ 

http://www.thedividendguyblog.com/ 

These sources will give you ideas and lead you to other bloggers in the dividend blogger community.

Disclosure:  This post is for educational purposes only.  I hold some of the securities mentioned. Individuals should do their own research and/or consult professional advice before making investment decisions.

DIY Investor in Top 10 of Dividend Ninja

Source::The Dividend Ninja

DIY Investor was picked by Dividend Ninja as one of his top 10 blogs, which I consider an honor considering the others in the list and the fact that Dividend Ninja is a high-quality blogger.

Anyone interested in investing and financial topics, and especially top of the line research on dividend paying stocks, will find this list a great resource.

Thanks, Ninja!

Fear vs. Greed

A popular way of viewing markets is in terms of a battle between fear and greed.  When greed has the upper hand and prices are rising sharply, it seems perfectly normal.  When fear gains the upper hand and prices plummet, like the correction we are now experiencing, not so much.

All kinds of advice comes out of the woodwork during times like the present.  After all, it's a chance to look like a genius.  Reputations are made in times like this.  Stay on the path, we are not lost, the road is straight ahead.  Coming out of the bush after listening to the advisor goes a long way towards inspiring confidence.

But the fact of the matter is that there is a bit of a moral hazzard issue here.  If the advisor is correct, then he or she is seen as a wise person.  On the other hand, if stocks are lower 10 years from now, the client is the one that loses.

It is notable that the advice to stay the course has always worked in the past.  On the basis of historical experience, it is the "safe" bet.  And, in fact, there are very good reasons why it should work this time - reasons that long-time market observers understand.  For example, stocks are getting cheap relative to the usual metrics of p/e ratios and dividend yield.  Also, actions are taking place behind the scenes to correct the problems.  One scenario (this should get a good laugh) is that the U.S. and the rest of the world actually begin to get their fiscal messes in order.

On the other hand, we are definitely in uncharted waters as usual.  Go back to late 2008 and early 2009. We know how markets turned out.  There was a massive rally ( which is firmly in investors' memories) from March 2009 on.  But what if the Fed and the Treasury hadn't stepped up at the last minute and guaranteed money fund assets?  What if TARP hadn't passed the second time around?

Today's situation is scary because we are depending on Europe to do the right thing policy wise.  In other words, we aren't driving the car.  Furthermore, we've got craziness in the U.S. political arena that can't be papered over easily by monetary and fiscal policy.

One observation I have made as an advisor is that many people are taking risks with their portfolios they don't have to.  In other words, they are set for a comfortable retirement even if they earn a modest 3% or so return on their assets.  They don't need 60% invested in equities.  They may want to think about reducing equity exposure.  The additional expected return doesn't compensate for the possibility of a big downdraft from here.  Others are well advised to stay the course, and younger people should start to put on their buying hat, IMHO.

Stock Picking Contest

Dividend Growth Investor has a 6-month update on a stock-picking contest he and several fellow bloggers entered into at the beginning of the year (in fact, have been doing for a few years) Contests like these are interesting to indexers as well as to stock pickers. Indexers believe that most investors are better off seeking to attain the returns of the market. Most stock pickers would tell you that their four best picks would beat the market.

In this spirit, imagine if we ran a pension fund and decided, after doing an exhaustive manager search, to hire the nine contestants and give them each $5 million to manage with the mandate to beat the S&P 500. Alternatively, we can easily match the S&P 500 with an index approach and pay much less than we pay professional managers.

At the midway point, the average return of the 9 contestants is 2.14% versus the 5.90% year-to-date return on the S&P 500. This is one of the results the indexers and stock pickers are interested in, but it is short-term and would only be revealing after at least 3 years or so.

Another fascinating exercise is to look at the results and try to pick the winner for the next period. This, of course, is what mutual fund investors try to do all the time. Keep in mind that the contestants only pick 4 stocks and may be nowhere near being representative of their actual portfolios.

In any event, I believe the contest is worth following and yields interesting data.


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