If you're an investor, you probably know that one of the most acrimonious arguments going on in the field right now is over whether you really can beat the market. It's a pretty important debate: After all, much of the world's multibillion-dollar investment industry is built on the premise that you can.
One school of thought suggests that stock markets are largely efficient, and trying to choose individual stocks that will outperform the market as a whole is a fool's game. Most of the folks in this camp say the solution is index investing—where you simply buy the whole market, often using exchange-traded funds (ETFs).
On the other side are the stock-pickers. They prefer to invest in a basket of individual stocks. Some have a strategy, such as value or momentum investing. Others, tragically, buy whatever their brother-in-law recommends and end up losing their shirts.
I've spent years trying to figure out which side is right. I tried index investing for a while, building a simple portfolio of ETFs that followed the Canadian, U.S. and international markets, plus a dollop of bonds to lower my volatility. I'm happy to report that it worked just fine—the returns I got were slightly higher than the average for Canadian balanced mutual funds.
But out of the corner of my eye, I was watching the stock-pickers, and wouldn't you know it, some of them seemed to be getting much better results. One in particular was, anyway—a brain on legs with a CFA designation and a PhD in physics named Norm Rothery.
I've known Norm for many years now, and in my opinion, he's one of the best stock-pickers in the country. That's because he takes the emotion out of it. He's spent his career crunching data, reading studies and evaluating what kinds of stocks outperform—and he's proven his theories in the real world time and time again.
I first met him when I was working for another magazine and he was hired to create a custom system for rating stocks. The one he designed evaluated stocks on both value (that is, whether they are trading at a cheap price relative to their fundamentals) and growth (whether they are growing their sales and earnings). His top picks were the ones that got the best marks in both.
That system has been churning away for more than 12 years now, and its performance has been mind-blowing. As of late last year, Norm's picks had shot up by an average of 14.7% a year since 2004, beating the market by more than 10 percentage points a year.
Because of results like that, we decided to hire Norm to create a new stock-picking system exclusive to Report on Business magazine. That system, which we have dubbed the "Megastar Stocks," builds on the existing data in the Top 1000 and debuts in this issue.
Since 1984, the Top 1000 has provided a treasure trove of data for stock-pickers who are keen to roll up their sleeves and jump in. But if you're a lazy investor willing to outsource some of that work, you can let Norm crunch the data for you. Rather than studying the data for 1,000 companies, you can focus in on his shortlist of 20.
There's no magic to this system. The Megastars are simply a subset of stocks with characteristics that have a high correlation with superior performance. These stocks aren't for everyone—they will be volatile and there will be years where they lag the market. But if you want a strategy that at least holds out the hope of outperformance, I would definitely take a look.
Duncan Hood is editor of Report on Business magazine. Send us your feedback at robmagletters@globeandmail.com or tweet us @robmagca