The winning strategy is: do nothing

A disciplined approach, so the professionals always tell us, is the key to success in investment. Now, thanks to James O'Shaughnessy, an American investment adviser, we have a splendid new example to show how successful a simple method, consistently applied, can be. His research into stock selection methods has unearthed the activities - perhaps non- activities would be a better word - of the Lexington Corporate Leaders Trust.

This trust was first set up in 1935. Its objective was to hold 30 shares. The only investment criterion was that they should be leaders in their industries at the time. The number of shares the trust bought was exactly the same for each company, regardless of the price. And just to make the job of running the portfolio even easier, the trustees were forbidden to change the shares to account for the fluctuating fortunes of the companies they originally selected.

You could not, in other words, find an investment method that was any simpler or - seemingly - less rational. Many investors, we know, tend to overtrade, but leaving a portfolio completely immune to anything that happens in the outside world seems to be taking the principle of passive investing too far.

Yet guess what? Over the last 20 years, this do-nothing portfolio, which now holds only 23 shares, has consistently outperformed the main US market index, the S&P 500. And what is more, the trust has beaten all but 15 per cent of conventionally managed funds in the US.

Luck or judgment? Mr O'Shaughnessy has no doubts. His conclusion reinforces the view that most active investment strategies simply do not deliver what they promise. No fewer than 80 per cent of mutual funds (the US equivalent of our unit trusts) fail to beat the market index over any reasonable time frame.

It is no surprise, in the circumstances, that indexing - buying a fund whose objective is simply to match the overall movement of the stock market - is becoming increasingly popular, especially with institutional investors. In the United States, the amount of money managed this way grew from $10bn in 1980 to $250bn a decade later. (You may have seen that BZW, the UK investment bank, which is the market leader in the field, says in future it will do no active fund management at all.)

What makes Mr O'Shaughnessy's conclusion important is the wealth of data that lies behind it. He is the first researcher to have been given access to Standard & Poor's entire database of stock market prices stretching back 43 years. The power of modern computing means he has been able to crunch these numbers to find out, in a systematic way, which kind of shares - and which type of stock selection methods - have done best over that period.

For those who like numbers, the result is a statistical treat. There is not space to do justice to all Mr O'Shaughnessy's findings, but here are just a few, to give a flavour:

The surest and most consistent way to lose money over time is to buy the most popular shares in the market - ie those with the highest p/e ratios, or lowest dividend yield, and so on. High p/e ratios are particularly dangerous. The stocks with the highest p/e ratios underperform the market nearly 90 per cent of the time.

The value indicator that works best over time is the price to sales ratio. (This, ironically, is one indicator which is rarely used on this side of the Atlantic by stock market analysts). Shares selected on the basis that they have the lowest price to sales ratio consistently outperform the market.

Generally speaking, picking shares on a "value" basis is better than hunting for "growth" shares, but the best strategies combine the best of both methods. Relative strength (how shares have performed relative to the market in the most recent past) is an important component of nearly all the most successful strategies over time.

Of scores of different strategies studied, a mixed strategy, half in large stocks with high dividend yields and the other half in smaller companies with persistent earnings gains, low price to sales ratios and good relative strength provided the best and most consistent returns after adjusting for risk.

But as with the Lexington Corporate Leaders trust, it is the implications that are most important. Not for nothing have fund managers and stockbrokers been awaiting his results with some trepidation. The findings are a pretty devastating indictment of active fund management techniques that underlie the industry's central marketing proposition.

But of course, as with so many things, investors only get what they themselves ultimately want. Mr O'Shaughnessy's conclusion on the fallibility of the individual investor is also severe, but equally incontrovertible.

"Successful investing runs contrary to human nature" he concludes. "We make the simple complex, follow the crowd, fall in love with the story, let the emotions dictate decisions, buy and sell on tips and hunches, and approach each investment decision on a case-by-case basis, with no underlying consistency or strategy."

