What is a realistic return on value investing?

[greypiggi]

Huh? Interests rates will only rise when unemployment is down to 6.5% or lower. The rising by fed is to prevent overheating and inflation. So logically equities would
Have done well till the time rates finally
go concretely up? Higher consumption, renewed corporate spending to on back of consumption led GDP growth.

What u mean is that when rates rise, there will be knee jerk fall in equities. But by then I think s&p
is probably another 5-10% above today.

[greypiggi]

Csi123,

My goal is 5% on all invested assets including property, pe, cash for next 50 years. That requires stock, bond, hedge fund investment portfolio to return about 6-7%.

The discretionary balanced portfolios aim to return 5+% and I think historical
Last 3 year data is 5% or so.

[csl123]

Csi123,

My goal is 5% on all invested assets including property, pe, cash for next 50 years. That requires stock, bond, hedge fund investment portfolio to return about 6-7%.

The discretionary balanced portfolios aim to return 5+% and I think historical
Last 3 year data is 5% or so.

IMO, if you go heavy on bonds, you might find it difficult to attain your investment target of 6-7%. Lets take a look at the expected returns of the components of your portfolio, assuming the following composition. (40% bonds, 35% equities, 25% cash)

Assuming the expected return and standard deviation(s.d) for the following instruments are

- Bonds Returns 3%, s.d = 3%
- S&P/MSCI ETF : Returns 6%, s.d = 12%
- Cash: Returns 1%, s.d = 0%

Expected returns = 3% * 40% + 6%* 35% + 1%*25% = 3.55%.
Volatility = sqrt ((3% * 40%)^2 + (12% * 35%)^2 + (0*25%) ^2) = 4.4%

A quick observation will show that only 100% etf might have a possibility of meeting your investment target. Alternatively, you can also go for actively managed equity funds and/or hedge funds, which generally target returns greater than 7%.

If returns are important, an actively managed fund will suit you. However, if you are also concern about volatility, you might only include hedge fund in your portfolio.

[greypiggi]

Csi123,

Investment grade bonds return 3%. I do a combination of em,
Unrated and investment grade at present. My bond portfolio ytm is about 5% right now. It is riskier this way but i buy looking at their p&l and diversify. Meaning each bond only 250k. And while
Idea is to always hold to maturity. I have gained from
Opportunistic trade.
Eg olam acquired by Temasek,
Osim convertible, uk/European bank rerating etc

Anyway, still experimenting, the Pb portfolio I benchmark against make about 5-7% depending on risk last 5 years. So I model after them, make the changes I
Think needed and avoid paying the aum fees. Frankly
Will know if all this works only after 1-2 economic cycles

[GiraffeValue]

First post!

Noticed that this post has already in its 3rd year. From sharing about value return expectation to XIRR computation, I always thought time weighted return will be better and easier to understand, however after reading posts after posts and some research somehow feel that XIRR is the better one.

I started my investing journey since last dec, initially thought that STI ETF DCA will be the optimal for average investor due the complexity of investing and potential costly mistakes make by most avg investor and also given the commitment of work and monthly salary which make perfect sense for DCA. and 8% CAGR isn't bad after all. My regular reading led me to the articles of teh hooi ling and shortly after Tweedy Browne of which convinced me to value investing.

So my approach of investing pretty much alighted with their characteristic of value investing, of course not everything but mainly on financial ratio and holding a basket of 20-30 value stocks.

I'm always curious about the return can be made through value investing by avg retail investors. As for myself I didn't really put much thought about how much return can I made[not possible to predict], mainly now just keep focusing on looking for value stocks, and constantly improving my knowledge and skill in stock picking. I guess the thrill of stock picking is also part of the return u get from DIY investment.

The below are the main criteria of my stocks which I created a weight scoring system to rank the stocks, so hope I will not have a bumpy road ahead.

-P/E 4-10,
-Ptb <0.85,
-div yield min 4% over 3yrs,
-Debt no or <0.2,
-ROE
-Mkt cap. >100M
-High cash to mkt cap
-FCF of 2-3yrs
-yearly Insider buying / Share buyback.

[CityFarmer]

A nice first post. Welcome to our VB. Wish you all the best in your VB experience.

Regards
Moderator

First post!

Noticed that this post has already in its 3rd year. From sharing about value return expectation to XIRR computation, I always thought time weighted return will be better and easier to understand, however after reading posts after posts and some research somehow feel that XIRR is the better one.

I started my investing journey since last dec, initially thought that STI ETF DCA will be the optimal for average investor due the complexity of investing and potential costly mistakes make by most avg investor and also given the commitment of work and monthly salary which make perfect sense for DCA. and 8% CAGR isn't bad after all. My regular reading led me to the articles of teh hooi ling and shortly after Tweedy Browne of which convinced me to value investing.

So my approach of investing pretty much alighted with their characteristic of value investing, of course not everything but mainly on financial ratio and holding a basket of 20-30 value stocks.

I'm always curious about the return can be made through value investing by avg retail investors. As for myself I didn't really put much thought about how much return can I made[not possible to predict], mainly now just keep focusing on looking for value stocks, and constantly improving my knowledge and skill in stock picking. I guess the thrill of stock picking is also part of the return u get from DIY investment.

The below are the main criteria of my stocks which I created a weight scoring system to rank the stocks, so hope I will not have a bumpy road ahead.

-P/E 4-10,
-Ptb <0.85,
-div yield min 4% over 3yrs,
-Debt no or <0.2,
-ROE
-Mkt cap. >100M
-High cash to mkt cap
-FCF of 2-3yrs
-yearly Insider buying / Share buyback.

[Musicwhiz]

Hi GiraffeValue,

Good criteria you have there, maybe I can just add some comments.

