In the 1990s, I started studying the stock market so I could devise an investment strategy to use when investing my own money. I then realized that there was no need for me to create my own investment strategy, because a number of others, who had more experience than I would ever have, had already done so. They studied the market, tested their ideas in the real world, tweaked them when necessary and came up with strategies that proved themselves over time.
Once I realized this, I decided to take these proven strategies (these investors had described their strategies in detail in books they wrote or others had written about their strategies), automate them to use for my own account. When these adaptations of their strategies proved effective, I created, in 2003, a website, Validea.com, so others could use these strategies for themselves. These are the strategies I use to choose stocks in the column I write here each week.
I automated the strategies of such well-known investors as Peter Lynch, Ken Fisher, David Dreman and Warren Buffett. With the exception of the father of investing, Benjamin Graham, who died in 1974, all of these men (and they were all men) were alive and still investing.
I am sorry to report that one of these great investors just died at the relatively young age of 70: Martin Zweig. Zweig was a very sophisticated, colorful investor who was in the front lines of Wall Street for decades, and he proved himself time and again. Zweig was an interesting mix of Wall Street-style street-fighter and academic.
He was known to flaunt his wealth, of which he had plenty. Bloomberg reports that he owned the sequined dress Marilyn Monroe wore when she sang "Happy Birthday" to President John F. Kennedy. He also is widely credited with calling the 1987 Wall Street crash. CNBC wrote in its obituary of Zweig: "Noted as much for his opulent lifestyle as well as his stock market prognostications, Zweig leaves a legacy marked by many years of success that extended well beyond the crash call."
In addition to being colorful, he held an undergraduate degree from Wharton and a Ph.D. in finance from Michigan State University. He could be flamboyant, but he also knew what he was talking about.
With Zweig's death, this is a good time to look at his approach to investing. Like many, he was a student of the price-to-earnings ratio, but unlike most, he put a floor under what is an acceptable P/E. He would not buy a stock whose P/E was less than 5, because he thought that companies with lower P/E ratios were probably weak. He was pretty liberal about how high he would go when it came to P/E ratios, but he had his limits, namely no more than three times the market average (the market average today is about 15) or no more than 43, whichever was lower.
He also focused on earnings per share. He did not just want a company's earnings to be increasing, he wanted to see an accelerating rate of increase. This helped assure that the investor was not getting into the stock after growth was slowing down. He also believed that for earnings growth to continue over the long haul, it must be driven by sales growth.
His approach works. Since I started following his strategy on Validea.com in July 2003, it has produced a total return of 116.5%, more than double the S&P 500's return of 53.0% for the same period. So far this year, my Zweig-based strategy is up 13.2%, compared with the S&P's 7.3% gain.
If you want to take advantage of Zweig's investment prowess, my adaptation of his strategy currently gives high marks to:
lululemon athletica (LULU)
Questcor Pharmaceuticals (QCOR)
RIP, Martin Zweig.