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
'It will be no wonder if people lack the enthusiasm to save taxfree,' says one expert. But there are ways to beat low rates on cash Isas

How to make the most of Isas: You can save more money now, the returns are tax-free and the rules are flexible

Rob Griffin sees how you can surmount the one big obstacle

Growing number of women under the age of 35 are turning to online gambling

Online gaming is changing the profile of victims, who see it as an answer to difficult relationships but sink deeper into trouble

Ethical investments: Lack of awareness means investors are supporting industries they oppose

Many of us have good intentions now but either we don't switch accounts or we back 'nasty' activities without realising
Payday lenders fail to recognise customers in financial difficulty, the FCA said

Payday lenders accused of unfair practices by watchdog

The Financial Conduct Authority found non-compliance in all reviewed firms

Hooray, you're going to live longer! But what should you do to celebrate?

Pension expert John Lawson talks on why improved longevity is something to plan for carefully

Pension freedom: Steve Webb answers your questions on the big shake-up

The new freedoms arrive in April but many of you have told us that you see problems as well as opportunities. The pensions minister Steve Webb responds
Pension Minister Steve Webb

There are 'dark corners' of the investment and pensions industry, says Pensions Minister

The DWP and the FCA have joined forces to investigate transaction charges in occupational pension schemes

Scottish Power was found to have unacceptably long call waiting times

Scottish Power hit with sales ban by regulator

The company was found to have unacceptably long call waiting times

This phoenix rose from the stage at the London Olympics. The insurer grew out of zombie life insurance funds

Phoenix Life: Chance of a refund for overcharged policyholders has risen

A retired adviser got his money back from the insurer after claiming he had been overcharged. Thousands of others may have a strong case
Expect a new wave of fishing expeditions by fraudsters now we can invest our life savings

Cold callers and your pension: watch out for dangerous boiler room scams

Sean O'Grady received a cold call last week that was much more sinister than normal. Yes, someone wants to get their hands on his pension...

Fuel poverty could claim 100,000 lives over next 15 years, warns energy charity

The NHS is currently bearing a yearly burden of approximately £1.5bn treating cold-related illnesses every winter

MPs call for Equitable Life policyholders to be paid £2.8bn owed by government

Hundreds of thousands of people's policies were hit when the mutual insurer almost collapsed at the turn of the century

The elderly woman's family discovered the mistake

DWP criticised after it left a pensioner £26,000 worse off

The Department for Work and Pensions has been slammed after a series of cock-ups left an elderly pensioner £26,000 worse off.

  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

    £18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

    Ashdown Group: Learning and Development Programme Manager

    £35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

    Recruitment Genius: Claims Administrator

    £16000 - £18000 per annum: Recruitment Genius: A position has arisen within th...

    Ashdown Group: Development Manager - Rickmansworth - £55k +15% bonus

    £50000 - £63000 per annum + excellent benefits : Ashdown Group: IT Manager / D...

    Day In a Page

    The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

    The saffron censorship that governs India

    Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
    Prince Charles' 'black spider' letters to be published 'within weeks'

    Prince Charles' 'black spider' letters to be published 'within weeks'

    Supreme Court rules Dominic Grieve's ministerial veto was invalid
    Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

    How did fandom get so dark?

    Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
    The galaxy collisions that shed light on unseen parallel Universe

    The cosmic collisions that have shed light on unseen parallel Universe

    Dark matter study gives scientists insight into mystery of space
    The Swedes are adding a gender-neutral pronoun to their dictionary

    Swedes introduce gender-neutral pronoun

    Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
    Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

    Disney's mega money-making formula

    'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
    Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

    Lobster has gone mainstream

    Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
    Easter 2015: 14 best decorations

    14 best Easter decorations

    Get into the Easter spirit with our pick of accessories, ornaments and tableware
    Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

    Paul Scholes column

    Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
    Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

    The future of GM

    The greenhouses where Monsanto 'plays God' with the future of the planet
    Britain's mild winters could be numbered: why global warming is leaving UK chillier

    Britain's mild winters could be numbered

    Gulf Stream is slowing down faster than ever, scientists say
    Government gives £250,000 to Independent appeal

    Government gives £250,000 to Independent appeal

    Donation brings total raised by Homeless Veterans campaign to at least £1.25m
    Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

    The most borrowed book at Bank of England library? Oh dear

    The book's fifth edition is used for Edexcel exams
    Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

    Cowslips vs honeysuckle

    It's the hunt for UK’s favourite wildflower
    Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

    Did a botched blackmail attempt help Cyril Smith escape justice?

    A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss