Investing in Lean

I’m a big fan of the Toyota Production System. I was thinking that I should find a mutual fund that invests in lean companies, but I couldn’t find one. I searched for “best lean companies” to see if I could get a list, and found Who Are the Best Lean Companies at, a blog I read every day.

I took all of the companies in the top 10 for whom I could find historical data. I compared buying one share of each of those companies to buying one “share” of the S&P500 over the same period. The lean companies outperformed the index.

D9: =RATE(C1-B1,0,-B9,C9)*365
D11: =RATE(C1-B1,0,-B11,C11)*365

Are those formulas right? I’m trying to get an annual return.

I couldn’t stock-pick my way out of a paper bag (I’m looking at you Buckle; I’m looking at you Inacom), so don’t take investing advice from me.

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11 thoughts on “Investing in Lean

  1. Why not change the sign on the opening value, and use XIRR?

    I think you end up with simple/compound rate issues with RATE()

  2. Dick,

    You call 7 and a half months “historical data?” :-) You should never, never annualize less than annual returns. Too little data to draw any valid conclusions, and it assumes that you will replicate that performance over the rest of the year. Besides, you shouldn’t be looking at just historical returns. Take my word for it, you are much better off with a well-diversified portfolio of index funds (ETFs are great low-cost choices). Spread your money around the world and across asset classes. Invest often, sell rarely. Sit back and wait. You will be rewarded in the long run.

  3. Without pretending that I know a lot about stocks or investing, I will add some comments. The S&P500 index is a “market-weighted index”, meaning that it tracks the value of an equal amount of ownership in each company. The “lean company index” created above is a “price-weighted index”, meaning that it tracks the value of an equal amount of shares of each company. The comparison is still between one investing strategy and another; they are just not necessarily the same style of investing.


    Quick example:
    Company A has 1000 shares outstanding
    Company B has 100 shares oustanding

    For a market-weighted index, choose (arbitrarily) 1% owndership. Then, the index will track the value of 10 shares of A + 1 share of B.

    A price-weighted index would track the value of 1 share of A + 1 share of B.

    For more information:

  4. Without any other information that might influence an investment decision, I’d generally work by making a notional investment of, say $100 and dividing it equally among the shares, then see what my hypothetical portfolio was worth later.

    Something like this:

    Stock# SharesNew ValToyota0.11352311.35682Danaher0.18154414.13322Honda0.38064811.32808Deere0.21710818.01997Textron0.24622114.27587Illinois0.24626312.31807Hon0.3407858.458288

    But a fair part of my day is taken up with checking custom stock index calculations (performed with varying quality by S&P) so this is right up my street. I wonder if a weighting by votes received (or some derivative thereof) might be useful?

  5. Rats. The comment system didn’t like my HTML table. Let’s try again…

    Stock #Shares Val
    Toyota 0.1135 11.36
    Danaher 0.1815 14.13
    Honda 0.3806 11.33
    Deere 0.2171 18.02
    Textron 0.2462 14.28
    Illinois 0.2463 12.32
    Hon 0.3408 8.46

    # Shares is $100/7 invested at the 16-Jul price, Val is what that investment is now worth. The total is $89.89.

    $100 invested in the S&P 500 over the same period would now be worth $88.37.


  6. You would have lost money in both cases.
    So I will take your advice not to take your advice … ;-0

  7. Hi Dick,

    That’s an interesting analysis. I wonder if some one has done a more large scale study on the subject. Given the number of PhD candidates in the various business schools, I imagine someone has.

    I suspect you already know that the principles behind lean apply to environments other than just manufacturing and large health care systems. I started a project last year in which we used them to reduce the duration of the month-end financial (accounting) closing process for a large financial news reporting company. We’ve already gone from 5 days to 2 days with a “it would be great but it’s not really needed” goal of 1 day. Of course, my personal goal — which the client does not share — was (is?) the ability to close the books “on demand.”

  8. I agree with Mike Woodhouse about investing–say–$100.00 in each company/fund. I think that more accurately reflects returns.

    Man, car companies suck over that 7 month period, and John Deere has ruled.

    While Tim correctly notes that many investors should “spread” money around, I’m a proponent of “putting one’s eggs in one basket–then watching that basket.” I understand that an historical 10-11% return on US equities is desirable, but I also believe that Warren Buffett is onto something when he notes that he could generate 50% annual returns if he only had $1.0m USD to invest in a relatively-few companies. Food for thought from a pretty successful investor in WB.


  9. I don’t really explain my premise for these types of posts. That’s probably because I’m a very lazy investor and I don’t think about all the things that you guys obviously think about. My premise here was that I have a sum of money to invest that’s not even close to a majority of my portfolio. Most of my retirement is in taxed deferred stuff and that’s split between four mutual funds: index, growth, value, international. I’ve set it up so there’s no way I can ever do very well or ever do very poorly. I tend to side with DA on the all-the-eggs theory, but I don’t have the inclination to watch the basket, so it’s just not for me. I also don’t have enough money to pay someone to watch my basket, so I tend to keep a lot of lonely baskets around. OK, I think that metaphor has run its course.

    I do appreciate the comments, though, so keep them coming. I always try to simplify this stuff too much, and it’s good to get the reminders that it’s not all that simple. When I first got out of college and finally made enough money to fill my gas tank all the way to full, I read One Up on Wall Street, which influenced my early investing. It seemed so simple. Find an undervalued company with conservative values, a history of growth, and a good story for the future. I did that. Apart from Meade and Gateway, I failed miserably. Meade was a good one, Gateway I just got out at the right time – luck not skill. So I decided that mutual funds and a life mediocre returns was for me.

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