Something to Think About… if you really can’t buy index funds – Part 3

Market-Beating Guru Adds Another Strategy…With Index Funds This Time

Financial literature is littered with scores of material claiming to show how average investors can beat the stock market. And “proof” of that success is shown through back-tested models. But as most financial veterans know, looking in the rear-view mirror at strategies that worked in the past don’t tend to hold much water in the future. Most of them fail to stand the test of time. The strategies devised by Michael O’Higgins may be an exception to the rule, however.

And the Miami-based leader of O’Higgins Asset Management has refined a strategy that he hopes the average investor can benefit from. Author of Beating the Dow and Beating the Dow With Bonds, O’Higgins is ready to pen a third book, and if it’s anything like the previous two, it’s going to be well worth the read.

O’Higgins’ success, as an investor, has come from making intelligent contrarian decisions. His Beating the Dow strategy called for buying five of the highest yielding, low priced (out of favour) Dow Jones Stocks and selling those, annually, that no longer fit the criteria. And his Beating the Dow With Bonds strategy utilized either the out of favour Dow stocks, T-bills, or long term treasury bills. The historical results of both strategies can be found in my June 16th post and they’re very impressive.

Mr. O’Higgins calls his new strategy, MOAR: for Michael O’Higgins Absolute Return. And he devised it to ensure that investors reap two benefits:

  1. Higher returns
  2. Less volatility

O’Higgins understands that the average investor is his/her own worst enemy. When markets gyrate wildly, investors tend to do silly things—either sell what they own, or desperately re-shuffle.

But he feels that an investor won’t necessarily sabotage their account if their investments aren’t as volatile…ensuring a lower likelihood that the investor will press the panic button.

I’m going to use O’Higgins’ own words to describe his method, as written in the April 2011 edition of the Gloom, Boom and Doom Report.

I use the five most undervalued investable stock markets in the world, which I call the Dogs of the World (DOTW). In addition, instead of Cash, I use U.S. Intermediate Term Treasury Notes [Long term Treasury Notes and Gold]. Lastly, in each year following a losing year for the DOTW, I take five percentage points from each of the other categories and use it to overweight the DOTW, thereby capitalizing on the historical tendency of equities to outperform other investments in years following stock market declines. The equity weighting is then brought back to normal, in 15 percentage point increments, as stocks rebound in the ensuring years.

Beginning in 1996—because I only have DOTW performance figures since 1995—the MOAR Strategy would have significantly outperformed every major stock index, long and intermediate term bonds, gold, cash and inflation, and done so while suffering only one losing year [averaging 12.79 percent from December 31, 2005 to December 31, 2010]”

 

OK, so what would this portfolio look like?

Michael O’Higgins wrote this article in April, 2011, but I don’t think the markets’ recent movements will affect the recommendations he gave then, based on current market levels in June, 2011.

  • 25% in the iShares Barlcays 20+ Year Bond ETF (TLT)
  • 25% in the iShares Barclays 7-10 Year Bond ETF (IEF)
  • 25% in the Spider Gold Trust (GLD)
  • 5% in the Belgium stock market ETF (EWK)
  • 5% in the French stock market ETF (EWQ)
  • 5% in Italy’s stock market ETF (EWI)
  • 5% in Ireland’s stock market ETF (EIRL)
  • 5% in Spain’s stock market ETF (EWP)

From what I understand, if the stock market ETFs, as a group, underperform the combination of gold and bonds, then O’Higgins takes 5 percent from each of the first three indexes above (the two bond indexes and the gold index) and distributes the proceeds to the underperforming country indexes above—considering that those are still the year’s worst performing stock market indexes. If they aren’t, then O’Higgins replaces them with the country stock market indexes that are.

It makes a lot of sense. And it’s intelligently contrarian. So what do you think? Do you like this strategy?

Part 1Part 2Part 3





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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8 Responses

  1. Moneycone says:

    Interesting twist in the strategy of rebalancing. I wonder what was the reasoning behind the countries he chose.

  2. Marco says:

    Hi Andrew,

    This is somewhat like the Harry Browne Permanent Portfolio strategy except that the equity allocation in the MOAR strategy is more granular.

    Marco

  3. RobberBaron says:

    Interesting that he is so strong in gold. Gold has done very well the past year. But I guess if he were committed to a strong entry in some kind of natural resource, GLD didn't do as well as SLV (silver).

    Just for fun, I ran Australia (EWA), Japan (EWJ), Taiwan (EWT), the S&P500 and the FTSE100 against these for the period Apr24 2009-Apr23 2010 in Yahoo. EWA beat the pants off all of them, FTSE was near the top, tied with the S&P500 and Taiwan (EWT). GLD was a poor performer during this 12 month period, not much different than Spain, and SLV was about the same as Taiwan, not as good as FTSE and S&P500. Japan, as ever, lags…

  4. Hey Marco,

    Great eye! You're exactly right. O'Higgins took that strategy and tweaked it.

  5. gibor says:

    Hi Andrew.

    Interesting approach, but what I'm womdering ,

    1. which countries O'Higgins takes in consideration? If for example , the next year worst performing will be stock markets in Mongolia, Egypt and Syria (just an example) – would he switch to those?

    2. Where info about all world stock market performances can be found?

    3. How exactly rebalancing will be working.

    For example: TLT and IEF had return of +5% and GLD -5%.

    EWK and EWP -10% , EWQ , EWI and EIRL – unchanged.

    How in this case rebalancing should be performed?

    From what I understand, he will still take 5% from TLT, IEF and GLD, and will spread it equly etween ll 5 market ETFs? Or I'm wrong?

    4. What action should be done if ETFs, as a group, overperform the combination of gold and bonds?

  6. Hey Gibor,

    I think you've got the idea down. But I believe that he only chooses from first world country index funds. It's going to be interesting to read more about it when his book eventually comes out.

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