Value Investing Strategy Performance in Singapore

[Shi Ern]

Hi,

I assume your data has already screened out non-value stocks but listing out the criterions for that may help other valuebuddies members to understand your point of view!

Ray

Well, for the PE example, you can say that PE above 18 is not really value stocks. So some of the baskets are value stocks, some that shoot above the cheapness criteria may not be value. So for PE less than 6 is closer to value? I not sure also since some buddies say this is not value investing. Maybe is ETF.

[Rr_1]

Hi,

yes in that case, it isn't value investing. You should be looking at criterias which value investors look out for. The data you would want would mostly be in the financial statements.

[specuvestor]

Nice work...
But I'd point out that your work doesn't answer the question you have posted.

All this would tell me the relative performance of each of the sub category within the parameter that you have back tested over the 2 yrs + period.

It tells me nothing about "value investing"
For example, it tells me that over the 2 yrs period (which is not that long), those with the smallest market cap outperformed all the other cateogries of market caps, AS A GROUP.
Unless you equate looking at market cap as = value investing, then the data is not relevant to answering the question you have posted.
(I am guessing the data cited here is just a reflection of huge increases in a few of the micro cap companies, so that skewed the line)

Also, grouping under certain parameters means that all members are artifically grouped together under that parameter, regardless of their actual value.
For example, under price:book, say the 0.5-1 times category, there could be company A that was trading at PB of 0.7 times, but its earnings were supeior , outlook was great blah blah.
Company was trading at PB of say 0.9, also in this category, but was showing losses blah blah.
So over the next 2 years they performed very differently but were grouped into this category, so their performance sort of "nullified" each other.
In short, what I m saying is that your data, isn't very relevant to value investing, cos there's nothing about value here.
Lastly, how about the price? Performance is all about price relative to value. One cannot say something is undervalued without looking at the price, and the price relative to value in any of the company in any of your categories, would've been very different.
For some the price could be far below, some could be far above, some could be exactly at the intrinsic value.
So again, the data is not relevant.

I enjoyed your charts immensely though.
Lotsa work.
If the data is correct, we can interpret some stuff from it, just not value investing.

Ok. so sorry, I didn't know it is not value investing.

The idea is too simulate the results of the average value investing porftolio using different common value investing ratios?
Maybe it can be used like a ETF investing benchmark for different ratios.

Like I posted many times, if value investing is about comparing ratios, my 15 year old daughter can do. Understanding a business and the environment takes more work and experience than that

Based on numbers, an academic says Buffet outperform by having higher beta. There's no such thing as value investing then... your question is answered.

But I'm biased cause I dont believe in quant investing. Ratios are useful for first cut filters, not for conclusions.

[Clement]

Just my 2 cents on the matter.

I think all of us have varying definitions of value investing and therefore i think the thread title is probably not very precise. The decline of the historical "value effect" has been studied and documented quite a bit, most recently by Goldman Sachs, so i am not surprised to see the results posted. Whether the results are meaningful for a value investing strategy depends on how a person defines value investing.

[chialc88]

Hi Shi Ern,
Don't bothers about the terminologies.

Focus on the PE chart.
Redo without S-Chip (keep the rest parameters the same).

Show me the result.

I don't expect any surprise.
 

oh, to short cut the troubleshooting process, 
upload your raw data for a quick check too.
says 1/1/2015 CompanyName and PE. 
(the rest all censored)

[holymage]

Hi Shi Ern,

Here are my thoughts.

Firstly, if everyone just rely on P/E, P/B, EV/EBITDA to buy shares, all investors need is a stock screener, perform some quick filters and everyone will be rich.

Next, the financial ratios you used is part of value investing. It indicates how cheap a stock can be, but cheap doesn't equates to value and it certainly doesn't tell the entire picture. A stock can be cheap forever (value trap) for various reasons, but the most probable reason is the company is fundamentally inferior. To mitigate the problem of poor quality, famed investor Joel Greenblatt (who popularized the magic formula - EV/EBIT) paired EV/EBIT with ROIC and ranked them. ROIC gives an indication on how efficient (quality) the company is in generating returns per unit of invested capital. Joel Greenblatt backtested this from 1988-2009 and the results showed returns in excess of 20%+. You can read more in "The Little Book That Still Beats the Market by Joel Greenblatt" or just google it.
However, in current times, as almost every serious investor would know about this, this approach is not as valuable as before.
In addition, it is very important to understand the meaning behind the numbers. For instance, relying solely on P/B will skew yours results towards assets-heavy companies - financials, insurers, real estates etc. You will almost never be able to shortlist an asset-light company like Facebook, Ebay or UMS Holdings.

As mentioned by someone, the backtested period of 2 years is way too short. Try backtesting it during 2006-2008 and during 2009-2011, you will draw very different conclusions. This is similar to judging the capability of an investor, based on a short investing record.

Anyhow, I do believe that Quant does works, but one must know how to mitigate the pitfalls of different models. Renaissance Technologies is founded by James Simons, a mathematician, they do not hire people from finance backgrounds and 1/3 of their staff have PHDs. Their Medallion fund generated over 35% returns over a 20 years period (due to high leverage and highly diversified positions), which beats the legendary Buffett's record by a mile. Somehow, Renaissance Technologies is not well known to Main-Street.
In addition, as mentioned previously, your Quant model is way too simple. You may take reference to the OVS Stock Portfolio by Jae Jun from Old School Value. He do disclose his methodologies and is based on fundamental metrics and he has backtested it (I can't recall the returns). Do note that he recommends using it as a screener though. As mentioned earlier, as he commercialized his OVS Stock Portfolio, as more people uses it, the value "reverts to mean" or "loses value".

https://en.wikipedia.org/wiki/Renaissance_Technologies

Lastly, if you are really interested in value investing using Quant, and is willing to put in the initial hard work to gain a foundation in value investing; I would encourage you to start by reading "F Wall Street by Joe Ponzio" and "Financial Statements by Thomas Ittelson". After finishing read these, if it still doesn't bore you, then hop onto to Amazon and read the next 10 investment books recommended by Amazon's "Customers who bought this item also bought" data analytics tool. I did this, although I started with the classic - "The Intelligent Investor by Ben Graham".

Hope this helps.

[specuvestor]

^^^ I was told that only the Medallion fund that is owned by the employees is doing exceptionally well.

[TTTI]

Hi Shi Ern,

Here are my thoughts.

Firstly, if everyone just rely on P/E, P/B, EV/EBITDA to buy shares, all investors need is a stock screener, perform some quick filters and everyone will be rich.

Next, the financial ratios you used is part of value investing. It indicates how cheap a stock can be, but cheap doesn't equates to value and it certainly doesn't tell the entire picture. A stock can be cheap forever (value trap) for various reasons, but the most probable reason is the company is fundamentally inferior. To mitigate the problem of poor quality, famed investor Joel Greenblatt (who popularized the magic formula - EV/EBIT) paired EV/EBIT with ROIC and ranked them. ROIC gives an indication on how efficient (quality) the company is in generating returns per unit of invested capital. Joel Greenblatt backtested this from 1988-2009 and the results showed returns in excess of 20%+. You can read more in "The Little Book That Still Beats the Market by Joel Greenblatt" or just google it.
However, in current times, as almost every serious investor would know about this, this approach is not as valuable as before.
In addition, it is very important to understand the meaning behind the numbers. For instance, relying solely on P/B will skew yours results towards assets-heavy companies - financials, insurers, real estates etc. You will almost never be able to shortlist an asset-light company like Facebook, Ebay or UMS Holdings.

As mentioned by someone, the backtested period of 2 years is way too short. Try backtesting it during 2006-2008 and during 2009-2011, you will draw very different conclusions. This is similar to judging the capability of an investor, based on a short investing record.

Anyhow, I do believe that Quant does works, but one must know how to mitigate the pitfalls of different models. Renaissance Technologies is founded by James Simons, a mathematician, they do not hire people from finance backgrounds and 1/3 of their staff have PHDs. Their Medallion fund generated over 35% returns over a 20 years period (due to high leverage and highly diversified positions), which beats the legendary Buffett's record by a mile. Somehow, Renaissance Technologies is not well known to Main-Street.
In addition, as mentioned previously, your Quant model is way too simple. You may take reference to the OVS Stock Portfolio by Jae Jun from Old School Value. He do disclose his methodologies and is based on fundamental metrics and he has backtested it (I can't recall the returns). Do note that he recommends using it as a screener though. As mentioned earlier, as he commercialized his OVS Stock Portfolio, as more people uses it, the value "reverts to mean" or "loses value".

https://en.wikipedia.org/wiki/Renaissance_Technologies

Lastly, if you are really interested in value investing using Quant, and is willing to put in the initial hard work to gain a foundation in value investing; I would encourage you to start by reading "F Wall Street by Joe Ponzio" and "Financial Statements by Thomas Ittelson". After finishing read these, if it still doesn't bore you, then hop onto to Amazon and read the next 10 investment books recommended by Amazon's "Customers who bought this item also bought" data analytics tool. I did this, although I started with the classic - "The Intelligent Investor by Ben Graham".

Hope this helps.

I was wondering how long would it take before someone brought up Renaissance...
That sorta results is undisputable

[Terry]

There's a article by tweedy Browne systematic investing.
Altough it proof that value investing outperform growth investing.
But I think a big bug in the test is that the cheapest group their 2nd price jump is 50% to 100% profit.
Eg : price quoted 0.001 next price is 0.002
Also their liquidity may not even work.

[Clement]

I really don't think the comparison of the performance of Renaissance's medallion fund with Buffett or most other fund managers is valid. For one, the fund is not compounding money in recent years and therefore most comparisons with them are comparing compounded returns with non-compounded ones. It is effectively a trading company that achieved a approximately 70% return on equity before fees. If we were to compare the returns they achieved with many high frequency trading shops during the period, those are not considered impressive. They stand out because of the scalability they were able to achieve as most estimates of the fund's capacity put it at US$9-10 billion.

They also run the Renaissance Institutional equities fund, which has been very successful within the framework of their objectives. Iirc, at launch they targeted a 40% beta with an alpha overlay, but i am unsure if the parameters are still the same today. I suspect the performance of that fund will be more reflective of what a very well run, purely quantitative, long-short equities strategy can be expected to achieve.