Why contrarian value investing is both agony and ecstasy
Back in 1939 an investor called John Templeton made an unusual series of investments that eventually helped cement his reputation as a legendary contrarian. As America was emerging from 10 years of the Great Depression, Templeton (who was only in his late twenties at the time) sensed an opportunity.
He bought $100 of every stock trading below $1 on the New York and American stock exchanges - paying around $10,400 for stakes in 104 companies. Four years later, 34 of those companies had gone bust but Templeton had still made four times his money.
He went on to build a fortune by looking almost anywhere in the world to find contrarian value investments. It was summed up in one of his best known quotes:
“Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
What it takes to be a contrarian
Contrarianism lies at the heart of value investing. It’s the essence of going against the herd and taking psychologically-difficult decisions to buy stocks that most of the rest of us won’t touch.
These are the investors who are prepared to buy when others are nervous or fearful. They target unloved and distressed companies, and they can be some of the earliest movers when markets hit rock bottom. It was contrarians who made serious money in the early months and years of recovery after the dotcom crash and the financial crisis.
Evidence shows that human nature is likely to have us running for cover in the face of danger. That’s why contrarianism is so counter-intuitive to many investors, even though it can work well over time. Seth Klarman, a dyed in the wool billionaire value investor, made this point in his book, Margin of Safety. In it, he wrote:
“Value investing by its very nature is contrarian… Investors may find it difficult to act as contrarians for they can never be certain whether or when they will be proven correct. Since they are acting against the crowd, contrarians are almost always initially wrong and likely for a time to suffer paper losses. By contrast, members of the herd are nearly always right for a period.”
But while - as Klarman point out - being a value contrarian can be painful, it’s a strategy that has proved to be very successful for some of those who apply it. Investors like David Dreman and James O’Shaughnessy in the US, have been practising it successfully for decades, while newer players like Wes Gray and Jack Vogel at Alpha Architect and Nick Kirrage and Kevin Murphy, who lead the global value team at Schroders, take an equally buccaneering approach to contrarian value.
Hunting for unloved shares
So what is it that really defines a contrarian stock? In Stockopedia’s StockRank framework for profiling shares based on the strength of their Quality, Value and Momentum, Contrarians are marked out by having strong combinations of Quality and Value but poor Momentum. Click here to read more about the components of the Quality Rank and Momentum Rank.
To get an idea of the types of stocks that this investing style picks up, I’ve applied it to British large caps (the screen is here) - but it can be equally applied anywhere in the market. The idea behind the approach is to explore unloved areas of the market where there are stocks with the potential to recover.
Name | Mkt Cap £m | QV Rank | StockRank Style | Piotroski F-Score | Yield (pc) Rolling | Sector |
5,583 | 95 | Contrarian | 7 | 7.4 | ||
20,434 | 91 | Contrarian | 7 | 7.5 | ||
6,595 | 90 | Contrarian | 5 | 3.6 | ||
3,069 | 87 | Contrarian | 7 | 5.2 | ||
15,315 | 85 | Contrarian | 5 | 4.9 | ||
2,506 | 83 | Contrarian | 7 | 4.1 | ||
3,596 | 83 | Contrarian | 6 | 3.3 | ||
8,022 | 82 | Contrarian | 7 | 8.4 | ||
27,755 | 76 | Contrarian | 7 | 5.6 |
Unsurprisingly, the results include some fairly scary prospects, peppered with profit warnings. BT is a good example, where an accounting scandal triggered a profit warning and the CEO is losing the faith of institutional holders. The share price has been falling for two years and the market just doesn’t like it much. It looks cheap, with a ValueRank of 87, but the QualityRank is holding up at 71 - putting it firmly in contrarian territory.
Several others - particularly Barratt (houses), Kingfisher (DIY retail) and Polymetal (gold and silver) - arguably face cyclical uncertainties that have already manifested in profit warnings (or the market thinks they will soon). The question for contrarians is whether they will recover.
So whether it’s an embattled stock or sector or a broader market dip, contrarian investors naturally move away from the herd. It’s a strategy that takes mental strength but relies on the time-tested rule of value investing that, over time, the market will price fundamentals correctly.
