5 ways to beat the stock market – from a fund manager who has been doing it for years

Wall Street is so full of greed, fraud and ego, a cynic could say that there is no place for any kind of spirituality to find a home.

But several religious precepts could actually help investors if they paid more attention to them, judging by the long-term returns of the Amana Growth Fund AMIGX,
+ 0.06%.

The fund avoids companies in activities prohibited by Islamic law. This results in the expected ban on alcohol, “sin” and pig processing companies. But it also overlaps with the basic investment principles that aid the long-term outperformance of this fund. It would probably be wise to follow these concepts – described below – whatever your religion is.

I also take a look at other principles you should adopt because they help explain the fund’s record, according to Scott Klimo, now head of the fund after managing it jointly since 2012. The fund beats its Morningstar (large-cap growth) category by 1.3 to 1.8 percentage points annualized over the past three to five years, with less volatility on startup, according to Morningstar.

Here is a look at the investment concepts you can borrow from this fund to increase your returns and, who knows, get more peace of mind in the process.

1. Avoid debt

Islamic law prohibits paying or receiving interest, so banks are out. But this also contributes to the imposition of limits on corporate debt. All companies with a debt / market capitalization ratio above 33% get the start.

“We believe that financial sustainability is an integral part of a company’s success,” Klimo told me in a recent interview. “We have done more studies and it works. It creates a good wind in the stern and this contributes to performance.”

A basic investment principle is at work here: the easiest way to make money is to not lose it. Heavily indebted companies can explode, so avoiding them reduces the risk. “Risk reduction goes hand in hand with performance,” says Klimo.

This rule keeps the fund out of notoriously unstable areas such as basic materials, real estate, telecommunications and banks. This means that the bottom bounces less than the S&P 500 SPX,
+ 1.04%,
the DIA Jones Industrial Average DJIA,
+ 1.43%
and Nasdaq Composite COMP,
+ 0.66%.
The Amana Growth Fund is one of the least volatile funds in its class, says Morningstar analyst David Kathman.

2. Stop looking at any check marks and overwrites

Spend any moment on Twitter and you will notice how enchanted people watch the market and their actions trade all day, commenting on every little move. This is rather stupid and a great waste of time. It does not increase your stocks faster. It drains energy creating stress.

“People sometimes bang their heads against the wall,” says Klimo. “Sturm and drang don’t really add value.”

This is valuable advice, both for reducing stress and for freeing up time for activities that really help – such as real research.

Since Islamic law discourages speculation, excessive portfolio trading is out of the Amana Growth fund. He has a decidedly long-term approach. The average holding period is over 10 years. He held Apple AAPL,
+ 0.24%
since maybe you were born before the early 90s.

So when COVID-19 hit headlines in March, Klimo didn’t look for properties looking for names to lose because they could drop more. “We said that we have good companies and that they will come out strong on the other side. So it will be fine, “says Klimo.

Part of this long-term doctrine means having the sense of staying in good names even if they seem expensive. “We will keep if the operational thesis is still intact,” says the fund manager.

For example, Amana Growth has a 6% position in Intuit INTU,
-0.11%.
This is a really large holding, since many mutual funds limit the size of a single holding to 1% -2% of the overall portfolio. The fiscal and financial software company looks expensive with a P / E in the upper 30 range. Growth could be hit as COVID-19 knocks out customers.

“But they have an exceptional long-term double-digit earnings growth record,” says Klimo. “We still like long-term history.” In the short term, Intuit would get a boost if Joe Biden became president in January, which would bring about many changes to federal tax laws, in turn supporting demand for his products.

When does Klimo sell? Triggers include a change in the original investment thesis or signs of management malfunction.

3. Invest in companies with a sustainable competitive advantage

A favorite are companies with a clear technological advantage. Klimo holds a 4.7% position in ASML ASML,
+ 0.33%
ASML,
+ 1.26%,
which produces lithography machines that produce chips. ASML has a freeze on the market with a 75% share. As this activity moves to “extreme ultraviolet lithography”, which uses ultraviolet wavelengths in chip production, ASML will have a 100% market share, Klimo predicts. “They will only own the market. They have a technological advantage over everyone. “

Another example: TJX TJX,
+ 2.16%,
a 2.8% position. Klimo thinks that TJX, whose stores include TJ Maxx, Marshalls and HomeGoods, is so good at discounted retail trade and setting up the “treasure hunt” bait, has its own niche – and a protective moat that keeps watch out for competitors. Now, with retailers failing due to the slowdown, TJX will be able to find even more bargains for buyers, which will help the results.

4. Invest in high quality management

You can spot them by looking at their track records. Klimo owns Lowe’s Lowe’s LOW dealer,
+ 1.34%
in part because Marvin Ellison took over as CEO in 2018, after years of producing great results in Home Depot HD,
+ 0.86%.
He is now using many of the same tactics to increase Lowe’s profit margins, such as fine inventory management and online operations.

Klimo is also loyal to Apple because of the “extraordinary” leadership of CEO Tim Cook. Klimo cites Apple’s success with services. Popular offers like Apple Pay, iTunes and the App Store have thrived under Cook. Unlike skeptics, Klimo is not afraid that Apple will come across smartphone innovation. He expects the new 5G compatible models to be released in the fall will be a hit. “We still have the utmost confidence in the investment thesis.”

5. Go with diversity at the top

Klimo likes gender diversity at the top and on the boards of directors because he says it improves the company’s performance. Here, quotes taking Estée Lauder EL,
+ 1.00%,
which has five women on its executive team, including the CFO, and seven women among its 16 board members. Klimo expects continued growth through expansion in China and other parts of Asia. It also rejects the theory that working from home suffocates the demand for cosmetics. “People still want to look good in their Zoom calls.”

What awaits us for the economy

Klimo also likes the story of Estée Lauder who holds up in a weak economy. It will be useful, because it does not expect a “V” recovery. He cites the continued spread of COVID-19, which will worsen when the flu season arrives. Even if governments don’t impose large blocs, companies will close facilities and stores.

See the latest MarketWatch coronavirus coverage here.

Another risk that few people talk about: the balance-sheet mandates of state governments. Shortages in tax revenues will bring big cuts to state services, a large part of the economy. “There is a big real problem that arises from the pike from the point of view of state budgets.”

Not that this is important for Klimo’s investment strategy. If history is a guide, his fund will only remain with his winners through any worsening of the economy.

At the time of publication, Michael Brush had no positions in any of the actions mentioned in this column. Brush suggested TJX, LOW, HD and EL in its Stock Brush Up on Stocks newsletter. Brush is a Manhattan-based financial writer who covered business for the New York Times and The Economist Group, and attended Columbia Business School. Follow Brush on Twitter @mbrushstocks.

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