Beating SP500

[ToFI]

Hi Guys,

So, I built a demo portfolio to beat SP500 by picking 67 stocks from SP500 and set them equal weight. I expect this portfolio to beat the SP500 by around 3% to 4% per year on average over the next few years. It's less certain more than 5 years if I don't touch the portfolio since SP500 constantly adds new and smaller companies. Nonetheless, it'll out perform for the next 5 years. It out performed SP500 by 4.9% so far in 2020.

My main method is pick the best companies with the best track record and potential future returns from the index and set them equal weight initially. No re-balancing. I repeat. No rebalancing except when a single position get way too big. With the main ideas above, it's possible to pick a stock in just a few minutes. I've shared my ideas to many places and the responses are not good. (Hint: MMM is the worst place for enterprising stock pickers. ). A lot of indexers out there get very angry if I tell them I can beat the index with minimum effort because it's outside of their realm. They use all kinds of reasons why I can't beat it: I am not a pro, confirmation bias, most people can't beat it, I am not warren Buffett. Logically speaking, above mentioned reasons cannot be the reason I can or cannot beat market. The only factor is myself. They won't believe it. They don't even know me personally. This forum has many intelligent people.I like this forum so far. It's very tolerable for different ideas. I expect more people will get it.

Some reasons why this portfolio will beat SP500: It contains the best companies in terms of track record, growth rate, long term staying power PLUS because the portfolio is equal weight. . When all stocks have above average attributes and I set equal weight. Each company is allowed to grow freely. Winners keep winning. Losers become insignificant in the long term. The result will be satisfactory. The cap weighted design of index fund is creating more risk. It over weights in the top 10 companies and under weights in many potential fast growers. But being equal weight alone is not a recipe for over performance, the above average attributes of individual companies are the key. There's an equal weight SP500 ETF which under performs cap weighted version.

I've made a Google drive spreadsheet: https://docs.google.com/spreadsheets/d/ ... 1038524919

[ToFI]

I don't know how to fix the formatting. Here's a snapshot of the symbols and # of shares. I won't change them.

Name
Symbol
Share
Adobe Inc.
ADBE
6.06
salesforce.com, inc.
CRM
12.30
PayPal Holdings Inc
PYPL
18.49
Accenture Plc Class A
ACN
9.50
Broadcom Inc.
AVGO
6.33
American Tower Corporation
AMT
8.70
Automatic Data Processing, Inc.
ADP
11.73
Intuit Inc.
INTU
7.64
S&P Global, Inc.
SPGI
7.32
Fiserv, Inc.
FISV
17.30
Crown Castle International Corp
CCI
14.07
Prologis, Inc.
PLD
22.44
ServiceNow, Inc.
NOW
7.08
Intercontinental Exchange, Inc.
ICE
21.61
Air Products and Chemicals, Inc.
APD
8.51
Equinix, Inc.
EQIX
3.43
Aon plc
AON
9.60
Sherwin-Williams Company
SHW
3.43
Waste Management, Inc.
WM
17.55
Lam Research Corporation
LRCX
6.84
Progressive Corporation
PGR
27.63
Moody's Corporation
MCO
8.42
Dollar General Corporation
DG
12.82
Roper Technologies, Inc.
ROP
5.65
TransDigm Group Incorporated
TDG
3.57
IHS Markit Ltd.
INFO
26.54
Ingersoll-Rand Plc
IR
15.05
Amphenol Corporation Class A
APH
18.48
WEC Energy Group Inc
WEC
21.68
KLA Corporation
KLAC
11.23
Verisk Analytics Inc
VRSK
13.39
Microchip Technology Incorporated
MCHP
19.10
Digital Realty Trust, Inc.
DLR
16.70
American Water Works Company, Inc.
AWK
16.28
Ball Corporation
BLL
30.93
ANSYS, Inc.
ANSS
7.77
Cintas Corporation
CTAS
7.43
Paycom
PAYC
7.55
MSCI Inc.
MSCI
7.75
Synopsys, Inc.
SNPS
14.37
ResMed Inc.
RMD
12.91
AMETEK, Inc.
AME
20.05
Copart, Inc.
CPRT
21.99
Mettler-Toledo International Inc.
MTD
2.52
CDW Corp.
CDW
14.00
Republic Services, Inc.
RSG
22.31
Align Technology, Inc.
ALGN
7.17
First Republic Bank
FRC
17.03
Keysight Technologies Inc
KEYS
19.49
Fortinet, Inc.
FTNT
18.73
Mid-America Apartment Communities, Inc.
MAA
15.17
Xylem Inc.
XYL
25.38
Gartner, Inc.
IT
12.98
Extra Space Storage Inc.
EXR
18.94
NVR, Inc.
NVR
0.53
Atmos Energy Corporation
ATO
17.88
MarketAxess Holdings Inc.
MKTX
5.28
Old Dominion Freight Line, Inc.
ODFL
10.54
Jacobs Engineering Group Inc.
J
22.26
IDEX Corporation
IDXX
7.66
Nasdaq, Inc.
NDAQ
18.67
Arista Networks, Inc.
ANET
9.83
Allegion PLC
ALLE
16.06
Jack Henry & Associates, Inc.
JKHY
13.73
Everest Re Group, Ltd.
RE
7.22
Globe Life Inc.
GL
19.00
W. R. Berkley Corporation
WRB
28.94