In his book, Klarman said the pain for contrarians is that they can end up being wrong more often and for longer periods than many others. But, as Sir John Templeton said: “If you want to have a better performance than the crowd, you must do things differently from the crowd.”
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
62 comments
When you are buying international stocks traded in different currencies if the pound declines against those currencies then you make a gain without the share price doing anything in its own currency. The gain is real but not repeatable unless the pound continues to fall, which it may do if Brexit goes really badly, but not indefinitely.
However, personally I would want to strip out the FX effect on the growth of each holding in the portfolio to get a better view of the what is contributing to the growth. I would want to know to what extent I had picked companies that have done well in constant currency to measure how well I was stock picking. To me the FX gain is more like a geographical asset allocation gain which may also be down to skill but I would want to look at this a separate issue.
Comparing domestic portfolio folio performance or benchmarks against international has some validity as the gains in each case are real but it’s not really clear where the relatively better or worse performance is coming from and how sustainable that may be.
Many domestic large caps have there income dominated by non sterling currency
Yes. However, that is not the share price and they will normally report their results with both the headline numbers and the numbers at constant currency. By making the revenues etc at constant currency visible the market can factor in how well they are really doing rather taking the tail or headwinds of FX into account.
That is true, but it still moves the share price
The point is about visibility and relevant benchmarking. You wouldn’t benchmark a fund manager investing in small cap European stocks against one investing in the whole of the US market because it is not a good comparator. You would benchmark against other European small cap managers and a European small cap index.
Portfolio size here is irrelevant, even if Phil has £1m and achieves 26% compound for 20 years he has £100m, not really a problem when half his stocks are £1bn + companies. Lynch had the problem because of the client money poring in, Buffett has a massive insurance float, their issues were not because of compounding an initial stake.
Agreed. Unless specializing in microcaps or going for extreme concentration, the private investor should have no limitations from portfolio size until he's running several million. Even then, it should only be an issue if dealing in illiquid small caps.
As there are an awful lot of people here who seem to operate with a minimum market cap limit, I don't see why portfolio size would be an issue.
Well I think the NT strategy and my approached that has developd from it is based on well known market anamolies ...
- Small cap investing
- Earning Surprises
- Momentum based approaches
I'd say it has a lot going for it and that's why it works so well. If it stops generating options in the UK, then I get options from the US & Europe.
Back to people cottoning on to a strategy ...
I'd suggest that the majority of people here would be delighted if their strategy grew their investments to £1m over time. No fund managers or financial academics are going to be paying attention to Joe Bloggs fantasy fund.
With respect the to NT screen and hindsight. There is no guarantee it'll continue to perform and when it doesn't I'll undertake the same exercise. Scan the Guru screens and see what's performing. Who says one has to be wedded to an approach?
Years ago here I was told "The market conditions will change and that strategy won't work any more".
I'm still waiting!
Hi Peter,
Slip of the point? A compound gain of 26.3%p.a. maintained over 20 years would actually deliver a 10,567.6% gain ... overall, a '107-bagger'.
Hi DaviStoVest, Thank for identifying the slipped decimal point. Now a 107 bagger over a 20 year period really would be something to write home about.
Regards,
Peter Craven.
A lot of this is dependent on the size of the portfolio under management. Huge gains are *relatively* easy for small portfolios as defined by their absolute value. As the portfolio grows it becomes harder and harder to add incremental value, even for the very best. Peter Lynch, for example, had an outstanding record but by the end of his tenure the Magellan Fund had grown to such a size it was harder and harder to outperform. Warren Buffett has, by his own admission, a similar issue.
Realistically a 10% annual compound gain, adjusted for inflation, over 20 years+ will provide outstanding returns. People who can achieve better than that, regardless of what system they're using, are among the very best investors. 20%+ over that kind of period isn't realistic in the real world unless the starting amount is trivially small, and even then would be surprising.
