My full interview with Ross Grant of Beating the TSX (BTSX) from the Canadian MoneySaver originally appeared in my national bestselling book, Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca.
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 investing. After I took early retirement in 1995 I looked at the stock price and total return data for the TSE 35 bluechip 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.
Ross Grant’s 16 Investing Lessons:
1) “The amount you need to live on every year grows, but what you set aside hopefully grows faster.”
2) “Eventually at some point in the future you get to the point where you can take out 4% a year to live on, and still have some money left when you die many years later.”
3) “So for every $40,000 that you want in income, you would need $1 million in your nest egg.”
4) “When you first start, the main growth in your nest egg is due to the annual savings you contribute . . . this balance changes as the nest egg grows in size relative to the annual contributions.”
5) “My 14-year average annual return for Beat the TSX stocks is 12.6%. The simplicity of the process is really what attracted me to it.”
6) “The key aspect of these [BTSX] stocks is the steady and often growing income stream.”
7) “Blue-chip means a well-established company that is paying consistent dividends, and they’ve been consistent dividend payers over time. They also regularly increase their dividends. And they are well diversified in their product line.”
8) “So every January 1, or December 31, you look at the closing prices of the stocks in the index. The index we’re trying to beat is Standard & Poor’s TSX 60, so there’s 60 stocks in it. You rank those 60 stocks by their dividend yield. You put the highest-dividend-yielding stocks at the top and sort them down to the lowest at the bottom. Then you remove the previous income trusts as you find that most of them are all energy stocks. They’re not as stable as your blue-chip companies. You take the top 10 that remain and you invest 10% in each of those 10 stocks. You let them sit there for a year and do it again the next December 31.”
9) “I feel that there’s two aspects that make the BTSX strategy work really well. One is that you limit yourself to big blue-chip companies, which are relatively stable, [and two] there can be some significant capital gains generated in the group of 10 stocks that are purchased.”
10) “A lot of the capital gains from Beat the TSX often come from stocks that are in the lower positions, and a higher percentage of your dividend yield comes from positions one, two, and three.”
11) “If I’m being given 4% in dividends, it is just like ‘money in the bank.’”
12) “If you were getting a dividend of 4% and then it increased by 10% it is like you are making a 4.4% yield on your initial investment.”
13) “What I’ve seen with the BTSX stocks is that their variability is less than the index, which is something that, as an investor who’s been investing for income, I would certainly be looking for and appreciate.”
14) “‘Why don’t other Canadians do it?’ [i.e., early financial independence] I wonder if they don’t know that it’s possible. I know it is a long-term plan and it took me over 20 years to achieve. It’s not a get-rich-quick scheme by any means, and you’ve got to have a lot of discipline.”
15) “First, the most important step was having a plan. Second, starting early. Third, getting above-average market returns. Fourth, minimizing taxes through RRSPs and the dividend income tax credit. And now we have the Tax-Free Savings Account, which is an incredible tool.”
16) “Buying index exchange-traded funds is better than mutual funds, because you don’t have the MER that’s dragging down the return.”
Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.