NEQTY_PORT
10/26/1981 DJRTNEQTY_PORT
10/29/1982 DJRTNEQTY_PORT
1.914
0.321
4.869
0.218
14.570
1.167
2.549
1.661
9.266
6.985
32.340
46.391
10/31/1983 DJRTNEQTY_PORT
–3.426
0.201
–12.855
10/29/1984 DJRTNEQTY_PORT
2.079
2.052
7.715
0.755
7.616
10/28/1985 DJRTNEQTY_PORT
15.071
16.821
52.858
58.994
10/27/1986 DJRTNEQTY_PORT
10.862
23.057
25.992
55.177
10/26/1987 DJRTNEQTY_PORT
5.035
8.472
11.335
19.073
10/31/1988 DJRTNEQTY_PORT
8.692
18.793
15.615
33.759
10/30/1989 DJRTNEQTY_PORT
0.939
1.444
1.300
2.000
10/29/1990 DJRTNEQTY_PORT
17.978
27.163
24.644
37.235
10/28/1991 DJRTNEQTY_PORT
17.785
18.340
17.598
18.147
10/26/1992 DJRTNEQTY_PORT
–14.552 –10.718
–12.369
–9.110
10/29/1993 DJRTNEQTY_PORT
–7.542
8.000
–6.804
7.216
10/31/1994 DJRTNEQTY_PORT
10.746
25.442
8.757
20.734
10/30/1995 DJRTNEQTY_PORT
27.481
33.961
17.856
22.067
10/28/1996 DJRTNEQTY_PORT
28.137
55.539
14.294
28.215
10/27/1997 DJRTNEQTY_PORT
66.222
28.513
31.001
13.348
10/26/1998 DJRTNEQTY_PORT
15.585
13.512
5.739
10/29/1999 DJRTNEQTY_PORT
–30.689
18.197
–10.714
10/30/2000 DJRTNEQTY_PORT
11.476
6.485
3.702
4.975
6.353
2.092
10/29/2001 DJRTNEQTY_PORT
1.611 –43.309
0.534
–14.364
10.0% Average Gain
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THE TRUTH ABOUT YIELD, CASH FLOW, PRICE-TO-SALES
179
Table 11.6 (Continued)
Return on Five Highest Sales per Employee
Date
Port
Apr15Amnt
AugLTDAmnt
Apr15Pct
AugLTDPct
10/27/1975 DJSALESEMP_PORT
10/29/1976 DJSALESEMP_PORT
0.814
0.002
1.230
14.018
21.167
0.226
0.031
10/31/1977 DJSALESEMP_PORT
–0.069
0.545
–0.985
10/30/1978 DJSALESEMP_PORT
10/29/1979 DJSALESEMP_PORT
0.758
0.643
1.605
10.446
22.114
2.273
7.570
26.765
10/27/1980 DJSALESEMP_PORT
–0.004
0.100
–0.038
10/26/1981 DJSALESEMP_PORT
10/29/1982 DJSALESEMP_PORT
10/31/1983 DJSALESEMP_PORT
10/29/1984 DJSALESEMP_PORT
10/28/1985 DJSALESEMP_PORT
0.400
2.511
0.824
2.101
1.999
0.976
3.559
3.421
18.641
25.390
1.632
5.004
9.911
3.682
12.023
21.066
5.588
8.961
25.054
3.257
7.760
0.887
8.692
10/27/1986 DJSALESEMP_PORT
5.799
10.898
21.685
40.755
10/26/1987 DJSALESEMP_PORT
10/31/1988 DJSALESEMP_PORT
10/30/1989 DJSALESEMP_PORT
7.665
4.597
3.635
7.426
30.063
29.122
8.339
13.698
24.849
4.993
8.367
11.494
10/29/1990 DJSALESEMP_PORT
13.746
12.519
30.315
27.609
10/28/1991 DJSALESEMP_PORT
6.494
10.446
11.289
18.159
10/26/1992 DJSALESEMP_PORT
7.013
10.516
10.392
15.583
10/29/1993 DJSALESEMP_PORT
0.905
11.161
10/31/1994 DJSALESEMP_PORT
4.722
13.195
1.132
5.003
13.958
13.979
10/30/1995 DJSALESEMP_PORT
24.749
31.021
21.619
27.097
10/28/1996 DJSALESEMP_PORT
17.156
37.555
11.067
24.226
10/27/1997 DJSALESEMP_PORT
36.017
3.979
19.427
2.146
10/26/1998 DJSALESEMP_PORT
40.768
43.103
20.260
21.421
10/29/1999 DJSALESEMP_PORT
15.255
57.924
6.150
23.352
10/30/2000 DJSALESEMP_PORT
–42.553 –53.828
–14.491
–18.331
10/29/2001 DJSALESEMP_PORT
15.912 –18.379
6.796
–7.850
10.4% Average Gain
(Continued)
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180 PUTTING IT ALL TOGETHER FOR LONG-TERM INVESTMENT SUCCESS
Table 11.6 (Continued)
Return on Five Lowest Price to One-Year Forward Earnings
Date
Port
Apr15Amnt
AugLTDAmnt
Apr15Pct
AugLTDPct
10/29/1976 DJPTOEARN_PORT
1.567
–1.810
10.583
–12.222
10/31/1977 DJPTOEARN_PORT
10/30/1978 DJPTOEARN_PORT
0.856
2.969
3.714
6.950
30.153
4.266
22.152
31.830
10/29/1979 DJPTOEARN_PORT
