Two Ways To Beat The Market

If your goal is to top the annualized returns of the major stock market indexes over many years, pay attention to Ken Fisher and John Buckingham. They have done exactly this, by using wholly different methods.

Ken Fisher told Forbes investment cruisers that he takes a "top-down" view and begins with the world. "America is 25% of the global GDP and 40% to 47% of the global stock market capitalization, depending how you measure. Any analysis of economics and stocks must begin not with America but with what is happening in the larger arenas--the global economy and markets."

For Fisher, the benchmark to beat is the MSCI, the Morgan Stanley world index. Fisher's method is to model the MSCI and then try to top it by over-weighting countries and industry sectors he thinks will do better in the coming year. This year, Fisher has underweighted U.S. stocks and over-weighted sectors such as tech and energy, compared with the MSCI.

As a theme, Fisher thinks global "super-caps" will outperform the market this year. A super-cap, says Fisher, is any stock with a market cap exceeding $80 billion. Nokia and IBM are examples of global super-caps that should do well in 2008.

Buckingham does the opposite. He takes a "bottoms-up" approach. As with Ben Graham, the 1954-69 era of Warren Buffett, Bill Miller, and other successful value investors, Buckingham tries to "buy dollar bills for 50 cents." Buckingham also wants a safety cushion. He therefore buys stocks with little debt and lots of cash. That was Apple at its decade bottom, when it had $5.74 of cash, no debt and traded for a bit over $7. (Don't you wish, don't you wish ...)

These days, Buckingham likes roughed-up tiny tech stocks such as Dataram, Ditech, Rackable Systems and United Online. He also likes a handful of cheap big-caps such as Microsoft and Cisco, both trading with price-to-earnings ratios of around 16 to 17.

Fisher says his goal is to "beat the relative competitive index by two or three points per year, over time." He has done that. Buckingham says his goal is to "double your money every five years." Since 1990, he has done that too.

I find it enormously interesting that two stock investors, using two wholly different ideas, have both trounced the market over the last two decades.

Of the two methods--Fisher's top-down ("look at the world first, because it's bigger") and Buckingham's bottoms-up ("cash balances still matter")--which method do you subscribe to?