Decoding the Lucky 13: A Historical Lens for Today's Market

The Lucky 13 approach is built on a simple, disciplined philosophy: identify companies with strong fundamentals and attractive yields, even if they are temporarily out of favor. The portfolio's design-selecting exactly thirteen stocks-was a practical compromise, aiming to build a solid foundation while leaving room for opportunistic additions throughout the year. This focus on quality and yield has translated into a powerful historical track record.

The core metric is clear. Since 1986, the Lucky 13 has delivered a compound annual growth rate (CAGR) of 12.35%. That figure significantly outpaces the S&P 500's CAGR of 6.02% over the same period. The arithmetic average annual return of 13.26% further underscores the strategy's ability to compound wealth. More importantly, the record shows remarkable consistency. The portfolio has posted seventeen years of positive total returns, with fourteen of those exceeding 10%. This combination of strong absolute returns and high positive return frequency defines the approach's resilience.

A critical advantage is its risk profile. The strategy has demonstrated a notable ability to navigate downturns. Performance data shows the portfolio has, on average, approximately 15% less risk than the broad market. This lower volatility is a direct result of the disciplined focus on companies with exemplary fundamentals, which tend to be more stable during market stress. The framework's strength lies in its balance: it captures significant upside through quality growth while actively managing downside exposure.

The bottom line is a proven blueprint. The Lucky 13's historical performance is not a story of chasing momentum but of systematically building a portfolio around durable business characteristics. It offers a tangible model for investors seeking to outperform the market over the long term while maintaining a lower-risk profile.

The 13-Year Cycle: A Historical Precedent for Current Conditions

The market's recent strength is built on a foundation of extraordinary, but historically rare, conditions. The past 13 years, from 2008 to 2021, delivered a 16% per year return for the S&P 500, a performance that ranks in the top decile of all 13-year periods in the past 96 years. This wasn't a natural market cycle but a managed recovery, engineered by the Federal Reserve's Quantitative Easing (QE) and Zero Interest Rate Policy (ZIRP). The experiment involved massive money printing to buy bonds, artificially suppressing yields and flooding the system with liquidity. This created a powerful tailwind for stocks, as cheap money fueled corporate profits and made equities more attractive than bonds.

The flip side of this policy was a below-average bond return, with bonds averaging just 4.4% annually versus the historical average of 6.6%. This divergence was the direct result of the Fed's manipulation. As long as QE was in full swing, bond prices were propped up, and their yields were kept artificially low. This environment allowed stock valuations to expand, as future earnings were discounted at ever-lower rates.

Now, that cycle is ending. The Fed is gradually reducing its bond buying, a process known as tapering. This marks the end of the artificial support. The critical risk is that as the Fed's balance sheet stabilizes and inflation persists, bond yields will increase. Higher bond yields have a direct and powerful effect on stock valuations. They raise the discount rate used to calculate the present value of future corporate earnings. In practice, this means the same stream of future profits is worth less today, which can pressure stock prices.

The historical precedent is clear. The 13-year bull run was an anomaly, driven by unprecedented monetary policy. Its conclusion is not a matter of if, but when. The market's current resilience, whether in tech or policy-driven sectors, is being tested against this backdrop. The end of QE and the return to higher bond yields could act as a persistent headwind, capping the upside for equities and forcing a recalibration of valuations. As Warren Buffett noted, when the tide goes out, we see who has been swimming naked. The question for investors is whether the market's recent gains have been built on solid fundamentals or on the artificial support of a policy cycle now drawing to a close.

Applying the Framework to Today's "Lucky 13" Candidates

The historical framework for market resilience points to a clear opportunity: in uncertain times, investors are rewarded for patience and discipline. The current market conditions favor a dual-screen approach that prioritizes either high-quality safety or high-yield value, offering a "paid to wait" characteristic that can drive returns through both income and potential valuation expansion.

The first screen targets stocks with a high dividend yield (5%+) and a low P/E ratio (under 10). This combination is a classic value signal. When a stock trades at a depressed multiple, its valuation is already pricing in significant pessimism. A high yield then acts as a cushion, providing income while the market reassesses the company's prospects. The goal is to identify firms where the market's negative sentiment may be overdone, creating a setup for a rebound. This is not about chasing yield blindly, but about finding companies with the operational resilience to sustain or grow that payout.

