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2013 AAII STOCK SCREENS REVIEW: the Factors Behind the Big Returns JJanuaryanuary 22014014 VVOLUMEOLUME XXXXVI,XXVI, NNo.o. 1 American Association of Individual Investors 2013 AAII STOCK SCREENS REVIEW: The Factors Behind the Big Returns Also Inside: The Conditions That Have Led to Small-Cap Outperformance How Long-Term Care Insurance Can Protect Your Portfolio Purchase Guidelines for Following the Model Shadow Stock Portfolio Access All 65 Stock Screens Online If you haven’t visited AAII.com recently, please take some time today to see what the website offers. Plenty of helpful resources are available at your fi ngertips to aid you in the investment process. This issue of the AAII Journal includes our year-end Figure 1. Stock Screens Performance History Page stock screening review on page 7. The article offers an in- depth look at the best-performing screens we track on AAII. com. In addition, we take a look at certain factors that have been consistent to winning approaches through the years. AAII offers all 65 screening methodologies online to members. Screening methodologies are available across all different styles and strategies, and there should be at least a few screens that suit your personal investment beliefs and risk profi le. Each stock screen is accompanied by an overview explaining the methodology and rationale behind the strategy. In addition, you can also see the screening criteria used and a list of passing companies for each month. Though we originally created these screens as a way to track investment performance for different strategies across various market cycles, it can defi nitely be used as a “watchlist” of stocks. Annual performance for each of our screens is reported online in the Performance History tab (Figure 1). In addi- tion, you can download the monthly performance for our screens going back to 1998. We also offer a risk and return Figure 2. Stock Screens Risk & Return Page spreadsheet with an expanded version that can be downloaded as an Excel spreadsheet (Figure 2). The risk and return spreadsheet is very telling, presenting risk-adjusted returns as well as best- and worst-performing months for each screen. In addition, the page and downloadable spreadsheet show bull- and bear-market returns. If you are interested in stock screens, we encourage you to read the year-end stock screening review on page 7. Additional resources that can help you get started are available online for all AAII members at www.aaii.com/ stock-screens. Finally, for investors who want to create their own screens, perform additional fundamental analysis, and see weekly instead of monthly lists of passing stocks, AAII offers Stock Investor Pro, an advanced stock screener and research database (go to www.aaii.com/stock-investor-pro for more information). To log into AAII.com, simply type in your 10-digit AAII member number (from the mailing label on your AAII Journal) for both Login Name and Password when prompted. January 2014 JANUARY 2014 Table of Contents Volume XXXVI, Number 1 EDITORIAL STAFF Vice President, Editor: Charles Rotblut, CFA AAII Stock Screens Managing Editor: Jean Henrich 2013 Stock Screens Review: The Year of the Bulls ............................. 7 Production Editor: Andrew Lautner By Joe Lan, CFA Editorial Assistant: Kate Peltz More than 40 of the 65 screens tracked on AAII.com beat the S&P 500 last year. Plus, two new risk measures are presented. Chairman: James B. Cloonan, Ph.D. Beginning Investor: Determining How Much to Allocate to Each Investment .......... 16 Vice Chairman: John Markese, Ph.D. By Charles Rotblut, CFA President: John Bajkowski Allocate by the percentage of portfolio dollars, not by the number of shares. Senior Financial Analyst: Wayne A. Thorp, CFA Assistant Financial Analyst: Z. Joe Lan, CFA Stock Strategies EDITORIAL POLICY Exploiting the Relative Outperformance of Small-Cap Stocks .......... 17 It is not the policy of the AAII Journal to By John B. Davenport, Ph.D., and M. Fred Meissner promote any specifi c investments or techniques of analysis. The opinions of authors are their Small-cap stocks outperform large-cap stocks during periods of eco- own and not necessarily those of AAII. It is the nomic expansion and can deliver excess returns when a sector rotation strategy is used. editorial opinion of the Journal that no one area of investment is suitable for all investors and that no single method of evaluating investment opportuni- Trading Strategies ties has proven to be successful all of the time. To Trend or Not to Trend .............................................................. 21 AAII is not a registered investment adviser or By Ray Rondeau a broker/dealer. Readers are advised that articles Price action is related to and infl uenced by the technical landscape are provided solely for informational purposes of the charts, but looking at additional factors, including the fundamentals, can and should not be construed as an offer to sell or provide added insight. the solicitation of an offer to buy securities. The opinions and analyses included herein are based on sources believed to be reliable and written in Insurance Products and Annuities good faith, but no representation or warranty, Long-Term Care of Your Personal Finances ................................... 