Monday, January 7, 2008

Really Smart Investing

I was having an email conversation with a really smart guy* which led to my doing a quick search at the U.S. Patent and Trademark Office.
This, of course, reminded me of the Ocean Tomo 300™ index.

Here's the index fact sheet.
There are a couple charts that tell the story:

In the eleven months from inception through September 30, 2007, the OT300 returned 20.6%, outperforming the S&P® 500 by more than 875 basis points. This performance record is auspicious and attests to the relevance of the OT300 as the natural benchmark for the U.S. economy. The OT300’s performance in its first year also speaks to the importance of objectively valuing patents owned by publicly traded companies to provide a fuller, more accurate picture of corporate health. In a 10-year backtest, the OT300 would have outperformed the S&P® 500 by more than 300 basis points annualized.

10-Year Backtest

OT300 10 Year

Index Construction

Potential OT300 constituents include all equities trading on major U.S. exchanges that are among the 1,000 most liquid securities. The potential constituents are then narrowed to a universe of companies that own patents. The patent-owning companies are divided into 50 style and size groups and ranked by their Innovation Ratios, i.e. patent value divided by book value where patent value is assessed by Ocean Tomo’s PatentRatings® system. Each group contains an approximately equal number of patent-owning companies. The securities in each group are ranked using a 100% rules-based methodology that identifies those securities with the greatest patent value relative to book value, while maintaining broad-based diversification. The six highest ranking securities in each of the 50 groups are selected (resulting in a total of 300 securities) and then weighted by market capitalization.

*Russell Seitz at ADAMANT.
Here's his latest post, a reprise of one of his Wall Street Journal Op-Ed's.
I also wanted to say thanks for his reminder of one of the great websites, Arts & Letters Daily.