One of the comments on my article last week made me reconsider the merits of relaxing the screen during bull markets. Apparently this is something the late Jim Slater was known to do:
I really appreciate all of your comments each week. They always force me to double-check my arguments, which is invaluable.
John’s comment aligned with my own thinking that it might make sense to relax valuation criteria slightly during bull markets. The logic behind this change is fairly obvious. The returns from investing in quality stocks at a higher valuation might still be greater than those available from cash. By focusing on quality, downside risk should be mitigated.
I’ve not found a reference to this approach in my copy of The Zulu Principle, although I may have missed it. But I have found an exchange of letters on this topic between Jim Slater and Algy Hall, who writes about stock screening for Investors Chronicle.
You can find the letters here on Jim Slater’s official website, but these are the relevant highlights:
Jim Slater: “… The probable reason for this is that, in these difficult markets with very low interest rates and high valuations, it is necessary to stretch the price-earnings to growth (PEG) limit to about 1.3 and, in that way, avoid losing some of the best shares. …”
Algy Hall: “… rising market-wide valuations have caused you to adapt a method you have laid out in your excellent book, The Zulu Principle, by focusing more heavily on your ‘quality’ criteria and relaxing your ‘valuation’ requirement …”
The context to the discussion is that Hall’s IC screen is underperforming Slater’s Telegraph portfolio and contains a different selection of stocks. It turns out that Jim Slater has relaxed his valuation criteria, whereas Algy Hall has decided to relax the criteria for quality.
My own Stock in Focus screen is suffering from a record shortage of shares this week. Only three companies qualify at the time of writing, all of which are already in the SIF Portfolio. So I’ve decided to experiment. What choices would be available to me if I followed Jim Slater’s example and put quality ahead of value?
I wouldn’t change much
In last week’s article, I highlighted the four core factors which control my screen results:
- Earnings yield (EBIT/EV) = Value
- Piotroski F-Score =…