–0.909
2.735
–5.840
17.576
10/27/1980 DJPTOEARN_PORT
0.964
–2.044
5.073
–10.761
10/26/1981 DJPTOEARN_PORT
10/29/1982 DJPTOEARN_PORT
0.872
6.824
1.668
5.554
10.629
9.409
36.116
49.794
10/31/1983 DJPTOEARN_PORT
–1.918
0.578
–5.722
1.723
10/29/1984 DJPTOEARN_PORT
3.723
4.423
11.243
13.356
10/28/1985 DJPTOEARN_PORT
11.193
10.539
33.583
31.621
10/27/1986 DJPTOEARN_PORT
13.499
31.404
29.617
68.903
10/26/1987 DJPTOEARN_PORT
23.278
21.375
53.603
49.221
10/31/1988 DJPTOEARN_PORT
6.472
7.998
9.666
11.944
10/30/1989 DJPTOEARN_PORT
–1.263 –12.097
–2.107
–20.185
10/29/1990 DJPTOEARN_PORT
19.016
26.896
45.333
64.118
10/28/1991 DJPTOEARN_PORT
13.165
6.443
21.606
10.575
10/26/1992 DJPTOEARN_PORT
13.468
20.111
20.322
30.348
10/29/1993 DJPTOEARN_PORT
–0.794
5.787
–0.923
6.730
10/31/1994 DJPTOEARN_PORT
3.623
18.351
4.010
20.310
10/30/1995 DJPTOEARN_PORT
18.662
7.884
17.773
7.508
10/28/1996 DJPTOEARN_PORT
9.942
31.381
8.675
27.382
10/27/1997 DJPTOEARN_PORT
32.709
0.006
21.906
0.004
10/26/1998 DJPTOEARN_PORT
42.216
31.200
25.406
18.776
10/29/1999 DJPTOEARN_PORT
–12.283
7.341
–6.805
4.067
10/30/2000 DJPTOEARN_PORT
18.946
33.589
10.265
18.198
10/29/2001 DJPTOEARN_PORT
37.885
0.224
19.870
0.117
15.3% Average Gain
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THE TRUTH ABOUT YIELD, CASH FLOW, PRICE-TO-SALES
181
Table 11.6 (Continued)
Return on Five Highest Price to Sales
Date
Port
Apr15Amnt
AugLTDAmnt
Apr15Pct
AugLTDPct
10/27/1975 DJPTOSALES_PORT
9.613
9.735
25.710
26.037
10/29/1976 DJPTOSALES_PORT
0.668
–6.394
1.409
–13.481
10/31/1977 DJPTOSALES_PORT
–0.287
6.981
–0.775
18.827
10/30/1978 DJPTOSALES_PORT
4.335
8.402
11.126
21.563
10/29/1979 DJPTOSALES_PORT
–2.904
5.806
–6.973
13.942
10/27/1980 DJPTOSALES_PORT
0.792
–7.432
1.713
–16.088
10/26/1981 DJPTOSALES_PORT
–1.971
–5.250
–5.828
–15.522
10/29/1982 DJPTOSALES_PORT
10.173
14.230
33.343
46.640
10/31/1983 DJPTOSALES_PORT
–3.367
–2.329
–6.607
–4.571
10/29/1984 DJPTOSALES_PORT
7.782
15.818
17.447
35.464
10/28/1985 DJPTOSALES_PORT
20.212
4.226
32.865
6.871
10/27/1986 DJPTOSALES_PORT
16.988
29.561
28.329
49.295
10/26/1987 DJPTOSALES_PORT
12.234
8.970
21.764
15.957
10/31/1988 DJPTOSALES_PORT
8.531
10.939
12.556
16.101
10/30/1989 DJPTOSALES_PORT
6.686
–5.620
10.235
–8.604
10/29/1990 DJPTOSALES_PORT
13.197
12.457
23.479
22.164
10/28/1991 DJPTOSALES_PORT
2.35
–0.252
3.436
–0.369
10/26/1992 DJPTOSALES_PORT
12.229
8.133
17.568
11.684
10/29/1993 DJPTOSALES_PORT
4.415
17.956
5.426
22.067
10/31/1994 DJPTOSALES_PORT
0.866
5.298
0.922
5.642
10/30/1995 DJPTOSALES_PORT
19.705
13.079
19.590
13.002
10/28/1996 DJPTOSALES_PORT
9.230
26.701
8.186
23.682
10/27/1997 DJPTOSALES_PORT
18.407
–9.881
13.541
–7.268
10/26/1998 DJPTOSALES_PORT
20.516
32.075
15.609
24.404
10/29/1999 DJPTOSALES_PORT
–13.465 –10.677
–8.493
–6.734
10/30/2000 DJPTOSALES_PORT
–5.533
–4.319
–3.774
–2.946
10/29/2001 DJPTOSALES_PORT
16.109
3.301
12.115
2.483
10.5% Average Gain
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182 PUTTING IT ALL TOGETHER FOR LONG-TERM INVESTMENT SUCCESS
wide array of values so you can see the difference and impact these ratioshave upon typical market performance. As an example, this strategy on theﬁve highest cash ﬂow stocks averaged 11.2 percent while on the lowest itaveraged 10.8 percent. Looks like a push to me.