The other thing to remember is that the investment world isn't static - the invisible hand applies to investing, too. So if someone comes up with a repeatable method that generates above average returns - Stockranks, say - and this becomes widely known, others will move to copy it and start to arbitrage away the returns. This has been seen repeatedly - the accrued interest anomaly is one instance that comes to mind.
In essence, the only thing that matters is real value in real portfolios over significant periods of time, which is why we all love Buffett and Munger so much. Even then there's an argument that after 1000 rounds of tossing coins there'll still be one lucky tosser coming up heads every time. Like all such arguments it's baloney, but it keeps believers in truly Efficient Markets sane at night :)
timarr
This argument that every one will cotton on doesn't float with me.
My strategy is just over 5 years old and it was simple to develop.
I scrolled through the Guru screens ranked by 5 year performance until I found a strategy with a limited drawdown that generated a reasonable amount of stocks.
The first one that hit the mark was The Naked Traderesque Screen. Just look at the performance ...
That screen formed the genesis of my strategy. Robbie Burns even publishes his trades and still people prefer to plough their own furrow thinking they can do better. His transparency inspired me to be transparent in my purchases using a fantasy fund.
I'm not sure what constitutes trivially small, but last year was my best year to date and I was close to my first ever six figure yearly gain, so I'm not managing £m's but it is far from a trivial amount of money.
This argument that every one will cotton on doesn't float with me.
Why? It's just capitalism at work - if something works and makes money and is publicised people will copy it and improve it and the margins will reduce. There's a small industry in academia and hedge funds doing nothing else.
As for the Naked Trader screen - well, yes, at any point in time it'll be possible to identify successful strategies with hindsight. That chart is over a 5 year bull market - any old idiot has been able to make money over that period. And believe me, I should know :)
What matters is why it's outperformed, because if it's not based on some underlying market anomaly or information asymmetry it's just noise in the machine and doesn't say anything about the period that really matters - the future. Correlation is not causality, otherwise the price of Bangladeshi butter would have been the best predictor of the S&P500 back in the day.
The point about the portfolio size also isn't about past performance, it's about the effect of the law of large numbers as compounded gains kick in. If I take your figures and round roughly for simplicity's sake it would suggest a £500K starting portfolio to get a six figure gain on a 26% uplift last year. If you compound that up over 20 years you end up with about £85 million, even without reinvesting dividends.
That would be nice, but it would make the investor one of the most successful of all time. Even Warren Buffett and Charlie Munger have only managed 19.1% over Berkshire Hathaway's lifetime in their control.
There's nothing wrong in riding the bull while it's storming ahead, but the real trick is in knowing when to get off.
timarr
er I think there's something quite wrong with the maths in that last post
My annualised return over 5 years is 26%, last year I cleared 38%
Yeah, might be. I stuck £500K and 26% into an online monthly compound interest calculator and that's what it threw out :)
We're in a highly unusual period for the markets, but history tells us that this period of relative calm won't continue forever. People get lax about risk management (aka disaster myopia) and don't see the issues coming. I'm not complaining, though, long may it continue!
timarr
Hi Tim, I don't follow some of that. If something works then why will it fail if more people follow it, you could argue that it will work better as more people are buying those shares. I have such comments about The Naked Trader, he has a lot of followers so the share price goes up after he announces his buys, same with Minervini. The Naked Trader screen has performed well, not the best but certainly much better than the market average and better than most other screens, it's not about making money, it's about how much money. The thing is there are so many different screens and other things on Stockopedia that no one screen or NAPs or whatever will have a huge following, even doing a NAPs the next day you will get a completely different selection. Also so many negative people who don't believe it will work for much longer etc. Yes it's been a bull market but Phils fund has made 225% in the last 5 years, the FTSE350 has made only 25.8% and the Allshare about 30%. Berthshire Harthaway made most of their money in the late 70-90s, I have seen some posts saying they don't beat the market average anymore, how much have they made over the last 10 or 20 years? How much has Mark Minervini made? If you are talking about funds, I would agree they get too large and difficult to manage, this is where the private investor has an advantage, he can buy and sell quickly as long he is in fairly liquid stocks at modest amounts. I agree the market won't go on up forever and will fall back but it does not follow that you can't still beat the market average. If you only have about 20 shares you can sell them and you can short the market etc. WB does not try to time the market although I have read he has a lot in cash at the moment.
