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The 'World Dominator' Triumph: More Return Without More RiskBy
Friday, September 12, 2014
The results are in...
If you want a low-risk way to make big returns in stocks, buy great business at good prices. Buy "World Dominators."
For the past eight years, I've told my readers (and anyone else who would listen) to buy World Dominator stocks.
World Dominator stocks are the biggest, best businesses in the world. They gush free cash flow, and have strong balance sheets and durable competitive advantages. They pay the world's safest dividends. When you think of World Dominators, think of businesses like Coca-Cola, ExxonMobil, Intel, and Wal-Mart.
Owning these businesses allows you to do something you're not supposed to be able to do. They allow you to beat the market with less risk…
Several months ago, my research partner Mike Barrett created a spreadsheet containing the performance of each World Dominator stock we've recommended, assuming an initial investment of $5,000 per stock.
To compare the results with the overall market, Mike also assumed an equal $5,000 investment in the S&P 500 at the time of each new World Dominator recommendation.
We've recommended a total of 18 World Dominators. So Mike's model assumed 18 x $5,000 = $90,000 invested in World Dominators and $90,000 invested in the S&P 500 on the same day as each new recommendation.
Through the end of last year, the World Dominator portfolio would have been worth $149,232 (excluding trading costs), an increase of 66%. The S&P 500 portfolio would have been worth $127,965, an increase of 42%.
To measure the risk of World Dominators versus the S&P 500, we'll use "beta." Beta doesn't technically measure risk. It just measures the size of a stock's "wiggles" compared with the S&P 500's.
For example, a beta of 1.0 means a stock's price wiggles the same amount as the S&P 500. A beta of 1.5 means it wiggles 50% higher and lower than the S&P 500. A 0.5 beta means a stock wiggles half as much as the market. Most investors hate it when stock prices wiggle around too much, soaring up only to plunge back. Our 18 World Dominators had an average beta of 1.03, just 3% more stock-price wiggle than if you had invested in the overall market, perhaps through an S&P 500 index fund.
World Dominators earned a 57% higher return than the S&P 500. And as measured by beta, they required you take just 3% more risk.
Based on experience, I believe World Dominators are LESS risky than the overall market, not more (as indicated by beta). Think about it... The S&P 500 has 500 stocks in it. We picked just 18 stocks and achieved nearly the same beta... with a much higher return.
This is the triumph of World Dominator stocks. Real investors who followed our advice and put real money into World Dominators trounced the overall market. And they did it without taking more risk.
Finance professors, advisors, and most brokers will tell you that to get market-beating returns, you have to take more risk. That's not true at all... and the triumph of World Dominators proves it. When you buy the world's best businesses at good prices, you get big returns... without taking big risks.
Good investing,
Dan Ferris
Further Reading:
A few months ago, Dan shared one of his favorite World Dominator opportunities with DailyWealth readers. "We've made a lot of money in this company," he writes. "But it's still cheap... which means we'll make a lot more in the coming years." Get all the details right here.
And earlier this week, Dan shared a hidden source of huge, safe yields. "If you want to make the biggest, safest gains over the long term," he writes. "Don't make the common mistake of looking at dividend yields in a vacuum." Find out what else you should consider here.
Market NotesA LOOK BACK AT YOUR 2009 INVESTMENT DECISIONS Today's chart shows how investing with the very recent past in mind can lead to weak returns.
Five years ago, it was nearly impossible to convince folks to buy stocks... but easy to convince them to buy gold. The 2008/2009 credit crisis was fresh on people's minds. Since people always like to invest based on recent history, they wanted to own gold – the "crisis asset" – instead of stocks. They expected another crisis to strike very soon.
The chart below shows the results of these approaches. It plots the performance of stocks (blue line) over the past five years with the performance of gold (gold line) over the same time frame.
As you can see, investing with a "better times ahead" mindset has been much better than investing with a "horrible times ahead" mindset. Stocks have returned more than 90% over the past five years... while gold has returned less than 30%.
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