The  ﬁve  lowest  price-to-sales  stocks  returned  13.5  percent  while the highest price-to-sales mustered up only 10.5 percent. That’s quite adifference.
Many  analysts  say  it  all  boils  down  to  consecutive  earnings  growth.Could be, but my studies show an average gain of 12.2 percent; good, butthere are better value measures. One that surprised me was the measure ofreturn  on  equity.  I  thought  a  high  rate  of  return  on  a  company’s  equitywould  be  a  great  sign  of  future  price  appreciation.  That  is  not  the  casefrom  this  study,  which  reﬂects  a  rather  modest  10.0  percent  return;  onewould do better to look at the ratio of sales per employee, which returned10.4 percent.
Anyway, here they all are for your perusal, study, and ediﬁcation. At
times I update these studies on my web site at www.larrywms.com.
The beauty of these ratios is that they keep us out of trouble. We donot  walk  down  the  disturbing  dark  alleys  of  Wall  Street.  Intelligent  in-vestors don’t want risk; they want return. And we now have a way of elim-inating a good deal of the risk. Do that and it means it is mathematicallyimpossible  for  our  returns  not  to  be  greater  than  those  of  someone  justbuying the averages.
In other words, you can do what the average guy and what 80 percentof the mutual funds have not been able to do—you can beat the market!This  is  a  staggering  statement  when  you  consider  that  80  percent  of  thefunds cannot outperform the S&P 500 or the Dow Jones Industrial Aver-age. Funds don’t appear to be such a great investment. Knowing that only20 percent of fund managers can beat the market tells us that we have onlya 20 percent chance of selecting the right fund. Eight times out of 10 thefund we select will not do as well as just buying the Dow Jones IndustrialAverage. This is staggering.
The  various  ratios  shown  here  can  be  used  to  evaluate  any  stock,  atany time. Maybe it’s a hot tip from your broker or brother-in-law. It maybe  good.  The  proof  comes  from  checking  the  valuation  numbers  shownhere.  You  can  prove  this  to  yourself  by  listening  to  CNBC  or  the  NeilCavuto show on Fox. The next time you hear of a stock that is falling outof bed, check the valuations. Invariably, when I do this fun exercise, what Isee are stocks with horrible valuations—a reason for the crash.
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THE WILLIAMS WAY TO BEAT WALL STREET
183
The  opposite  of  this  is  that  by  using  some  very  simple  rules  we  canconsistently outperform the Dow and in the process outperform the fundmanagers. We can do this without paying the fund managers their exces-sive  fees,  without  being  exposed  to  a  basket  of  stocks  we  know  nothingabout  and  to  any  possible  chicanery  on  the  part  of  wrongly  intentionedfund  managers.  If  the  odds  are  8  to  2  against  us  beating  the  marketthrough the mutual funds process, why not do it on our own?
There is only one reason: You haven’t known how to. But that is nowa thing of the past. You can beat the market averages. You can outperformthe hotshots of Wall Street.
MORE ON MUTUAL FUNDS
It’s no secret the mutual funds that made so much money during the lastbull market lost a ton during the bear market. This tells us that past per-formance  is  sure  as  heck  no  guarantee  of  future  success.  Here’s  moreproof.  In  a  study  I  did  of  the  best-performing  funds  for  the  past  threeyears—2002, 2001, and 2000—the four best-performing funds for 2002had actually underperformed the S&P 500 in 1998 and 1999, the big bullyears! Had you gone by their performance in the good years, you wouldnever have bought them for the bad years. Ah, yes, the ﬁrst one now shalllater be last.
