Systematic Value Investing[Explained] - Why It Makes Sense

Hey everyone, I have read through some of those threads that you all discuss about systematic value investing approach particularly, the idea from Teh Hooi Ling and Joel Greenblatt.

I guess you all have come across articles and probably backtests showing low P/B or low P/B on a portfolio with a systematic approach would beat the market. And the results of the study often turn out to be quite striking.

I think many remain skeptical and doubtful as it seems too good to be true, and probably you have questioned whether investing can be so simple.

I have just written a blog post on it[5000+ words], it aims to answer many of the questions you would probably have in mind. :

[Image: Systematic-Value-Investing-13-QA-Low-PB-...-1976..jpg]

Systematic Value Investing: 13 Q&A, Low P/B Beats Expert and Ben Graham in 1976.

Lastly, I go into the "why it works" and why "it makes sense". 

Below is my summary:

– The unusual case of low price to a fundamental vastly outperforms investors is not something exceptional when ones take their view across the multi-disciplines phenomenon of model outperforming human. Systematic value investing is just one of the many examples of model outperforming human across various fields.

And who knows maybe in the near future we would find it in the footnotes of another highly subjective discipline in the thesis explaining the outperformance of model vs human.

– All the fears and worries of systematic group approach to value investing are entirely baseless and unfounded. The only things that backing up such worries are human emotion and nothing more.

– Perhaps the hardest part for an individual to accept is the very fact that their years of experiences and intuition count very little if not nothing to the selection process when measured against hard data.

– I’m not suggesting that there is nothing we can do to improve our investment process. On the contrary, I do think that there are things that we can do to further enhance our performance. And the thing to do is definitely not spending countless of hours drilling financial statements and making an arbitrary assumption of the company management, earnings growth and etc.

As to what are things we should be doing will be a topic for another day.

So long the stock is Safe and Cheap it will make money

I believe in the systematic approach, albeit it might not be the best performed one. The best case study, is the Yeoman Cap, as far as I am concern. The fund has long enough track record, and Mr. Yeo has been interviewed enough, for us to know some of the key ingredients of his success.

Hi GiraffeValue, my quantitative approach is similar to your Systematic Value Investing.

I think the question is not why it works, but who and how to do it effectively.

To retail investors, I find it difficult to get access to reliable and updated FA data for screening. Manual checking or updating is normally necessary. Also recently I feel maybe more factors should be included, such as the stability of earning, the outlook of the entire industry, etc.

For institutional investors, they can afford to pay for FA data for screening, but many of the under valued counters are too small for them to acquire substantial amount without pushing up the price too much. I think this is the main reason Buffett has abandoned this method.

(14-09-2015, 09:07 PM)zf87 Wrote: Hi GiraffeValue, my quantitative approach is similar to your Systematic Value Investing.

I think the question is not why it works, but who and how to do it effectively.

To retail investors, I find it difficult to get access to reliable and updated FA data for screening. Manual checking or updating is normally necessary. Also recently I feel maybe more factors should be included, such as the stability of earning, the outlook of the entire industry, etc.

For institutional investors, they can afford to pay for FA data for screening, but many of the under valued counters are too small for them to acquire substantial amount without pushing up the price too much. I think this is the main reason Buffett has abandoned this method.

I really doubt the restriction on FA data on the Systematic approach for retail investors. Yes, I agree FA terminal e.g. Bloomberg terminal is expansive, but a lower cost financial site, e.g. Shareinvestor.com, should serve the purpose well for most retail investors.

Yeoman Cap's AUM is around S$159 million, as in its website. Systematic approach, usually comes with broad diversification, with average about 1% per counter.

For Yeoman a lot of their performance has to do with their long term hold strategy which allows them to do dividend reinvestment and dividend compounding, as well as the massive asset appreciation that has happened this last couple decades, which would benefit undervalued stocks since they are bought way below their asset values.

