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

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:

Higher returns
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 1 – Part 2 – Part 3