The Early Retirement Masterclass (ERM) strategy does not invest in US securities because of taxation issues. The first being a 30% withholding tax on all dividends received. The second issue concerns estate taxation. US tax authorities might impose tariffs on US stock holdings if the investor were to pass away suddenly.
Nevertheless, it would be an interesting exercise to study the proper investing style to adopt if ERM students were to invest in US blue-chip counters.
This article will assess the feasibility of investing in the Dow Jones Industrial Average (DJIA), which consists of 30 iconic American blue-chip stocks.
Conditions of our backtest
We use Pyinvesting to back-test for the past ten years (dated 22 Feb 2011 – 22 Feb 2021). We will first create a baseline performance of investing in an equally-weighted portfolio of all 30 blue-chips. We will then create a sub-set portfolio of 15 stocks with the following factors :
- Low Price to Book Ratio
- Low Price to Earnings Ratio
- High Dividend Yields
- High-Profit Margins
- Low Beta
- High Momentum / 180-day Relative Strength Index
We will record the return, semi-deviation, and Sortino ratio of each strategy.
- Semi-deviation is a measure of the downside risk of the stock returns over the past 10 years.
- Sortino ratio being risk-adjusted returns per unit of downside risk.
Best investment strategy for the DJIA (in the past 10 years)
We tabulate the result as follows:
The best way to grow your money in the US markets, according to statistics
Here are some conclusions we can derive from this exercise.
- Value investing has not been a good idea for the past decade
When investors talk about value investing underperforming growth in the US, they were not kidding. Buying 15 counters with the lower price-earnings ratio and price to book ratio would have underperformed buying all 30 stocks.
If you wish to adopt a value investing stance on the DJIA, you will need a much longer holding period for value investing to come back into vogue in the US markets which may require the return of higher interest rates.
- Dividend investing can result in more unsatisfactory performance
US blue-chips that give out a dividend has also underperformed a strategy to buy all 30 blue-chips in equal shares.
On top of this, you will have to deal with higher dividends taxation.
- Growth investing should be the chosen strategy moving forward
While the value and dividends strategy tend to underperform, the investor should instead focus on companies with high-profit margins. Stocks that have performed well in the past would also continue the trend of doing well in the future, as evidenced by the 180-ay RSI providing superior performance.
The risk of adopting this approach to investing is the question of whether such factors will continue to outperform when the period of low interest rates was to end.
How to further improve your returns
Combining three successful factors into one and reducing the number of short-listed counters from 15 stocks to 8 stocks, we obtain a superior portfolio that has racked up 18% gains for the past 10 years at a reasonable semi-deviation of 14.7%. An actual screen of the US stocks will flag some decent technology counters like Apple, Intel, Salesforce and Microsoft.
(This is not investing advice)
Readers should not invest directly based on these screens as the ERM performs an analysis based on the much larger set of factors over different periods. I also tell my students to short-list the counters further by reading analyst reports and making a qualitative assessment to determine whether they are suitable for the inclusion of their portfolio.