Their CAGR over 17 years since fund started is 13.61% net of fees according to their website. It's not bad but wouldn't say its impressive, considering for a small fund ($159m), though they try to make it look impressive by comparing to a poorly performing index ETF which has only increased 100+% over the past decades. Looking at the market crash years, tech crash 2000 and GFC crash 2008 they are not really crash resilient at all falling ~25% and ~48%. Asset boom years in 2003-2007 and post GFC has seen their fund performing well. Also their fund started during the AFC when STI was only around 1000 mark and other asian stock exchanges were also pretty depressed, which means they came from a very low base. Can still remember all the blue chips on fire sales back then, if bought and held from then till now with dividends reinvested your returns would be pretty good too.

S&P with div reinvested from OCT 1997 to JUN 2015 gave a CAGR of 6.55% with total return ~200%.

Berkshire on the other hand has had much higher CAGR above 20%+ since 1965 but since they grew to multi-billions size, it is going down towards single digits.

(14-09-2015, 11:30 PM)BlueKelah Wrote: For Yeoman a lot of their performance has to do with their long term hold strategy which allows them to do dividend reinvestment and dividend compounding, as well as the massive asset appreciation that has happened this last couple decades, which would benefit undervalued stocks since they are bought way below their asset values.

Their CAGR over 17 years since fund started is 13.61% net of fees according to their website. It's not bad but wouldn't say its impressive, considering for a small fund ($159m), though they try to make it look impressive by comparing to a poorly performing index ETF which has only increased 100+% over the past decades. Looking at the market crash years, tech crash 2000 and GFC crash 2008 they are not really crash resilient at all falling ~25% and ~48%. Asset boom years in 2003-2007 and post GFC has seen their fund performing well. Also their fund started during the AFC when STI was only around 1000 mark and other asian stock exchanges were also pretty depressed, which means they came from a very low base. Can still remember all the blue chips on fire sales back then, if bought and held from then till now with dividends reinvested your returns would be pretty good too.

S&P with div reinvested from OCT 1997 to JUN 2015 gave a CAGR of 6.55% with total return ~200%.

The CAGR performance with fee, should be about 16%, based on its fee structure. Yeoman Cap performance is the best among the quantitative funds exposed, with comparative track records.

Quantitative funds are usually broadly diversified, thus "crash" together with Mr. Market. The monthly standard deviation was 6.22%, comparing with the index's 6.30%. The best part is the average return was double, comparing with a "typical" 8% index return, if you are not happy with the chosen bench marked index  

Yes, the Yeoman's secret of success is very simple. Buy at low (generally available during crashes), and hold as long as fundamentals sustained. Anyone with normal IQ, can do that, but surprisingly very few did that. We should agree that, it took a lot of conviction on value investing principle, to invest millions into stock market in 2000/2008, when everyone were calling "bear, bear, bear". I have heard many are saying the same, but cold feet, when crash arrives. They will find excuse not to do it, and saying those did are just lucky  

(14-09-2015, 11:30 PM)BlueKelah Wrote: Berkshire on the other hand has had much higher CAGR above 20%+ since 1965 but since they grew to multi-billions size, it is going down towards single digits.

Yes, I agree Mr. Buffett approach is better, if done right. The approach is scale-able from small retail investor, all the way up to fund as huge as BH.

If i may add to the discussion, i think the joel greenblatt way of investing works only if you diversify. I think thats what many fail to do. Value traps do exisit and diversification is one way to not accidentally put all (or a significant portion) of your resources on a lemon.

Personally, Im also looking into adopting such a method. One other way to minimise the risks for a retail investor is to only pick stock with a mkt cap of say 100 mil or 50 mil. The reasoning would be if its large enough, chances are that it has sufficient resources to weather unforeseen adversities or is at least a genuine enough company. That doesn't mean its a guarantee; it just improves your chances.

(14-09-2015, 08:54 PM)BlueKelah Wrote: So long the stock is Safe and Cheap it will make money

yea not just investing that applies to everything that involve transaction.

(14-09-2015, 09:07 PM)zf87 Wrote: Hi GiraffeValue, my quantitative approach is similar to your Systematic Value Investing.

I think the question is not why it works, but who and how to do it effectively.