Hi herbie
Well, the problem tends to be that if there is some underlying market anomaly then the effect of everyone trading it will tend to arbitrage it away. An anomaly essentially just means predictable mispricing. Obviously if more and more people are trading this the price differential will disappear rapidly - it then becomes an arm's race as to who can get to the trade first, a situation that will always favour institutions with deep pockets.
With a lot of the more popular writers and tipsters you have to be quite careful about how you measure. The fact that a tip can move the market gives a tipster an inbuilt bias in their favour and they very often have better data sources than the average private investor. To be honest, I often wonder why they're writing about their strategies. Surely if they were any good they'd be trading and not telling anyone? Perhaps I'm just an old cynic ...
In terms of performance the starting value makes a huge difference, If my starting capital is £10,000 then a 225% gain is irrelevant in the bigger picture. If it's £1,000,000 then that's quite impressive. To be clear, I'm not commenting on Phil's fund, I'm just making a general point, it's a lot easier to outperform with smaller amounts of capital. That's the main reason Berkshire Hathaway's performance has tailed off a bit - it's not that Buffett and Munger are worse investors than they used to be, it's simply that when you have billion dollars to invest there aren't many things to put it in. They still managed 23% last year, mind you.
And the market matters - in a bull market it's not that difficult to make money, in a bear market it's incredibly hard and psychologically punishing. In 2007/8 I was 42% down at one point and it was sheer pain as I watched my life savings draining away day after day after day. At the time I was posting on TMF and the board traffic dropped to near zero as all the happy investors disappeared, one by one.
Basically if people are still posting about their great performance 18 months into the next bear market I'll be genuinely impressed. As it stands, I don't think we can tell the difference between skill and surfing a wave.
timarr
I'm pretty sure you always were - keep up the good work ;-)
Yes I agree with your first point if there is an anomaly, maybe that's why Stockopedia does not work so well in the US markets. But I don't think these are necessarily mispriced, in fact many investors will think they are overpriced. I agree about tipsters, the prices are often marked up before the market opens, seen that with IC tips. I also agree that momentum based strategy will not work in a bear market that's why the likes of Minervini will be out or shorting the markets. Why do they write about their trades because it probably supports the shares and of course they are ahead of the information, they will buy and sell before anyone else knows. As for growth making it less manageable then that maybe the in case for some, for me it's not a problem, in fact at times I could do with more funds, I buy UK and European shares and a few US, most European and US shares don't have a liquidity problems and I can easily double my stake in each. After the next crash I will probably buy more US shares. I don't have Bethshire Hathaway's figures for last year but I have the last 3, 5 and 10 years, which were 35%, 80% and 117%, the S&P500 produced 33%, 83% and 117%. I can see why he advises buying index trackers. Yes I agree about bear markets, difficult to make money unless you short the market. I will probably sell most of mine apart from the income ones, some defensives and do some index shorts. In a bear market it's not about making money it's about not losing, I would like to be mostly cash so I can re-enter when the markets start to pick up. I'm already part of the way there.
I think the points are firstly that if you are making 26% pa then at some point you become the victim of your own success, by definition your portfolio gets larger and more difficult to manage as time goes by. If PhilH keeps going the way he is then he won't be in modest amounts for too much longer. Unless I suppose he starts spending the money, or giving it away - I'm happy to provide bank details for donations : )
Secondly there are many cases of funds and investors returning exceptional gains over three to five years periods. Doing it over a 20 year period is another matter.
I have to add that there is a general historical theme that when people start saying "I've identified a fool proof method of successful investing" or "its different this time" or "there is a way of always beating the market" things have a habit of going spectacularly wrong shortly afterwards. I think its best to maintain a sceptical perspective on one's own abilities and what can realistically be achieved.
On your last point about WB what he does do is operate on the basis of valuation which is a proxy for market timing, if it is too pricy he stands back and waits for value to reassert itself.
