Quarterly Strategies Review: Winners and Losers

Thursday, Sep 20 2012 by
6
Quarterly Strategies Review Winners and Losers

What a quarter it's been in the markets. The FTSE has had a good run gaining 7.1% and equity investors everywhere have started licking their lips over the gathering momentum in the wake of further lashings of quantitative easing around the world. When stock markets go up, there are stocks, sectors and strategies within them that do even better. As it's our mission to highlight what works when in the markets, let's take a look at how effective Stockopedia's model portfolios of the Investing Masters have been performing.

We keep hammering home at how important it is to use quantitative investing tools in your investing process. Instead of listening to brokers, tipsters and rumours and being swayed by the Siren song of the stories they sell, using a dispassioned common sense stock screening process can help impove the gullible, emotional and easily influenced human decision maker at most of our cores. Learning to defer (or at least listen) to the 'quant' can often help to improve profits in tough markets such as those we are seeing today.

Stockopedia beats the market again

Our 3 month performance can continually be tracked at this link, and as of the time of writing we can see the continued strong outperformance of some classic investing strategies. 72% (43/60) of our long only strategies have beaten the FTSE 100 with gains of between 7.1% and 23.4%, while all 5 of our short selling strategies have beaten it on the downside - again indicating how important it is to avoid fundamentally weak, near bankrupt stocks with potentially dodgy earnings - no surprises there!

At the top of the tables it's been a story of quality, dividends and contrarianism trumping growth and momentum but for how long that remains to be seen.  We have just rebalanced our model portfolios which we do every quarter, so lets take a closer look at how they've done.

Contrarianism and Dividends pay

One of the best books on my investing table is David Dreman's Contrarian Investment Strategies - it's a massive font of evidence that shows that buying cheap, out of favour stocks just works so incredibly effectively. Is it such a surprise that two of his very unfashionable strategies have been the top performers over the summer with gains of over 21% in 3 months?

Strong fundamental health goes rewarded

The top performers include almost all of our high 'fundamental momentum' strategies - based on the F-Score indicator developed by Professor Joseph Piotroski. Not only are three Piotroski strategies near the top of the list (returns of +17, +19% and +20% respectively), but also two that use the score as a key component - Richard Beddard's blend of Piotroski with the Magic Formula (+18%), and our SocGen-esque 'Quality Income' strategy (+13%) which highlights high F-Score dividend paying stocks. Just to cap off what a tremendous 3 months it's been for the F-Score, near the bottom of the performance list lies one of our James Montier Short Screens (-3%) which uses Piotroski in reverse to highlight the stocks with terrible fundamental momentum.

 Special Offer: Invest like Buffett, Slater and Greenblatt. Click here for details »

Dividend Dogs continue to rock 2012

Anyone who's been around the market for some time will have heard of the Dogs of the Dow strategy, which picks the 10 highest yielders in the index and holds them for a year. We publish a variant for the FTSE 100 that's up almost 30% year to date and an impressive 12.5% for the quarter. But it's not the only one - every single one of our high Dividend strategies beat the FTSE 100 over the quarter, and that's based on capital gains alone, not total return!

And what of the legends of finance?

While many of the 'greats' of investing finance used a very qualitative approach to investing that is harder to model we can still build portfolios that display some of the financial characteristics of their preferred stocks. For example, three of our portfolios inspired by Warren Buffett and his 'tutors' Philip Fisher and Benjamin Graham have shown quarterly returns averaging around 15% - and that's without adding in dividends. These investors span classic value, growth and bargain stock perspectives, going to show that there's more than one route to lasting investment success.

Momentum didn't pay…

The more moderate performers in the last 3 months have tended to be the momentum strategies (recently discussed here). This may be a surprise considering we've seen a bit of a surge in the market, but as of the last rebalancing date in July the markets had just taken a bit of a swoon. It seems that a fresh wave of leaders has taken charge of the market - new leadership is always a good sign for a new bull phase. We are hoping for a better performance from them in coming months as long as the market rally continues.

Capitalise on strength for Q4

So how to select the best stocks for Q4 2012? While no-one knows what the future holds, markets do trend and focusing on recent winning strategies in the stock market has been shown to be effective. In an environment such as this, we fully expect financially strong, dividend paying stocks to hold up well even if the market environment continues to be volatile. The strategies described here are based on some of the finest literature ever published on and about stock picking, and using some of these screens as starting points for stock selection can not only rapidly reduce the time spent stock picking but also we hope will help you to produce market beating returns in your portfolio. Of course, it's always important to do your own research, and you can easily modify or "fork" these expert strategies to build in your own interpretations or new screening elements by using our library of over 300 screenable ratios.

PS - we are currently offering a free trial of our investing software - click here to take a trial.

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Disclaimer:  

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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7 Comments on this Article show/hide all

marben100 19th Sep '12 1 of 7
1

Our 3 month performance can continually be tracked at this link

Surely this is reviewing results with the benefit of hindsight? When I drill down though the links, what I find is a selection of stocks that each screen currently throws up. To be valid, we need to see what stocks were selected at the start of the relevant period.

