An Index by Any Other Name…

This article was written with Oliver Pursche, of Gary Goldberg financial network. It was part of a series of articles developed under an agreement with to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

When the concept of motif investing (explanation below) crossed my desk, I was immediately interested in the possibilities it offered “do-it-yourself” investors. For starters, it’s inexpensive, and it’s powerful. More on that later. First, what is it?

Motif investing is a new model for investing developed by a Bay-area firm called Motif Investments. At their core, motifs are simply indexes, but they are more intuitive and consumer friendly than their traditional counterparts, and they can be purchased for just $9.95 in denominations as low as $250.

Among the 60-some motifs offered by the company, there is the Bullet Proof Balance Sheets motif, which consists of companies with huge cash balances (balance sheet strength is something I care about deeply when making an investment selection). Then there is the Lots of Likes motif consisting of companies with the most-liked brands on Facebook (FB). Then there’s one of my favorites, the so-called Income Inequality motif which is composed of choice luxury retailers and ultra discount retailers.

Where the power comes in is that investors can adjust the sector weightings as well as the individual stock composition of each motif, immediately back test their ideas to see if they want to go forward with their adjusted motif. For example, the Income Inequality motif is weighted 67% toward luxury retailers like Saks (SKS), Movado (MOV), and Coach (COH), and 33% weighted toward discount retailers like Big Lots (BIG) and Dollar General (DG).

I happen to feel that since there are about 3 million one-percenters and about 297 million ninety-nine percenters that the weightings are all wrong. Unlike a traditional index however, the investor can shift the weightings in the motif, so that it’s 67% discounters with the balance in high-end retailers. For example, if an investor believed that Tiffany’s (TIF) is so snooty that it dampens sales, the investor can remove that from the index altogether.

The power of this is almost incalculable because it enables investors to put their own knowledge and intuition to work (the ultimate in double-edged swords, which I will discuss below).

For instance, I’ve long been fascinated and disappointed by Americans’ addiction to junk food and the accompanying bulge it produces. I know this is costing me in the form of higher Medicare costs, lost productivity, and bigger bills when I go to the hospital – for, mind you, the errant weekend warrior injuries that accompany my much healthier lifestyle and diet. But the question is, can I make money from the trend?

The Junk Foods motif gives me my opportunity. It’s composed of soda companies (about 51%) like Coke (KO) and Cott Corp. (COT), as supplier private label soda to the likes of Wal-Mart (WMT), fast food restaurants (about 34%) like McDonald’s (MCD) and Jack in the Box (JACK), confectioners (about 11%) such as Hershey (HSY) and Tootsie Roll Industries (TR), with 2% remaining each for ice cream and purveyors of cookies and snacks.

The one-year return on the Junk Foods motif, as is, handily beat the S&P 500 by several hundred basis points. Pretty good, but I think I can do a little better putting some of my observations to work.

Specifically, I think Pepsi (PEP) is going to eat Coke’s shorts, so I took Coke out of the index altogether. Next, I feel that the beverage companies are slow growers next to the fast food restaurants. After all, beverages are already everywhere and to increase revenue, they have to increase what professionals refer to as “share of stomach,” a tricky and expensive business. By comparison fast food restaurants can find new customers simply by expanding the number of restaurants they have; not easy, but easier than trying to make sure that of the 47 gallons of soda Americans consume each year, more and more of it consists of Dr. Pepper (DPS).

Accordingly I peeled beverage companies back to just 7% of the index, increased the fast food restaurants to 75%, and increased the confectioner position from 11% to 15%. On a back tested basis, maybe I should have left things alone, as my adjusted motif returned about 8% versus the motif, as is, returned 9%. However, as an investor, I play the long game, and over the past five years, my Junk Foods motif handily beat the existing one, returning 72.5%, versus their 60.6%.

I would strongly urge sophisticated do-it-yourself investors to visit and take a test drive. I would also strongly urge these investors to use caution, too. Motifs are additive, and they power they put in your hands to back test your ideas, is to some degree catnip. But remember – please – that past results are not always the best indicator of future performance.

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