TimesOnline:How to beat the markets: invest in dull firms

How to beat the markets: invest in dull firms
By Patrick Hosking, Investment Editor
TimesOnline

ECONOMISTS at the London Business School have come up with a “system” for beating the overall stock market that has worked for more than a century: pick boring stocks.

Dull companies with seemingly slow growth prospects have spectacularly outperformed racier-looking companies over the past 105 years.

A sum of £100 invested in 1900 in low-growth and therefore high-yielding shares would have grown to £6.9 million today, assuming no tax or dealing costs and all dividends reinvested. The same amount invested in high-growth, low-yielding companies would have grown to only £296,000 over the same period.

Even after adjusting for inflation, the boring stocks strategy would still have produced a 1,130-fold real return for the great-great-grandchildren of the original investor.

Paul Marsh, Professor of Finance, said that the trend had persisted on and off for the entire period and applied in other countries, too. “It’s compelling and intriguing and I wish I had a better explanation for it.”

American academics Fama and French first identified the trend in the 1980s and argued that it was explained by the risk premium demanded of high yielders. Professor Marsh prefers the explanation that irrational exuberance has persistently persuaded investors to ignore the lessons of history and buy into high-growth stories.

“Growth is a very easy strategy for fund managers to explain to clients. But buy a dog that continues to be a dog and you risk just looking stupid.”

In conjuction with ABN Amro, the LBS economists also published fresh research that found absolutely no evidence that fast-growing countries produced higher stock market returns than low-growth ones. Investors piling into China, India, Russia and Brazil might take note.