(This is the second post in a short series on personal investment strategies that have at least some relation to concepts in The Challenge Dividend.)
A few weeks ago, I decided to start tracking the performance of Fortune magazine's Most Admired companies. My hypothesis was that these companies would outperform the market, and I figured that this list could be a strong alternative to buying mutual funds. Instead of spending 2% or more with a professional trader, maybe a $4.95 magazine could deliver the same or better results. I spent 30 minutes plugging stock prices into a spreadsheet and planned to return and update it each year. But this weekend Fortune did me a favor, it went ahead and published the results of the last 23 years. Awesome.
I was happy to see that my hypothesis was proven correct over the past 23 years. According to a recently published study, from 1983 to 2006, the Most Admired companies reaped an annualized return of 15.4%, a very nice premium over the S&P 500's 11.2% return over the same period. If you invested $100,000 in a fund of these companies you would end year twenty-three with $2,696,090, a figure $1,546,850 more than what the same investment in the S&P 500 would generate.
Interestingly, the study found that a fund of the Least Admired companies would actually perform even better. During the same timespan, a similar fund would have returned 17.8%, or a 4,328,540 result from a $100,000 investment. Why would a fund of the "losers" do so well? There's a few potential reasons:
- Professor and author of this study, Meir Statman (his real name), believes that investors have an overly positive feeling on the Most Admired, so they may be willing to pay higher prices for that stock.
- The underdogs have more upside. They have already been beaten down by investors and have small capitalizations.
- I believe the underdogs do better because they are in the ultimate position of challenge driving improvement. At the bottom of the heap, the fewer remaining investors know that they need to do something dramatic. They attract turn-around leaders and investors who have experience fixing companies.
I am glad to see a Challenge Dividend hypothesis prove out only weeks after coming up. And now I've got one measure of the actual Challenge Dividend Return on Investment - 17.8%! Stay tuned for "The Challenge Dividend Fund", it's on my list of to-do's in 2007.