To retail investors, I find it difficult to get access to reliable and updated FA data for screening. Manual checking or updating is normally necessary. Also recently I feel maybe more factors should be included, such as the stability of earning, the outlook of the entire industry, etc.

For institutional investors, they can afford to pay for FA data for screening, but many of the under valued counters are too small for them to acquire substantial amount without pushing up the price too much. I think this is the main reason Buffett has abandoned this method.

hey zf87 I have read your posts. Happy to hear that you are using a similar approach.

As for the screener I agee with CityFarmer, S.I and SGX Screener would do the job(I'm using that).

and on "I think the question is not why it works, but who and how to do it effectively." Which is why I think investing can be at best involve less human intervention as much as possible. STI is the best example systematic investing approach that solely based on mkt cap alone.

(14-09-2015, 09:24 PM)CityFarmer Wrote:

(14-09-2015, 09:07 PM)zf87 Wrote: Hi GiraffeValue, my quantitative approach is similar to your Systematic Value Investing.

I think the question is not why it works, but who and how to do it effectively.

To retail investors, I find it difficult to get access to reliable and updated FA data for screening. Manual checking or updating is normally necessary. Also recently I feel maybe more factors should be included, such as the stability of earning, the outlook of the entire industry, etc.

For institutional investors, they can afford to pay for FA data for screening, but many of the under valued counters are too small for them to acquire substantial amount without pushing up the price too much. I think this is the main reason Buffett has abandoned this method.

I really doubt the restriction on FA data on the Systematic approach for retail investors. Yes, I agree FA terminal e.g. Bloomberg terminal is expansive, but a lower cost financial site, e.g. Shareinvestor.com, should serve the purpose well for most retail investors.

Yeoman Cap's AUM is around S$159 million, as in its website. Systematic approach, usually comes with broad diversification, with average about 1% per counter.

(15-09-2015, 09:42 AM)CityFarmer Wrote:

(14-09-2015, 11:30 PM)BlueKelah Wrote: For Yeoman a lot of their performance has to do with their long term hold strategy which allows them to do dividend reinvestment and dividend compounding, as well as the massive asset appreciation that has happened this last couple decades, which would benefit undervalued stocks since they are bought way below their asset values.

Their CAGR over 17 years since fund started is 13.61% net of fees according to their website. It's not bad but wouldn't say its impressive, considering for a small fund ($159m), though they try to make it look impressive by comparing to a poorly performing index ETF which has only increased 100+% over the past decades. Looking at the market crash years, tech crash 2000 and GFC crash 2008 they are not really crash resilient at all falling ~25% and ~48%. Asset boom years in 2003-2007 and post GFC has seen their fund performing well. Also their fund started during the AFC when STI was only around 1000 mark and other asian stock exchanges were also pretty depressed, which means they came from a very low base. Can still remember all the blue chips on fire sales back then, if bought and held from then till now with dividends reinvested your returns would be pretty good too.

S&P with div reinvested from OCT 1997 to JUN 2015 gave a CAGR of 6.55% with total return ~200%.

The CAGR performance with fee, should be about 16%, based on its fee structure. Yeoman Cap performance is the best among the quantitative funds exposed, with comparative track records.

Quantitative funds are usually broadly diversified, thus "crash" together with Mr. Market. The monthly standard deviation was 6.22%, comparing with the index's 6.30%. The best part is the average return was double, comparing with a "typical" 8% index return, if you are not happy with the chosen bench marked index  

Yes, the Yeoman's secret of success is very simple. Buy at low (generally available during crashes), and hold as long as fundamentals sustained. Anyone with normal IQ, can do that, but surprisingly very few did that. We should agree that, it took a lot of conviction on value investing principle, to invest millions into stock market in 2000/2008, when everyone were calling "bear, bear, bear". I have heard many are saying the same, but cold feet, when crash arrives. They will find excuse not to do it, and saying those did are just lucky  

Ah I wouldn't want go into how other funds are doing, definitely not comparable. Retail investors have more edge, I can also pull out a few that got 18%+ CAGR for the past 3-4 years but again simple size is too small to be representative.

OMG how come my reponses are gone?