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MODEL
PORTFOLIO RETURNS
ORIGINAL
PUBLISHED RESEARCH RESULTS
The original research on the S&P 500 stocks for the years 1990 through
1998 was first made available to the academic community through Dr. Joseph
Belmonte's (Penname Dr.J.B.
Farwell) Doctoral Dissertation
in 2002 and then to the investment community through
his book entitled Buffett and Beyond published in 2004 under his penname
of Dr. J.B. Farwell.
Please be aware that when
Return on Equity (ROE) is used in any of our material, it is NOT the Traditional Accounting
ROE, but rather the Clean Surplus ROE. Please see the link "What
is Clean Surplus."
ALL TEST PERIODS
Below are the portfolio results of the first of
three, 4-year test periods.
Each of the results shown include fourteen portfolios all of which had
an average portfolio Clean Surplus ROE greater than the average Clean
Surplus ROE of all the S&P 500 stocks in the test. In other words,
they are portfolios with above-average ROEs.
RESULTS: FIRST TEST PERIOD
Each individual portfolio’s average ROE (the average of the ROEs of
all the stocks in each portfolio) from 1982 through 1989 is
followed by the risk-adjusted average per year return
for the following 4 years.
The S&P returned 10.35% per year
during this 4-year time frame. Every one of the portfolios with above average ROEs outperformed the S&P 500
Index for the 4 year period of 3/31/1990 through 3/31/1994.
The above results are depicted in the
chart below
RESULTS OF THE SECOND TEST PERIOD
The results of the second test period are
below. Each portfolio’s 8-year average ROE from 1986 through 1993
is followed by the risk-adjusted average per year
return of March end 1994 through March end 1998.
The S&P returned 28.66%
per year during this time frame. Every one of the portfolios with above average ROEs outperformed
the S&P 500 for the period 3/31/1994 through 3/31/1998.
Above Results in chart form below
RESULTS: THIRD TEST PERIOD
The results during this bear market are the same as the first two
test periods. Every 10-stock portfolio with above average Clean
Surplus ROEs
outperformed the market averages over the following
4-year time periods.
All
Portfolios with above average ROEs outperformed the S&P 500 Index for the period 12/31/1998 through 12/31/2002.
Above Results in chart form
below
BENEFITS OF LARGER PORTFOLIOS: MUCH
GREATER PREDICTABILITY
(AND SAFETY)
OVER ALL TIME PERIODS
The chart below shows the first 4-year test period. However,
all the test periods result in the same chart formation. In
every case, portfolios constructed of 30 stocks are much more
predictable (in their total returns) than portfolios of just 10
stocks. However, in both portfolio sizes, 10 stocks and 30
stocks, all portfolios outperformed the S&P 500 index over all test
periods.
The meaning of this is
extraordinary. As an example, if a portfolio of 30 stocks
exhibits an average ROE of 25%, we would expect an 80% chance that
this portfolio will return approximately 20% (25% x 80%) in an average
year when the S&P returns 12%.
The next chart below chart is a culmination of four, 4-year test periods
3 of which were shown above. The percentages you see, such as 1990-1993
show the Clean Surplus portfolio exceeding the S&P 500 index by and average of
18.6% - 10.4% or 8.2% PER YEAR for each of the 4 years that the
portfolio was held.
SUMMARY: THE FINAL TEST RESULTS
The results of all test periods as well as the up-to-date research
in the very beginning of this link, shows that every portfolio which was predicted
to outperform the S&P index did indeed do so whether the holding period was
a one
year (recent research) or a four year holding period. These results indicate that Clean Surplus does
indeed exhibit PREDICTABILITY and portfolios with a high and consistent Clean
Surplus Return on Equity outperform portfolios with lower and inconsistent ROEs.
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