THE WILLIAMS WAY TO BEAT WALL STREET
The ratio ﬁgures set up for us the ideal investment scenario. As we can see,the best group of stocks to buy, on average, would be those with the lowestprice and highest yield in the average or sector we’re purchasing. So that’sour  ﬁrst  criterion.  We  have  answered  the  selection  aspect  of  investing  byknowing  exactly  what  stocks  perform,  overall,  better  than  the  averages.The rule is simple: Buy the low-priced one with the highest current yield orlowest price-to-sales ratio.
I took this one step further by adding a timing mechanism of whento buy and sell our select list, the hot stocks if you will, from the invest-ment average. Earlier in this book I showed there is a distinct tendencyfor  the  Dow  Jones  Industrial  Average  to  rally  from  October  into  thespring of the year.
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184 PUTTING IT ALL TOGETHER FOR LONG-TERM INVESTMENT SUCCESS
Now  let  me  show  you  the  real  kicker  here,  which  is  what  the  Dow
Jones Utility Average does.
As you can see in Figure 11.2, the vast majority of the time the utilityindex starts a big rally just about the time the stock market stops going upor goes into a sideways trading zone. Generally speaking, this usually be-gins in about April of each year. From April into the October low the stockmarket typically doesn’t perform nearly as well. Yes, some years it doesn’tfollow this tendency and continues churning higher. But that is the excep-tion. Smart investors don’t bet on the exception.
The utility index usually starts a big up move around the ﬁrst week of
April into the ﬁrst week of October.
Thus, we have a rolling investment program going on here. The data pre-sented next reﬂects that of buying the Dow Jones Industrial Average the lastweek  of  October  of  each  year,  exiting  on  the  ﬁrst  Friday  of  April  the  nextyear, and at that time purchasing the ﬁve lowest-priced and highest-yield DowJones Utility stocks of each year, holding until the ﬁrst trading week of Octo-
Figure 11.2 Dow Jones Utilities
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LARRY WILLIAMS HIGH-YIELD INVESTMENT
185
ber. That portfolio has achieved remarkable gains far surpassing anything themutual funds have done, and has been doing so on a consistent basis.
LARRY WILLIAMS HIGH-YIELD INVESTMENT
This  approach,  timing  the  entry  and  exiting  into  the  high-yield,  low-priced stocks switching from one Dow Jones average, to another has aver-aged 24.1 percent a year since 1985 (see Table 11.7). I do have ﬁgures thatgo back further than this that suggest an equally high rate of return. TheDow Jones Industrial Average from 1976 to 2001 had a net showing of
Table 11.7 Rolling Investment Program
% ReturnBuying Utilitiesat Seasonal Low,Exiting at Seasonal High
% ReturnBuyingIndustrials atSeasonal Low,Exiting at Seasonal High
%ReturnBuy andHoldDow 30
% ReturnDow JonesIndustrialAverage
5.905.330–0.20211.219.809–1.8433.9570.7746.444–6.1428.5374.75019.48613.42
3.692
35.813.9–7/2001
24.49529.998–7.82413.1619.18220.91914.39925.0372.41312.96314.89617.87918.90519.3777.7095.417.7Average
30.835.2–8.024.328.919.018.225.88.86.723.321.838.332.711.354.830.924.1
282501129.4–51831423328171924–6–513.8
Year
19851986198719881989199019911992199319941995199619971998199920002001
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186 PUTTING IT ALL TOGETHER FOR LONG-TERM INVESTMENT SUCCESS
8.3 percent a year. During that same time our continual rolling programwould have done close to 30 percent a year.
The beauty of the program, I believe, comes from a combination  oftwo factors. We are sidestepping the time period when stocks, at least inthe Dow Jones Industrial Average, are most susceptible to decline. We arenot invested in that danger zone. Instead of being invested in the industri-als at that time we’re investing in the utility stocks, which typically pay ahigher  rate  of  return  than  the  Dow  Jones  Industrial  Average  stocks  andalso have less volatility to the downside during market declines. There is afundamental reason for this: Utility stocks offer investors a yield, a rate ofreturn, as opposed to long-term capital appreciation.
This is why the utilities actually outperform the Dow Jones IndustrialAverage  most  of  the  time  during  this  danger  zone.  The  reason  is  simple.When stocks start to slide, people get out of the Dow Jones Industrial Av-erage looking for a safer haven for their money. That is exactly what theutilities  offer,  a  higher  rate  of  return  and  some  possible  upside  apprecia-tion, so money ﬂows from the Dow Jones Industrial Average into the utilitystocks. Our investment program simply has us getting abo