Specific examples illustrate this principle. Consider VICI Properties, a casino REIT yielding 6.1%. Its recent decline has been driven by negative sentiment about the sector and concerns over potential rent adjustments with its anchor tenant, Caesars Entertainment. Yet, the stock's low valuation and high yield create a compelling entry point for investors who believe the market is overreacting to short-term headwinds. Similarly, Verizon Communications offers a forward dividend yield of 6.75%. The telecom giant has underperformed for a decade, but its recent restructuring plan aims to cut costs and improve profitability. With the stock trading at a forward P/E of around 8.5, the market is pricing in minimal growth. A successful turnaround could lead to both improved earnings and a multiple expansion, rewarding patient shareholders.

The second screen focuses on high-quality, financially strong companies with a proven track record. These are the "safe harbors" that can navigate volatility. The framework requires a stringent set of criteria: top safety and timeliness ranks, strong financial strength, and a projected total return above 15%. This filters out the speculative and focuses on companies with durable competitive advantages and management teams that have delivered. The goal is to build a core portfolio of resilient assets that can compound value over time, regardless of market noise.

The bottom line is a practical, forward-looking strategy. The market's current preference for value and yield is a signal, not a guarantee. The framework provides the discipline to act on it. By systematically applying these screens-whether hunting for a beaten-down REIT or a high-quality dividend aristocrat-investors can build a "Lucky 13" portfolio designed to thrive in any market. The process itself, with its regular rebalancing, ensures the portfolio stays aligned with the most compelling opportunities, turning market uncertainty into a source of alpha.

Risks and Guardrails: Where the Historical Thesis Could Break

The historical "Lucky 13" approach-building a diversified portfolio of high-quality value stocks-has a proven track record. But its success in the past 13 years was heavily dependent on a unique macroeconomic environment. The current shift away from that environment introduces three critical risks that could derail the strategy's historical thesis.

First, the strategy's foundation is the end of a cycle defined by easy money. The 600% surge in the S&P 500 since 2008 was fueled by Quantitative Easing and zero interest rates, which suppressed bond yields and pushed capital into equities. Now, as the Fed tapers, the "invisible hand" of manipulation is receding. The risk is a broad market re-rating. When bond yields rise, as they are likely to, the discount rate applied to future earnings increases. This pressures stock valuations across the board, not just in cyclical sectors. The historical outperformance of stocks over bonds in this period was an anomaly, not a rule. The guardrail here is recognizing that the era of guaranteed equity returns is over.

Second, sector concentration risk emerges as a specific vulnerability. The "Lucky 13" approach, by targeting high-quality and dividend stocks, can inadvertently overweight interest-rate-sensitive sectors. Consider the examples of VICI Properties and Verizon Communications, both of which have been highlighted for their high yields. VICI is a casino REIT whose value is tied to consumer spending and credit availability. Verizon is a telecom giant with a low forward P/E but facing intense competition. In a rising rate environment, both face headwinds: higher financing costs for REITs and a potential slowdown in discretionary spending that could pressure telecom ARPU. The strategy's focus on "quality" and "value" thresholds may not adequately screen for this macroeconomic sensitivity, leading to underperformance when the cycle turns.

Finally, the execution risk in the selection process itself is heightened in a volatile market. The strategy's rules are designed to find "quality" and "value," but the definitions are relative and can be misapplied. The evidence shows the process excludes stocks with negative ROE, negative cash flow, or "NA" P/E, which is a necessary guardrail. However, the criteria for "High Quality" include a combined numerical rank of 5 or less and a 3-5 year average annual projected total return of 15.00% or above. In a market where earnings are volatile and growth projections are uncertain, these thresholds can lead to capital loss if a stock is misjudged. The strategy's rule of replacing the worst performer each quarter provides a mechanism for discipline, but it also means the portfolio is constantly being reshuffled based on short-term performance, which can be noisy and lead to chasing momentum or selling winners too early.

The bottom line is that the historical thesis of steady, risk-adjusted returns through disciplined value selection is being stress-tested. The end of the cycle, sector-specific vulnerabilities, and the challenge of accurate stock selection in a changing environment all introduce frictions that were less pronounced when the market was in a powerful, one-way uptrend. For the "Lucky 13" approach to succeed now, it requires not just adherence to its rules, but a deeper understanding of the macroeconomic guardrails that have historically supported it.