[jacob]

What's your combined beta?

[ToFI]

I can get it from Google finance. For this demo portfolio, average beta is: 0.907
So less than 1 means this portfolio is less volatile than market. It makes sense. With this investment style, the portfolio drops less in bear market and rises more in the bull market. It results in long term out performance. This is possible because for good stocks, there are more buy and hold investors followings and less speculator followings in both bull and bear market.

[BeyondtheWrap]

Why specifically 67 stocks?

[Toska2]

To avoid the 68 joke.

[Nomad]

Personally, I think that is a lot of stocks to track - how did you pick them, did you use Stocopedia or similar software?

[ToFI]

Why 67 ? I don't have a target number of stocks. I guess I could use 30 stocks. But my goal is the smooth out the return and not to worry about individual stock not meeting expectation. It's like the resolution on a computer monitor. The higher it is, the better the graphic looks.

@Nomad, I use spreadsheet to track all stocks. At this number of stocks, it's like an index fund. After I picked them, I don't follow too much on individual news. The major work is capital gain documentation when I sell stocks once a year. This portfolio is a virtual portfolio. My own portfolio has some overlap but contains stocks outside of SP500.

I used Yahoo finance and company website to do the research. I look for signs of good company to invest in: 1.Consistent and smooth long term share appreciation and 2. consistent revenue growth for past 5 years. #1 is a must. #2 can have exceptions because a company can have flat revenue growth for a few years and then grows rapidly for next few years. Most of time, it has to meet both. I also look at the product/service it's offering to estimate its long term demand stability.

[Lucky C]

pick the best companies with the best track record and potential future returns from the index and set them equal weight initially.

Picking only the stocks with the best future returns is certainly a good way to beat the S&P 500.

[basuragomi]

If going off of historical performance, I always thought that a trivial answer would be to buy a S&P500 index fund then double down on margin. Most years you would beat the index!

[ToFI]

If going off of historical performance, I always thought that a trivial answer would be to buy a S&P500 index fund then double down on margin. Most years you would beat the index!

It's very tempting to use leverage but it's not good to lose sleep at night. Why not multiple 10% by 1.5 and get 15%? The biggest risk is you risk starting over from 0 again.

https://www.cnbc.com/2018/02/26/buffett ... worst.html

[ToFI]

Date Feb 27, 2020:

2020 YTD performance:
Virtual DIY fund (made of stocks from SP500): 2.08%
SP500: -2.95%

Out performance: 5.03%

[ToFI]

It's interesting to see how a subset of SP500 performs vs SP500 in extreme volatility.
Note: the precise weighted beta of this portfolio should be 0.87. Previously, I just added them together and divided the sum by 67. The correct formula is sum of [(individual beta)X (Individual stock value/total portfolio value) ]

Date March 03, 2020:

2020 YTD performance:
Virtual DIY fund (67 stocks): -0.23%
SPY(SP500 ETF): -6.42%

Out performance: 6.19%