-P/E 4-10, - Is PER always the best measure? How would you know if a PER is "cheap" or "expensive"?
-Ptb <0.85, - PTB may not be accurate due to the accounting concept of historical cost. Also, market values may change the values of receivables and inventory drastically.
-div yield min 4% over 3yrs, - Dividend yield is a function of share price as well as historical dividends. Be careful of share price plunges which make yield look higher than it should be. Also be wary of companies which are about to drop or eliminate dividend - the historical yield may look tempting but you have to dig deeper.
-Debt no or <0.2, - Debt may sometimes be essential to help a company grow, and there is no hard and fast rule on an "appropriate" level of debt. Of course, excessive debt is never a good thing.
-ROE - ROE >15% is a good place to start. You may also wish to use ROIC (Return on Invested Capital) and ROCE (Return on Capital Employed)
-Mkt cap. >100M - Small caps may sometimes offer better value as they under-researched. Keep an open mind. Good businesses exist in the most unlikely places sometimes.
-High cash to mkt cap - High cash is good but may provide a drag on ROE. Try finding the ex-cash valuation of the Company.
-FCF of 2-3yrs - I'd go further back and look for 5-8 years of FCF. Also, look at how the Company performed during the GFC years of 2008-2009 to get an idea of its FCF ability during crises.
-yearly Insider buying / Share buyback. - This is helpful but may not always be a reliable indicator. Best is to dig into the business and numbers yourself.

A realistic return would be around 7% to 10% (some say 6-9%) CAGR over a complete cycle of around 8-10 years. To be honest, I am still compiling my return and I only have records stretching all the way from 2007 till 2014, so that's just 8 years (inclusive). It's a little better than 10% but I think I haven't accounted for cash so it's probably lower.

Hope this helps. Good luck!

[csl123]

Hi,

Personally, I will think it should be higher than the 7% (The long term return of S&P 500 is 7.6%. See this. By going passive and buy a low expense etf, the return should be at least 7%)

Value investing in theory should outperform a passive investment method, as it is active management of portfolio.

[corydorus]

Hi,

Personally, I will think it should be higher than the 7% (The long term return of S&P 500 is 7.6%. See this. By going passive and buy a low expense etf, the return should be at least 7%)

Value investing in theory should outperform a passive investment method, as it is active management of portfolio.

Well, if we include dividends to S&P ... that's 9% ? I am not saying the index is good or not. And whether is past performance can indicate S&P future, i think we need to consider deeply. When i look at the chart, there are two waves of exponential gains.

1982 - 1995 Ramp up of S&P
1995 - 2001 Exponential Growth of S&P

Which doesn't seem sustainable as it will almost vertical growth if there will be a 3rd. After 2001, S&P in a up/down mode if you have hold across that period till now, hardly moves much for past 14 years with 50% fluctuations. If we consider Income has not been linear to growth, the future is unlikely to see this 2 waves of gains less hyper-inflation or scenario that can breaks this logic.

[GiraffeValue]

Hi GiraffeValue,

Good criteria you have there, maybe I can just add some comments.

-P/E 4-10, - Is PER always the best measure? How would you know if a PER is "cheap" or "expensive"?
-Ptb <0.85, - PTB may not be accurate due to the accounting concept of historical cost. Also, market values may change the values of receivables and inventory drastically.
-div yield min 4% over 3yrs, - Dividend yield is a function of share price as well as historical dividends. Be careful of share price plunges which make yield look higher than it should be. Also be wary of companies which are about to drop or eliminate dividend - the historical yield may look tempting but you have to dig deeper.
-Debt no or <0.2, - Debt may sometimes be essential to help a company grow, and there is no hard and fast rule on an "appropriate" level of debt. Of course, excessive debt is never a good thing.
-ROE - ROE >15% is a good place to start. You may also wish to use ROIC (Return on Invested Capital) and ROCE (Return on Capital Employed)
-Mkt cap. >100M - Small caps may sometimes offer better value as they under-researched. Keep an open mind. Good businesses exist in the most unlikely places sometimes.
-High cash to mkt cap - High cash is good but may provide a drag on ROE. Try finding the ex-cash valuation of the Company.
-FCF of 2-3yrs - I'd go further back and look for 5-8 years of FCF. Also, look at how the Company performed during the GFC years of 2008-2009 to get an idea of its FCF ability during crises.
-yearly Insider buying / Share buyback. - This is helpful but may not always be a reliable indicator. Best is to dig into the business and numbers yourself.

A realistic return would be around 7% to 10% (some say 6-9%) CAGR over a complete cycle of around 8-10 years. To be honest, I am still compiling my return and I only have records stretching all the way from 2007 till 2014, so that's just 8 years (inclusive). It's a little better than 10% but I think I haven't accounted for cash so it's probably lower.

Hope this helps. Good luck!

Hi Musicwhiz

About the ratios whether is cheap or expensive, There's something to do with my approach which help I guess, because I'm using shareInvestor stock screener, so as for Low P/E low PtB, good div yield & ROE I have assigned weight to it and select those accordingly based on their ranking. Pretty much those stocks that are selected are also low in their sector as well. I then look into each company FR to see any red flag. And also Google and search Valuebuddies stock section to see whether I have missed out something. This is also how I got your blog and ended in my bookmark eventually

I set PE >4 and mkt cap >100M is to flush out those stupid S-chips which look too good to be true. Not always I'm able to follow exactly to my criteria as I'm looking to get a basket of 15-20 stocks by end of this year, too stringent on criteria I'll lose out a lot of selection, even till now I only have 8 stocks on my buylist. So keep reading, keep searching.

If I can achieve 10% return I'll be damn happy, as for now 5-8% I will be quite satisfy. Just now the main focus is to improve my skill and knowledge on the world of investing.