A Fundamental Approach to Investing in US Stocks

Abstract

The majority of research on active and passive investment approaches suggests individual investors should choose a passive index investment vehicle over an active management investment vehicle. This paper proposes utilizing fundamental stock data to develop an active fundamental approach to investing in US stocks to determine if utilizing the data in a systematic approach enables us to outperform a corresponding traditional index approach. The approach is back-tested and yields a 40% cumulative growth advantage over a traditional index approach.

Keywords: fundamental, return on equity, ROE, PEG, GARP, earnings yield, EY, Benjamin Graham, Warren Buffett, Peter Lynch, Christopher H. Browne, growth, core, value, sectors, Vanguard 500 Index Investor fund