How We're Getting 15% A Year on ASX Shares.
Richard Hemming
Why a value philosophy and stock picking delivers. Over the past two years, our Blue Chip Value Portfolio has returned 14.5% a year, almost double the benchmark S&P/ASX 200 Index’s 8.3%.
As uncertainty ratchets up in the global economy, this outperformance should continue. Investing in value and being patient has never been more important, which is why following our advice will make you a lot of money over the long term.
Check out our stock analysis on our top 5 outperforming stocks as well as our Research Rundown of over 40 stocks from Australia's blue-chip stocks, in this issue, which includes 3 updated BUY recommendations.
Our BCV Portfolio’s strength in the past year has been primarily due to the two super sectors it's highly leveraged to: banks and resources, which have been rebounding to differing degrees.
The Portfolio is based on a value philosophy of investing in companies that have been out of favour, precisely because they weren’t growing strongly, but have solid fundamentals, being cash flow positive, with stable or rising dividends, and with strong balance sheets.
This contrasts to most funds, which have conspicuously underperformed. This includes both the index trackers like Vanguard and the actively managed funds that have a “growth” bias, which is momentum-based.
Learn more about Investing in Blue Chips and start investing successfully in ASX Blue Chip stocks.
The Value of Patience
That momentum has well and truly reversed. But it’s worth remembering that it would have been tempting to bail out of the banks when they were getting hit hard only 6 months ago and switch to growth stocks such as the BNPL operators.
On the one hand, this highlights the patience you need, but also how quickly markets can change. Momentum can go both ways! Value is not for turning.
When you invest solely in stocks that are doing well, the very source of this outperformance sows the seeds of its own demise. This is the classic problem of following the herd.
The challenge investors face is not to assume realised returns are also expected returns. When your stock is doing well, you think it will do well forever.
In reality, when the stock price goes up, you are accepting less and less reward for the same level of risk.
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How many stocks should I pick?
The benefits of stock picking and creating a well-diversified portfolio are rarely, if ever, underestimated. The ASX 200 Index has too much diversification for what you need.
You can adequately reduce your risk for future growth by owning 20 stocks.
Owning stocks enables you to stick with winners and select those you understand and that match your values.
The bottom line is that the biggest factor in your return is the price you pay. You might be sitting on lower average stock prices than six months ago but you do have the comfort of dividends, which is what Blue Chips provide. Your cash yield is probably better than when you invested.
Finally, owning quality Blue Chips does protect you from the ravages of inflation. These are companies that operate in monopolistic industries and have significant pricing power. These are the companies that are causing inflation! Sure, they are passing on increasing costs, but their profit margins are being maintained alongside nominally rising revenues.
Three Attributes Blue Chip Value Looks For In A Company.
The company is not expensive on a Price to Book ratio. You are simply looking at the share price divided by the net assets per share. This methodology comes up with the same result as the simple PE or price earnings ratio but is preferred because it is more easily comparable across industries. This involves some work because you are stripping out a lot of accounting related non-cash profits and expenses.
Strong operating profitability. Under the Radar focuses on cash flow return on assets because it’s similar to Return on Assets but is more focused on cash flow. Once again we are stripping out the non-cash accounting related effects to get back to what a company is really getting as a return from its past investments.
At the big end of town Under the Radar avoids companies that are heavily reinvesting excess cash flow or free cash flow back into the business. We don’t like big “capex humps” coming up where a company is set to spend huge amounts on assets.
Read more about Investing in Small Caps. Why we picked these ASX Small Cap gems and their outstanding performance.
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