Returning to my first post, had you been a contrarian and bought Barrat in 2010 for £1, you'd have five bagged by now, a compound annual return of 50% before dividends and with minimal trading costs.
Sadly I didn't ...
Clearly to follow a contrarian strategy you would have to have made a range of buys of this nature not all of which would have paid off etc etc but the same is true of PhilH's fund, it is an approach and a series of decisions which has yielded excellent returns over the period for which is has been run, but only because the person running it has implemented it well.
My point is simply that there are a range of different methods which deliver good returns, some better than others at different times and in different market conditions and all with different levels of risk. There is no reason why someone could not get 26% returns using a contrarian based strategy. the implementation would have to be right but that is the case with PhilH as well, if someone tried to do the same as you and did it badly they wouldn't get the same returns.
Hi Bonitabeach,
I'm still going up a very steep learning curve myself. Of the shares I listed I only hold modest quantities of St James Place, Croda International and Rio Tinto and all for under 3 years.
The financial model I used to calculate the average 10 year compound gain (Dividend and Price) less trading expenses of St James Place was to find the compound gain over 10 discreet time frames and work out the average. For each start date the initial investment modelled was £20,000.
Mon, 02-Jan-2017 Fri, 25-May-2018 17.14%
Sat, 02-Jan-2016 Fri, 25-May-2018 10.97%
Fri, 02-Jan-2015 Fri, 25-May-2018 15.48%
Thu, 02-Jan-2014 Fri, 25-May-2018 15.14%
Wed, 02-Jan-2013 Fri, 25-May-2018 23.89%
Mon, 02-Jan-2012 Fri, 25-May-2018 25.10%
Sun, 02-Jan-2011 Fri, 25-May-2018 24.79%
Sat, 02-Jan-2010 Fri, 25-May-2018 22.71%
Fri, 02-Jan-2009 Fri, 25-May-2018 23.46%
Wed, 02-Jan-2008 Fri, 25-May-2018 16.78%
Average 19.55%
St James Place Plc is a very attractive investment proposition because of its compound gain history and because the dividend is forecast to increase by an average of 13.6% this year and 16.47% next year. The share also has a rolling yield of 3.59% at Fri, 08-Jun-2018 closing price of £11.93.
I also had a look at Philh's fund and the remarkable 26% return it has produced. Note worthy though, is high number of trades carried out by Philh. Like most things, the entry and exit criteria Phil uses are a case of "The devil is in the detail"
Hope this is entertaining and helpful.
Regards,
Peter Craven.
Hi Peter, Re Philh's fund, I think you will find the Stockopedia figure of 26.3% is after trading costs, does not include any dividends and has wide spreads. I usually get better prices through my broker than what I can get in the fantasy fund. Also there is at least a 20 minute deal on dealing which does not help. So that 26% maybe well be higher in real life.
However, it doesn't include any FX fees for foreign stocks. For me personally that is 1% on transactions. But like herbie said the fantasy fund doesn't include dividends.
Hi herbie47, The 26.3% compound gain is remarkable enough in its own right. If dividend income is excluded and unusually wide trading margins have been incorporated into fund model then this has to be worth at least a couple of percentage points more taking the actual compound gain to about 28%.
A compound gain of 26.3% PA maintained over 10 years would yield a 932.8% gain.
A compound gain of 26.3% PA maintained over 20 years would yield a 1,056.76% gain.
Suggest philh should become a fund manager, slaughter the market and show Warren Buffet how its done??
Thing is, I am getting similar returns from different shares. We have the stock ranks method in common.
Hi Underscored, Pleased to learn you are getting great returns using stock ranks. I'm not a subscriber to the Stockopedia web site so I don't have access to the various ranking systems..
I want to stress that my portfolio only returns about 10% at the moment. The shares I am investigating are still "Work in progress" but I plan to migrate my shares to what I believe are stocks which will yield much better returns.
Regards,
Peter Craven.
"Observing the performance deciles illustrated by the Stockopedia charts reveals that even the winning investment strategies have loosers and underperformers in the lower deciles."
I don't understand this statement.
Hello Hotsocks,
I value your comments and the maturity of your response.
