What I learnt from 10 years with the guru investors

This is my last article for Stockopedia. Thanks for being such a supportive crowd. The truth is that I’ve been on a huge learning journey myself over the past 12 years. Most investors don’t have the time to spend endless days thinking, reading and writing about investing. So it’s been a privilege for me and I hope at least some of it has been useful for you.

Ten years ago, when Stockopedia launched the first iterations of the tools on the platform today, one of the really striking new features was the Guru Screens. These ready-to-go strategies pair up the power of the Screener (with its 460 different financial ratios) with the approaches of some of the most influential legends of investing.

Whether you’re interested in small-cap growth, large-cap dividends, bargain value, unloved contrarians or blistering momentum, there’s a Guru Screen for you.

But even more than that, the Guru Screens are an instructive guide to what you can really do with the screener. You may want to use the types of quality measures that Warren Buffet likes. Or perhaps apply valuation filters like Ben Graham would have done. Or maybe the fast-paced growth rules that Bill O’Neil applies in his strategy. The GuruScreens are a window on what the best investors really look for.

Crucially, of course, the screens show constantly updated lists of companies that pass their rules. So they’re an ideas generator. And with baskets of stocks swept up every quarter into portfolios for each screen, the results have been monitored closely.

As the writer covering these strategies, the combination of ‘current qualifiers’ and screen performance was a surprisingly useful guide to market conditions and sentiment. I ended up feeling like I knew some of these legends personally. In fact, there were moments when I did actually find myself face-to-face with one or two of them. But more on that later.

Here’s a view of how all the long-only Guru Screens have performed, in aggregate, since they were launched in the UK in late 2011:

Now, a long term chart like this smooths out all manner of market events. The Covid collapse and rebound is very clear. But the shock of Brexit in June 2016 now looks like a mere blip - though it sure didn’t feel that way at the time.

In terms of broader trends, you can see strong Guru Screen moves in 2013/14, again in 2017/18 and again in 2020/21. These were bullish phases in the market, and the screens seemed to magnify them.

Trends in different investing styles

The Guru Screens are divided into broad investment themes: Bargain, Growth, Value, Momentum, Income and Quality. On a 10 year view (below), again some of the detail is lost but the overall trend is pretty clear: Growth and Momentum were the big winners over the past decade, with Value always playing second fiddle.

Bargain strategies - packed as they tend to be with speculative micro-caps - have delivered impressive headline gains at times. But they’ve always been very volatile. It really is bear market downturns where these deep value strategies work best, and we’ve really not had any of those over this period.

It would be misleading to read too much into performance comparisons between styles. But over the years I found that trends in performance of the screen groupings can tell you a lot about what’s going on in the market.

As an example, take a look at this shorter-term view (below) of performance since the start of 2020 between Growth, Value and the market. You hear a lot about this dynamic (often in abstract terms) but the benefit of using the Guru ‘lens’ is that it presents a quite real picture of what’s going on.

You can see the recovery from the initial Covid-induced collapse and just how well Value did in that phase. As the market peaked, the two styles were in lockstep, but as the market declined this year, this Gurus show that Value has held up better than Growth.

2012 - 2014: Recovery mode

Back in 2012, the market had already recovered much of the ground lost in the financial crisis. Value strategies were flush with ideas and leading the performance league.

Remember Dart Group? These days it’s known as Jet2 (LON:JET2), but 10 years ago it was a poster child for value investors. Between August 2012 and August 2019, Dart’s share price rose from 73p to 790p - or 930%. In many ways it became symbolic of the opportunities that could be had in small-caps. And from the Guru Screen perspective it was one of those stocks that neatly transitioned from pure value through to ‘growth at a reasonable price’ and earnings momentum (although now it only passes short-selling screens).

Indeed, the bigger theme in this period was the general transition from Value to Growth and Momentum as the most influential drivers of returns. This was happening against a backdrop of substantial economic support from central banks, with an era of low rates set to stay for many years.

Looking back at some of my strategy reviews (which read like I was commentating on a horse race) it was the Earnings Upgrade Momentum screen that was “accelerating into the lead”. In mid-2013 there were 50 stocks passing that strategy (which looks for rising trends in near term earnings forecast upgrades by company brokers). This was real recovery territory, with momentum properly taking over. To put that into context, today there is just one security on the list - and the 2022 performance of the screen has collapsed.

Looking back at my reviews from 2014, I wrote how GARP was giving way to growth at any price. Screens like the Charles Kirkpatrick and Bill O’Neill CAN-SLIM were delivering quarterly gains of 20%-plus.

I think one of the lessons from this early phase was about the cyclical, although unpredictable, nature of different investment styles. After such a tumultuous period in the market, it was amazing how quickly Value gave way to Growth and Momentum, which marked the start of a much more confident phase in markets. And it wasn’t the last time we saw this.

2015 - 2016: Growth, but not at any price

Broadly speaking, Growth strategies among the Guru Screens fall into two categories: those that try not to overpay (growth at a reasonable price - GARP) and those that will pay up at any price.

GARP strategies are always some of the most popular in the market, not least because they often gravitate to smaller, more exciting companies. These are the ones that investors tend to view as better placed to deliver outsize returns. Or as the well known British growth investor Jim Slater once put it: “elephants don’t gallop”.

Slater sadly passed away in 2015, a year when Stockopedia’s version of his Zulu Principle strategy generated a 29% return. If any Guru Screen has proven to be a barometer of sentiment over the past decade, Slater’s take on GARP was it.

The screen’s balance of value, forecast earnings growth and price strength make it great at finding growth shares but especially sensitive to economic turbulence. Any hint of trouble will see the number of screen qualifiers tumble. But when it’s firing on all cylinders the Zulu Principle has been excellent at finding ideas and generating impressive returns with them.

