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“If you want to beat the S&P 500, starting thinking of the index as a filter and not as a benchmark. It’s a starting line; it’s not the finish line.” 

                                                      – Andrew D. Ellis, Founder, ThinkingLonger, LLC

Every path on the road to being a Data Driven Investor is littered with mistakes, assumptions, successes and failures and the road taken is different for each and every one of us.

I came to it late in life and I didn’t even intend to start down this road when I began what seemed to me to be a different kind of project.  After all, I was 65 years old and a retired lawyer. I had no training in investment analysis and, while I had “enough” to retire, I certainly did not think of myself as any kind of expert.

But, three years ago, when one of my children was at her first job and was opening a 401(k) account, I began to think about how I could help her invest for the very long term.  Not for five or ten years but for twenty-five years and beyond.  It wasn’t a giant leap to realize that her peers needed the same help that she did.

And I already knew the common wisdom.  If you’re not Warren Buffett, just invest in a S&P 500 Index fund and ride with the economy.  After all, Buffett had dared the hedge fund industry to beat that index over ten years and the only fund that had taken the dare had given up after three. Long Now Foundation

I did have one advantage.  As a lawyer, I had spent years researching the wisdom of others. Now, I just had to find some guidance.  I had a Eureka moment when I read a quote from Peter Lynch.

“I think you have to learn there’s a company behind every stock and there’s only one real reason why stocks go up.  Companies go from doing poorly to doing well or small companies grow to large companies.”

At the end of the day, the only way that a company manifests its improvement is in the price of its stock.  It’s the price that counts.  We buy stock with the expectation/hope that its price will go up.  Nothing else really matters.

At that point, I began to look at the S&P 500 as a filter and not as a target to be beaten.  Perhaps there was a handful of companies already included in the S&P 500 with a ten year history of at least 20% price appreciation that might be companies that were “doing well” and/or had grown from small to large.  It was an arbitrary appreciation rate.  But it was also pretty unarguable that price appreciation at that rate might be a good basis for investment.  Of course, guessing was no substitute for analysis.

In thinking through what I wanted to test, other excluding (and equally arbitrary) factors came to mind and I designed my testing to incorporate them.  No energy stocks or utilities (too vulnerable to non-market forces) and no counter-cyclicals (I wanted the wind at my back.). I also needed to add some selling criteria – basically a price appreciation threshold below which any given position would be sold. I then back-tested the results over a 25 year period.  Here’s the projected results of a $25,000 investment made each year from 1995 to 2019 in a bundle of stocks that satisfied my purchase and sale criteria (i.e., revising each year’s investment based on the identified criteria).

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Don’t get me wrong.  My methodology does not beat the S&P 500 each year.  Rather, on a cumulative basis, assuming a tax-free environment (like a Roth), and reinvestment and compounding, it consistently beats the S&P 500 over extended periods of time.  And that was my goal.

In fact, once I started thinking longer – much longer — it wasn’t a giant leap to realize that incrementally better performance over an S&P 500 Index fund could help a lot of people. ThinkingLonger.com is the result of this effort.  If there’s enough interest, we will share our long-term recommendations for free.  (After all, who would pay an average Joe like me for financial advice?)

Of course, we’re “eating our own dogfood.”  I’ve put some money to work following the ThinkingLonger strategy.  Additionally, our research has led us to methodologies for our day-trader friends and an options strategy that we might initiate.  It’s all just too early to tell.

For what it’s worth, I never expect to hit a home run with this approach.  I’m happy with singles and doubles year in and year out, with a certain amount of strike-outs, fly-outs and walks every year.  (After all, the last .400 hitter in Major League Baseball was Ted Williams in 1941 – some eighty years ago — and, with that average, he only got a hit four out of every ten at-bats.).  The goal is to make the S&P 500 an ally in finding a new kind of winner – actually a new bundle of winners – over extended periods of time.

Every now and then, we’ll share our progress here at DDI and welcome your thoughts and contributions.

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