I have to admit that I have not looked at the Stockopedia performance charts as I am not a subscriber to site.
Observing the performance deciles illustrated by the Stockopedia charts reveals that even the winning investment strategies have loosers and underperformers in the lower deciles.
My efforts have focussed on doing my own research on a limited number of companies (42 to date) and using spreadsheets do the arithmetic and document the results. The basic approach is to download the entire dividend and share price histories so I can compute the compound (Price and Dividend) gain PA.
I compare the performance of the shares I have studied and use the basic selection criteria of good historical compound gain and dividend forecast prospects. Each has a weighting of about 50%.
The numbers alone don't tell the story so the next stage is to look at the company reports and get the numbers in context.
This is all very time consuming. Over the last year I have spent about 4 hours per day on this endeavour. But it is rewarding and I learned a lot. Good example of getting the numbers in context is Rio Tinto. Dividend prospects are not to good at the moment because of the incredible returns over the last 3 years.
Still very much have "L" plates on at the moment.
Regards,
Peter Craven.
Peter Craven wrote: "I'm very sceptical about the capability of any Stockopedia screen to yield 20% PA over a long timeframe."
I would agree with that. The past history of the Stockopedia screens and the StockRanks are entirely over a period during which there has been a multi-year bull market in equities. They might not perform as well during the next bear market, whenever that occurs, even in terms relative to the market as a whole. One reason is that past bear markets have often led to 'momentum crashes' and the StockRanks and many of the Stockopedia screens have a large momentum component.
Hi herbie47, I'm very sceptical about the capability of any Stockopedia screen to yield 20% PA over a long timeframe.
Do you realistically think this sort of performance can be maintained over a 10 or 20 year period.
Regards,
Peter Craven.
Hi Peter, To be honest I don't know, this has not been tested in a bear market, I think some years such as 2017 you will get great results of 45% and other years much less, but it always seems to beat the market average. Remember Stockopedia is picking what it considers the highest ranking shares. I think 20% may well be feasible. Who knows what will happen in 10-20 years time. All I know is it has improved my performance so for me it's worth it. I was sceptical to start with that's why it took me a year to really implement it, I should have done it sooner. Actually it was the first NAPs that really got me interested in Stockopedia.
Hi Herbie47, I have been investigating the average compound gain of companies with an excellent track record over the last 10 years. By compound gain I mean what an initial investment of £20,000 would be worth taking into account the dividend income and share price gain. My study show that the compound gain is sensitive to the latest share price. This aligns with your observation that performance is impacted by a bear or bull market. For your info please find as below a list of companies all with a compound yield of over 14% in the last 10 years.
Ashtead Group Plc (AHT) - 39.25%
London Stock Exchange Group Plc (LES) - 26.97%
Mondi Plc (MNDI) - 25.05%
Rentokil Initial Plc (RTO) - 24.32%
Halma Plc (HLMA) - 23.97%
Spirax-Sarco Engineering Plc (SPX) - 23.41%
Fidessa Group Plc (FDSA) - 23.14%
DS Smith Plc (SMDS) - 22.49%
Diploma Plc (DPLM) - 22.14%
DCC Plc (DCC) - 21.46%
Croda International Plc (CRDA) - 21.37%
St James's Place (STJ) - 19.55%
RPC Group Plc (RPC) - 17.34%
Ferguson Plc (FERG) - 15.72%
Legal & General Group (LGEN) - 15.17%
Clarkson Plc (CKN) - 14.88%
Rio Tinto Plc (RIO) - 14.81%
Unilever Plc (ULVR) - 14.76%
Polypipe Plc (PLP) - 14.56%
Prudential (PRU) - 14.14%
Regards,
Peter Craven.
So what is the signal in a company report you are looking for?
Hi underscore, I use company reports and presentations to make judgements about the quality and growth prospects of a company. There is no single issue which I look for. On the financial side I judge quality on the compound gain over the last ten years use web resources to discover what the dividend prospects are for the next two years.
No weight given to broker ratings as these are biased in favour of buy.
No weight given to PE ratio as this is simply a measure of investor sentiment.
