Ross Grant has just inherited the “Beat the TSX” model. Lucky guy. After 28 years of beating the TSX, David Stanley, Ph.D. and long-time contributing editor to the Canadian MoneySaver, is retiring from his post and passing the torch to Grant, who followed the model for years and achieved financial independence early in life. This is a significant milestone, since Beat the TSX has proven itself to be a successful investment model, albeit an extremely boring one. Boring because the concept is simple and the application easy for any investor to create wealth in the market. In this case, boring = good.
At a Toronto Money Show presentation, David Stanley explained the history of where and how Beat the TSX originated:
In 1991 Michael O’Higgins wrote a book called Beating the Dow. His “Dogs of the Dow” uses an emotion-free method to select high-dividend stocks. From 1974 till 2012 (38 years) BTD has averaged 11.7% vs. 9.1% for the S&P 500 index, an increase of 29%. O’Higgins’s book became an instant investment classic and served to get me interested in dividend investing. After I took early retirement in 1995 I looked at the stock price and total return data for the TSE 35 blue-chip index. I was struck by how much the total return index with its reinvested dividends had outperformed share price appreciation. I adapted the structured decision-making process of BTD to the TSE and wrote my first “Beating the TSE” column in 1996.
In the presentation, David Stanley explained how to implement the Beat the TSX strategy: “The list of S&P/TSX 60 stocks is ordered from high to low by dividend yield, the top 10 stocks are then ordered from low to high price. Stocks are purchased in equal dollar amounts and held for one year or more. Investors build up a portfolio of high-quality stocks purchased at a reasonable cost. No secret sauce, hocus pocus, animal spirits, etc.”
BTSX is both a contrarian and passive strategy: buying into those high-dividend yields implies that those stocks have declined in the market in the current year, and will theoretically revert to their means since they are Canada’s largest and most prominent companies by market capitalization. The BTSX strategy has racked up high annual compound returns, and yes, it has actually beaten the market. Over its 20-year history, BTSX has achieved a 12.26% compound annual return versus the index’s 9.83%. BTSX beat the index by 25%. However, as David explains in his final column for Canadian Money, “BTSX: The Last Hurrah,” this data only reflects the annual average total return. “The strong point of the BTSX system is the influence of compounded reinvested dividends. Those results are much more convincing: $1,000 invested in both the BTSX portfolio and the total return index (benchmark) would now be worth $18,056 for our portfolio versus $10,409 for the index.”
Ross Grant will carry on the BTSX tradition going forward and report its progress. Peter Hodson, owner and editor of Canadian MoneySaver, said to Ross in the editorial piece for David Stanley’s final issue: “Ross, you have some big shoes to fill. But since David hand-picked you for the task, we are sure you will do just fine.” Peter may well be right: at 22, Ross calculated what it would take to retire early, and 21 years later, he reached his goal of financial independence at age 43.
Beat the TSX is a strategy that you can easily employ. But before you do, Ross has some additional refinements to the BTSX model that you should follow.
Blue-chip Stocks: stocks that contain certain characteristics that denote stability: large size, long history, reliable products or services, dividend increases, solid reputation or brand perception, and so on. Blue-chip stocks can be concentrated in banks, utilities, and telecom. An example would be Bell Canada.
TSX 60: a stock index that contains 60 large publicly traded Canadian companies from the S&P TSX index. This index is the primary source for the BTSX model.