In 2016, I interviewed Jim’s son Mark, who runs the respected investment firm Slater Investments. He still very much uses Zulu Principle rules in his funds, and has absolutely smashed the market doing it.

Another GARP strategy to produce very consistent gains over many years is one based on the rules devised by Robbie Burns - the Naked Trader.

Robbie was another of my interviews in 2016 and we chatted about how his strategy had not only earned him millions but also garnered a small army of followers. His easy going nature and insistence on explaining investing in terms everyone can understand has been a punchy formula.

But it hasn’t always been easy for growth investors. For much of the past decade Growth and Momentum felt unstoppable. Yet sudden declines in the face of market turmoil when the UK voted to leave the EU, and later when Covid hit in 2020, caused a lot of hurt for growth stocks. These events were short lived but they were a reminder that bad habits, assumptions, extrapolation of the past into the future and all manner of behavioural biases can be hugely damaging, even when times are good.

Brexit and beyond

As news of the Brexit vote became clear on the morning of June 24, 2016, Mark Carney, then Governor of the Bank of England, essentially said the bank would step in if market volatility got out of hand. It didn’t. And in fact the moment marked the start of an acceleration in the performance of the bullish Growth and Momentum Guru Screens. In fact, by the end of 2017, we had 30%-plus annual performances from screens right across the style spectrum.

If anything, the problem for the popular GARP screens at this point was that ‘reasonable prices’ were getting harder to come by. Looking back at my strategy review at the time, another of the Momentum screens, the Earnings Surprise screen, had produced a near 70% gain that year, and 114% in two years.

What seemed to be screaming from the screens was that in bullish conditions, markets are more than willing to reward fast-growing companies that are outpacing their analysts. But this momentum can be amazingly fragile. After such an impressive run, returns from the Earnings Surprise screen collapsed through the back half of 2018.

Academic research has long shown that Momentum - given that it’s partly driven by investor psychology - is hugely prone to crashing when confidence falters. This is something we’ve seen many times with the Momentum screens over the past decade. It’s an incredibly powerful factor, but it requires care.

2018 - 2019: Small-cap highs

In 2018 it was a case of more of the same - Growth and Momentum continued to set the pace. By mid-year, the UK’s smaller-cap Alternative Investment Market hit a five-year high. Among the winning Guru Screen strategies that year were Joel Greenblatt’s Magic Formula and Jim O’Shaughnessy’s Tiny Titans. It was these two incredible heavyweights of investing that I managed to come face-to-face with during an ambitious (utterly crazy) interview mission to the United States.

When it came to Jim - a genuine doyen of quantitative investing - he was the first to say yes to an interview as I tentatively made plans early in the year. With Joel it was more complicated. Months of speculative emails had got me nowhere and I’d completely given up. But just as I was leaving the office on the Friday before flying on the Sunday, I got a call out of the blue from a PR who was keen to make it happen. So the scene was set for an interview in midtown Manhattan at 9am on Monday morning. Cue panic.

You can find the resulting interviews here:
Jim O’Shaughnessy
Joel Greenblatt

O’Shaughnessy’s Tiny Titan strategy has been a formidable force over the years. His views on how to measure value and momentum have changed over time, but this little strategy has had an incredible run.

Greenblatt’s Magic Formula has had a more mixed experience - and that’s no surprise. This quality and value approach is well known to suffer dry spells, and the past decade has been tough on Value. That said the strategy has done brilliantly in the aftermath of Covid - proving that it’s still a very effective approach.

2020 - present: Bear territory

BTFD - buy the fxxxing dip - has been a somewhat aggressive view, typically in the States, of how to handle down-days in the market over the past decade. Take a look at this 20 year chart (which again masks some real pain at times) and you’d be hard pressed to argue. The experience of the US market in recent years has been quite incredible.

But of course, faced with high and rising inflation that’s triggered a volte face in central bank policy, markets (in almost all Western regions) are understandably cooling off. It’s these kinds of sustained market declines where the Guru Screens tend to struggle. Not only do their recent performance figures slump but the number of companies passing the strategies can fall sharply as well.

We had a similar experience with the screens in 2016 as the market sold off both before and after the EU referendum. Back then, Growth screens hit turbulence, but some of the Value screens, which at the time contained a number of mining and commodity stocks, did quite well. It was the same in late 2018, when the prospect of rising rates, economic weakness and trade wars with China caused a sell-off.

Whilst periods of stress in the market have a dragging effect on the Guru Screens, what subsequently happens is that as the market recovers - which it will - the screens find their stride again. It could be that Value screens are the first to benefit as lower share prices feed through. Or Momentum begins to build, which breathes life into the Growth screens. Or it could be that investors begin to focus more on Quality, which is a factor that gets a bit lost in very bullish conditions, but becomes much more important in sell-offs. We saw exactly that in the months after the Covid collapse in early 2020.

So 12 years after Stockopedia first started tracking the Guru Screens, there’s a hint that history is repeating itself in places. We’re back in a world of perhaps a little more uncertainty than usual. Price discovery is maybe a little less efficient than it has been, especially in small-caps. The outlook for earnings is possibly a little less upbeat than we’ve been used to.

But if the Guru Screens have taught me anything it’s that they’ll find the opportunities in these uncertainties. For the investor looking for ideas, this window into the market is such a useful perspective. At first, the numbers of qualifiers begin to fill up, and as those screen portfolios are refreshed, their performances will point to the factors (the investment styles) that are working best.

Some of these Screens are based on ideas and strategies that have been around for decades. But the relentless, almost tidal, cycles in the market, together with the enduring behaviour of investors, mean that these Guru strategies will be a helpful guide well into the future.