If you want to show the performance of "model portfolios", you need to state what those portfolios are at the start of each period, and when and how they are revised.

Or have I missed or misunderstood something?

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Edward Croft 19th Sep '12 2 of 7
3

In reply to marben100, post #1

Hi Mark - I think you may misunderstand our approach. Our results are tracked in real time - these are charts and performance histories of the portfolios of stocks that qualified for the screen criteria as of the last rebalancing date.

Screens are rebalanced quarterly and then held (and tracked) in the model portfolio until the next rebalancing date. The portfolios have been rebalanced several times now - initialised at our beta launch in mid-December, then rebalanced in mid-March, mid-June and now in mid-September.

You are right that each screening page daily shows the currently qualifying stocks for each strategy - these may or may not be currently held in the model portfolio currently used for tracking performance. Currently they are close matches to the portfolios as we've only just very recently rebalanced, but as we drift towards December the lists will diverge until we rebalance again.

I should also mention that many 'backtesting' solutions actually suffer from hindsight bias and survivorship bias. Most databases do not continue to list stocks that fall out due to bankruptcies etc - any backtesting based on them will thus have an upward bias in their results (survivorship bias). Our model portfolios do not suffer from this as they are live tracked portfolios based on the actual database as of the rebalancing date. If stocks fall victim to bankruptcies etc the portfolio takes the hit as of that date. While this is certainly more admin on our part it makes for a far more authentic illustration of the kinds of returns on offer.

Hope that makes it clear and thanks for keeping me on my toes!

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marben100 19th Sep '12 3 of 7
1

In reply to Edward Croft, post #2

Thanks Ed,

But how can I see what the model portfolios actually were/are, as opposed to what the screens currently throw up?

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Edward Croft 19th Sep '12 4 of 7
2

In reply to marben100, post #3

The portfolios have always been publicly available to subscribers on the screening pages so there's no secrecy there but we aren't currently publishing the historical transactional record.  It's all in the database and we may publish the histories in future on the screening pages as a kind of "public portfolio" - though that's unlikely to happen in 2013 due to other near-term development commitments. I assume you want to know the key drivers of certain screen returns? Are they driven by single stocks, small caps, micro caps and so on?

It varies screen to screen, but as a general answer, I would say that some of the most surprising names can be key drivers of quarterly returns and often outperformance becomes isolated to just a handful of unexpected stocks in each list. Joel Greenblatt once wrote a great blog post about his Magic Formula in this way. He found that often people want to pick out their favorites off each candidate list, but by doing so, they often don't pick the seemingly very unfavorable stocks that actually generate the lions share of the returns !

Blog: Follow @edcroft on Twitter
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seasons 20th Apr '13 5 of 7
1

I think I understand how the screens work and the usual comments that DYOR and "Past performance not indicative of future returns." and "results [are] candidates for further research, not as a buy list". As suggested, I did cherry pick my stocks from the list, trying to go for a "healthy" selection. But I reckon it involves emotional bias and is not as manual I'd like it to be - and I may see better (or worse) results this way. Re: the Magic Formula it sounds to me that the list IS a buy list, after all (or intended to be).

I bought most of my stocks 3 weeks ago (not using the Magic Formula alone but did pay attention to it) and after that almost all stocks started to decline in value, I put it on the general FSTE decline (has the new ISA money depleted?). I probably shouldn't worry (yet) but I still can't put my worry aside that I did buy at the top.. I have two suggestions:

The "New Screen Ideas" is a great tool. My worry is that although the stocks are updated daily on the screens, I have no idea for how long they have been there. As most screens do not seem to care too much about the actual price (unless through some indicators like P/S or P/E), I cannot know if I have missed the boat or not. Therefore, it would be great to see WHEN the given stock was added to the list (and here I am referring to the list which is updated daily).

The other idea was to be able to see the selections for the current quarter (i.e. the list that drives the chart), as suggested above. I understand that it is no secret -- however it is only true IF you take note of the actual lists on the actual rebalance date. A week later things might have already changed.

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Murakami 21st Apr '13 6 of 7
1

In reply to seasons, post #5

Thanks for the feedback - I've set up a ticket using the Green Help & Feedback button on the right to discuss it with you in more detail. That's the best way to give us product feedback, just FYI for the future.

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GallyThreepwood 6th May '13 7 of 7

In reply to seasons, post #5

+1 on the request to have a 'date added' for when stocks join the screen. Had a brief discussion on the subject some months ago with Ed, I believe. Would be so useful

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About Edward Croft

Edward Croft

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CEO at Stockopedia where I weave code, prose and investing strategies to help investors beat the stock markets. I've a background in the City and asset management but now am more interested in building great stock selection tools for the use of investors online.   Traditionally investors online have had very poor access to the best statistics, analytics and strategies for the stock market and our aim is to set that straight.  High Quality fundamental information has been prohibitively expensive in the past and often annoyingly dull. People these days don't just want to know the PE Ratio and look at a balance sheet. They expect a layer of interpretation over data, signal from noise and the ability to know at a glance whether a stock is worth investigating or not. All this is possible using great design and the insights gleaned from quantitative research.  Stockopedia is where we try to make it happen ! more »


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