May 17, 2018

It is widely held that more than 80% of fund managers fail to outperform their benchmark. What is less known is that most private investors tend to also underperform. Stockopedia’s own Ed Croft recently announced at the UK Investor show that a study of 78,000 U.S. brokerage accounts revealed the average investors underperformed the market by 3.7%. This is not an isolated instance. The percentages differed but the same held for UK and Taiwanese investors. Croft covered a number of reasons for this but suggested results might be improved if investors focused on quality stocks having good value and momentum. 

It was satisfying to finally have someone of influence validate the investment strategy I have held for some time. The importance of value was made evident to me early on by Ben Graham’s work, although I prefer The Intelligent Investor to the drier Security Analysis mentioned by Croft. I am a fan of Buffett’s quality with value investment method and have read most of the books written about Buffett and his way of investing.

The trouble with a value only approach is that these companies are a one-time affair with no staying power. Once they reach their fair value, there is no driving force to propel them higher, forcing investors to look elsewhere for further returns. This was Buffett’s take-home lesson from his time under Graham. Theoretically, adding quality to the mix should provide the engine for continued high returns. The problem with this approach is these companies can go unrecognized for a long time. In the interim, investors usually become disillusioned and turn elsewhere with little to show for their time and trouble. For example, I have a list of three dozen companies meeting both value and quality metrics that have gone nowhere since 2014.

For more timely returns, it seems what is needed are companies in the limelight, capturing investor’s imaginations, that also have quality at good value. And so, we arrive at the concept of momentum. Momentum stocks are not a new idea. Momentum investors have been around since the early 1900’s. One of the most notable was Jesse Livermore. Back then they were called speculators, which is likely a more apt term for Livermore who had a knack for making and losing fortunes. Livermore would follow hot stocks but also bet against the market. Back in the panic of 1907 his short…

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