Many savvy financial analysts, from Warren Buffett to Andrew Gluck (See "Master Harold's New Portfolios" in "Investment Advisor," July, 2003, pp. 39-46.) expect for various reasons that the equity premium, the traditional extra performance of stocks over bonds, will be much lower in the coming years than was the case for the past generation or so. After inflation, investment expenses, and taxes, some now say the average equity portfolio for quite some time is probably going to average zero to only about a 3% net annual total return. Under these conditions, investors need an edge!
One place to look for such an advantage is to Benchmark Investing (BI), a strategy for purchasing the stock of major companies when they are out of favor, and thus lower in price, and selling once they are again popular and showing healthy investor profits. Had you invested just $1000 in 1973 using the Benchmark Investing approach, later popularized by Kenneth Lee in the book, Trouncing the Dow, and then kept rebalancing according to the system's guidelines, you'd have $1,082,230 as of 7/4/03, excluding taxes, commissions, and any redemptions. (These results are based on the site's current figures and correspond with those [through 1996] published in the book.) That works out to a 26.72% compound annual total return!
Although it has the disadvantage of generally more frequent stock trading, that there are often greater tax consequences, but for this factor BI would have even beaten Warren Buffett's superb investing performance in the same period.
Ideal then for tax-deferred brokerage accounts, BI relies on a value investing technique for assessing when major companies' stocks are undervalued or overpriced, and hence when to buy or sell.
BI demands more homework by the investor than many approaches but, as is evident from the total returns, one's labors are well rewarded. This method also requires access to a current set of reports from "Value Line Investment Survey." They are usually available in large public or business school libraries. Alternately, one could elect to subscribe to the "Trouncing the Dow" web site. It currently costs about $200/year.
Here are the steps to take if, like us, you'd rather do the calculations yourself: