2012 Guru Strategies Review: All Hail our Algorithmic Overlords?

Friday, Jan 04 2013 by
2012 Guru Strategies Review All Hail our Algorithmic Overlords

It's that time of year when investors all tend to reflect on our relative performance to figure out whether we should throw up our hands and just invest in a (boring) tracker. And what a year it's been in the equity market! From the depths of despair in the early summer when the Euro crisis looked set to swallow us all... to the fiscal cliff relief relay of recent days. When all of that was said and done, in the year to January 3rd 2012*, the FTSE 100 gained 6.6% while the FTSE All Share was up 9.0%. As it's our mission to highlight what works when in the markets, let's take a look at how effectively Stockopedia's model portfolios of the Investing Masters have been performing versus these benchmarks. 

Guru Models Keep On Slaying The Market....

The performance of the models this year has been frankly astounding. The screen performance can continually be tracked at this link or in detail here.

To recap, since December 15th 2011, we've been tracking 60 long only strategies and 5 short strategies, spanning from the investing greats (the likes of Graham) to classic academic finance papers (such as Piotroski). You can read more about how we run & rebalance the strategies here.

Of the long only strategies, an astonishing 90% (54/60) have beaten the FTSE 100 with gains of between 9% and 76%. Versus the FTSE All Share, 82% of the Strategies (49/60) are beating the Index. The average return of these long models was 22.4%. 

On the short side, all but one of the short selling strategies are in negative territory (as they should be), and even that one, the Altman Z-Score screen, is well below the market return (having eked out just 0.22%). The worst (or rather best) performing short screen is down 24.4% in the last year, showing how important it is to avoid fundamentally weak, near bankrupt stocks with potentially dodgy earnings - no surprises there! 

Which Strategies have done best?

As you can see clearly from the following chart (continuously updated here), this year has been a story of Value and Income, which have outperformed other investiny styles. 


At the top of the tables it's been a story of value, dividends and contrarianism trumping growth and momentum. The 15 top performing screens have been:

Screen Name Style % Return
Bill Miller Contrarian Value Screen Value 76.7
David Dreman High Dividend Screen Value 46.0
Charles Kirkpatrick Value Screen Value 45.9
John Templeton Screen Value 41.3
Benjamin Graham Net Nets Screen Bargain 38.2
Piotroski F-Score Price to Book Value Screen Value 37.8
Dreman Low Price to Cash Flow Screen Value 37.8
David Dreman Low PE Screen Value 37.6
Benjamin Graham NCAV Bargain Stock Screen Bargain 34.8
Richard Driehaus Screen Momentum 34.6
Negative Enterprise Value Screen Bargain 34.3
Winning Growth & Income Income 32.4
Naked Trader-esque Screen Growth 31.7
Free Cash Flow Cows Screen Bargain 30.5
Warren Buffett - Hagstrom Screen Quality 29.0

Top of the table is Stockopedia’s model of the investment style of Bill Miller, former manager of the Legg Mason Value Trust. It highlights unloved stocks with strong cash earnings and has generated an incredible one year return of almost 77.0%. This is a very concentrated screen, though, so it will be interesting to see whether this performance can be sustained. 

In second place is a High Dividend model based on the writings of famous contrarian investor, David Dreman, of Dreman Value Management. Focusing on out-of-favour dividend-paying stocks, it has returned almost 46.0% to investors over the past year. Impressively, all three of Stockopedia’s Dreman models are in the Top 15 models table over one year.

Just behind that is the combined Value & Momentum Screen of Charles Kirkpatrick,  up almost 46% It combines quantitative filters for relative price strength and relative reported earnings growth, with a value criterion - using relative price-to-sales percentiles.  Again, it's very concentrated.

Ben Graham's Net Net and NCAVs screen have also done very well, up 38.6% and 34.8% respectively. So has The F-Score Price to Book Value model of Josef Piotroski, associate professor of accounting at the Stanford University Graduate School of Business. This is in sixth position, returning 37.8% over the past year. The F-Score aims to identify deep bargain-bucket stocks that are in recovery.

Did we expect so many models to outperform?

Not really. Some of the models we're tracking are ones that we favoured, others were included for the sake of completeness. As a result, we kind of expected the distribution of returns to be a bell-curve around the market mean, albeit one shifted to the right, i.e. some screens would be doing worse and others (hopefully more) doing better than the average. But, in fact, very very few screens have underperfomed the market. 

So what's going on here? Well, there are a number of important caveats - the biggest one is that it's just a year's performance of course but, at least, what we're seeing here is based on live portfolio tracking (not just wishful backtesting). Secondly, part of this outperformance is explained by a small-cap effect. The FTSE Smallcap Index is up 26% this year and, because we have such a comprehensive stock database, many screens do pick up the more ignored small caps. Notwithstanding the impact of that, the performance is still just astonishing!

Get Your Quant On

We keep stressing how important it is to use quantitative investing tools in your investing process. We wrote a post recently about Nate Silver's Moneyballing of the American election and how simple algorithms can be better decision-makers than instinctual human judgement.

This is especially likely to be true when emotions like fear and greed get involved. Instead of listening to brokers, tipsters and rumours and being swayed by the Siren song of the stories they sell, we would argue that using a dispassioned common sense stock screening process (whichever one that may be) can help improve the gullible, emotional and easily influenced human decision maker at most of our cores.

So see you this time next year - when we may well be eating vast amount of humble pie on the back of some nasty mean-reversion! But, for now, we're going to enjoy this moment in the sun.

* For this comparison, we've taken the year to January 3rd - this is not because it  biases the results in any way but simply because some of us were nursing New Year hangovers and it took a while to run the numbers. Thinking about it, December 31st was a rather peculiar time because of the fiscal cliff uncertainty on that day so perhaps this (entirely arbitrary) choice of dates has some logic. 

Further Reading


Filed Under: Stock Screening,

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.

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9 Comments on this Article show/hide all

kevinsamvance 5th Jan '13 1 of 9

The current top ten stocks ranked by Mcap from the Smallcap index have also gone up over 70%(plus 3% divi) from 1st Jan 2012 to 1st Jan 2013. No rebalancing trade costs every quarter and a spread average of around just 1%. There are many ways to skin a cat. KLR, SPRT, TCG, 888, NTG, FSJ, STHR, GNC, CINE, BRAM.

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Roger Lawson 7th Jan '13 2 of 9

Fascinating. But with the average return on all long screens being 22.4 when you are including small cap and AIM companies in the screens, and as you say yourself the small cap index is up 26% (although the AIM index is down but mainly I suspect because of companies in the mining sector with assets but no revenue or profits being downgraded which would be excluded from most screens anyway), it still leaves the question of whether blindly using screens would help. But doing this each year may tell us which screens are reliable and which are not. Guess we'll all be looking at what the Bill Miller screen is currently recommending.

Website: ShareSoc - UK Individual Shareholders' Society
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loglorry 7th Jan '13 3 of 9

Do you have a screen to screen out the bad screens please or if you have several such screens then a screen for them?

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Roger Lawson 7th Jan '13 4 of 9

Hang on, the Bill Miller screen is definitely "concentrated" as the article puts it. In fact at the current time it only suggests three stocks - Dart, Standard Chartered and Air Partner. Nobody with any sense would run a portfolio of 3 stocks, particularly when 2 of them are very small companies. Maybe what we need is a "screen of screens" so we can get more in there rather like a "fund of funds" for all those of us who "sincerely want to be rich" (to guote Bernie Cornfeld).

Website: ShareSoc - UK Individual Shareholders' Society
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Murakami 7th Jan '13 5 of 9

Thanks for the comments. We have something called the Screens of Screens - discussed in depth here - which picks the stocks that are appearing most frequently across all the other screens tracked on Stockopedia - be they value, bargain, growth, quality, income or momentum (excluding short screens). By definition, this tends to be a list of relatively defensive stocks because they exhibit good fundamentals across a wide range of investing strategies. What we haven't done (yet) is weight the importance of each screen based on its historic performance, although we are thinking about doing this.


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Murakami 7th Jan '13 6 of 9

p.s. Definitely agreed re: Bill Miller - as implemented, it's a very rigorous set of criteria so it's very concentrated when applied to just the UK stock universe and risky/volatile as an approach for that reason, presumably hence its outperformance to date and potentially its underperformance going forward.

We deliberately try to be very purist about implementing the relevant screening factors for a given Guru, rather than focusing on whether the resulting list itself is sufficiently diversified - that's the DYOR part.

We will shortly be expanding our coverage across Europe so that will add more candidate Miller stocks (you can sign up for the Europe-wide version here), plus we're working on moving from sequential screening (simple) to simultaneous Z-Score screening (much harder), at which point we should be able to generate and track more diversified lists, even for these very tough criteria/factor screens.  

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Roger Lawson 7th Jan '13 7 of 9

Well at least I am holding a few of the screen of screens stocks already!

Website: ShareSoc - UK Individual Shareholders' Society
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kevinsamvance 9th Jan '13 8 of 9

Murakami, the reason I haven't subscribed to Pro yet is that imo the stock screen has little validity if its results cannot be backtested. The alternative is to wait several years to see how things work out which is not a good option for the trader or for Stockopedia. I've been using screening for several years & have no doubt what so ever it has vastly improved my performance but backtesting was an important part of the process in order to gain sufficient confidence to trade the strategy. The reason I highlighted the top ten smallcaps gaining 70% in my previous post is that backtesting tells me it's not actually a very good long term strategy. So, does Stockopedia have any plans to provide a future backtesting fascility?

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Murakami 9th Jan '13 9 of 9

Hi Kevin, we discuss backtesting a bit here in the FAQ: 

http://help.stockopedia.co.uk/knowledgebase/articles/80621-can-you-add-longer-timeframe-performance-histories .

The short answer is we're working on it but it's complicated to do well, and very dangerous if done badly (as most commercially available systems seem to be).

Do feel free to raise a Support ticket via the Green Help & Feedback button and we can discuss the issue in more depth offline.

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