25 expressed or implied, is made as to their accuracy, By Christine Fahlund, Ph.D., CFP completeness, timeliness, or correctness. Neither Long-term care covers the costs of assistance with daily living activities we nor our information providers shall be liable and can protect your fi nancial stability. Pay attention to a policy’s condition triggers for any errors or inaccuracies, regardless of and elimination periods. cause, or the lack of timeliness of, or any delay or interruptions in, the transmission thereof to the users. All investment information contained herein Insurance Products and Annuities should be independently verifi ed. Life Insurance Cash Value: A Practical Discussion .......................... 29 Past performance is no guarantee of future By Peter Katt results. Investment information provided may not be appropriate for all investors. Investment Borrowing against or withdrawing the cash value of a policy will information is provided without consideration of reduce the death benefi t and could put the policy at risk of lapsing. your fi nancial sophistication, fi nancial situation, investing time horizon, or risk tolerance. Readers are urged to consult with their own independent AAII Model Portfolios fi nancial advisers with respect to any investment. Model Shadow Stock Portfolio: Purchase Guidelines and Rule Changes ................................................................................ 32 The AAII Journal (ISSN 0192-3315) is pub- By James B. Cloonan lished monthly by the American Association of Guidelines regarding price action and news are discussed, as well as Individual Investors. For information or to notify a higher market capitalization limit and the latest portfolio changes. of a change of address, contact AAII at 625 N. Michigan Ave., Suite 1900, Chicago, Illinois 60611, Departments (312) 280-0170, (800) 428-2244, www.aaii.com. Please use mailing label or member number when Editor’s Note .........................................2 Briefl y Noted ..........................................4 corresponding. POSTMASTER: Send address AAII Investor Surveys .............................3 Letters ...................................................6 changes to AAII, 625 N. Michigan Ave., Suite 1900, Chicago, IL 60611. Subscription rate: $49.00 per year. Add $15.00 to subscription for delivery outside the U.S. The AAII Journal is a registered trademark of the American Association of Individual Investors. © 2014 by the American Association of Individu- al Investors and its licensors. All Rights Reserved. Printed in the U.S.A. Editor’s Note The fi rst issue of the AAII Journal was published 35 years ago. On the inaugural cover were simply the words: “The American Association of Individual Investors is an independent nonprofi t corporation formed for the purpose of assisting individuals in becoming more effective manag- ers of their own assets through programs of education, information and research.” (The second issue featured a photo of the Chicago Board of Trade. In recognition of you have been member for over 30 years or a member for the Journal’s start, a more current photo appears on this less than a year, we hope you have benefi ted from all of month’s cover.) the resources AAII provides, including the AAII Journal. If Many magazines have come and gone since the fi rst so, please tell a friend or a family member. As a nonprofi t AAII Journal was published. Much of the credit for the organization, we are reliant on membership dues to fund continuation of this journal goes to AAII founder James operations. Spreading the word about AAII is one of the Cloonan, who is the fi rst recipient of the Cloonan Award best ways you can help ensure that we will be around for for Excellence in Investment Education. (More information the decades to come. about the award can be found on page 4.) My predecessor As an AAII member, you have access to more than Maria Crawford Scott also deserves much credit for every- 60 stock screens on AAII.com. These screens are based thing she accomplished during her 25-year tenure as editor. on the methodologies of many famous investors. I’m a big Much has changed since 1979. As Jason Zweig noted believer in stock screens since they can not only quickly in a November 2013 Wall Street Journal article about Jim identify stocks with the traits you desire, but often lead you Cloonan, brokerage commissions have plunged from over to good stocks you would have otherwise not looked at. $40 to under $10. Most individual investors only have infre- On page 7, you can fi nd updated performance numbers quent conversations with a representative of their brokerage for all of the screens we track and Joe Lan’s discussion of fi rm, and those conversations are typically about something what common traits the best screens share. other than placing a trade.
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