Consideration given to yield and share price away from years maximum.
Regards,
Peter Craven.
Thanks for the list of shares with their compound gains, very interesting.
Have you looked at the page on Stockopeadia with the performance charts for the stock ranks? It allows you to filter by the different stock ranks and different rebalancing periods. The results indicate that the momentum rank has been the best performer which fits with the market conditions during which data is available, as it is a bull market. The returns of the composite momentum/quality/value score are actually less than momentum on its own as they are brought down by the quality and value elements which have not performed so well. Quality has performed better than value (unsurprising as it is a quasi-momentum measure in some respects).
What is clear is that over the limited period for which data is available and during the bull market over that period returns from a stockrank based approach have been very strong.
However I share your scepticism that this is a magic bullet that will deliver guaranteed returns at this kind of level (and in fact stockopeadia state openly that periods of underperformance should be expected at some point). I think in a bear or flat market momentum may not perform so well and that the value and quality ranks would not be as suited to a purely statistical/data driven approach.
Firstly because I think they are harder to pin down to a purely mechanical analysis of selected data. If you look at the performance charts for the momentum score they are very neatly divided into deciles or quartiles of performance, the value and quality charts are not so neat and tidy.
Secondly because the periodic rebalancing approach is I think well suited to momentum trading. The sell point is easily identifiable as the point where momentum is lost. It does not work so well for value based approaches for example because if you keep selling just as the value element reduces then you are denying yourself the recovery upside that the value based approach was designed to pick up - you buy cheap shares in the hope that they will recover, not because you want them to stay cheap.
Thirdly because bear or flat markets are much more stock pickers markets than bull markets when a rising tide lifts all boats.
Personally I think humility is important as whatever your successes the market can always turn against you, and any belief that a particular system has "cracked it" feels dangerous to me. History suggests the odds are against it.
Hi Peter, thanks for that list, I do hold Ashtead (LON:AHT) and Rentokil Initial (LON:RTO). Most of those are larger companies, I think you will find Stockopedia performs better with smaller companies, you can check the performance on here: https://www.stockopedia.com/stockranks/performance/?exchanges=LSE%2CISD&field=_QVMScore_lo∩=350&period=1&buckets=deciles
If you change from the default >10m to >350m the gain drops from 155% to 116%. Most NAPS have small to medium size companies with a few large ones. The best performers recently have been Games Workshop (LON:GAW) +325% and IQE (LON:IQE) +204% since Jan 2017, IQE (LON:IQE) would have been sold at end 2017 as Stockrank had fallen, it was 148p then. 2016 had Indivior (LON:INDV), IG Design (LON:IGR), Morgan Sindall (LON:MGNS) if you had still held them until today you would have made 159%, 124% and 116% respectfully. At the end of each year then a new NAPs is done, some shares are reselected I think Computacenter (LON:CCC) has appeared in 3 NAPs, Edward Croft has changed the rules slightly from year to year. This is a review of the original 2015 NAPs which produced over 43% gain in a year: https://www.stockopedia.com/co... Of course NAPs is only one way of using Stockopedia, I think you will find many members don't do NAPS, I have not done one, I prefer to pick individual shares and buy/sell at different times of the year.
Hi Peter,
Thank you for the illuminating research.
It is a bit deflating to realise in the 10 year period I only held (and continue to hold) one of the shares in your list; St James Place ; currently languishing on a StockRank of 24! It is even more deflating to admit I did not buy my holding, I inherited it.
You do not say over which ten year period your research applies: if it is 1 Jan 2008 to 31 Dec 2017 then I think the results could be very different 12 months later with Financial stocks to the fore?
Had a quick look at Phihlhs Fund too. He has returned 26% p.a. and he professes to know next to nothing about the companies he invests in - respect!
Back to the drawing board for me.
Bonitabeach
cig & Shipoffrogs,
There's a poker adage that goes
For me the largest group of investors that lose out to me are the large financial investors, e.g. pension funds, investment funds, etc.
Due to their size they are not nimble enough to move in/out of the companies that I invest in. As a result their returns suffer and mine prosper.
The beneficial owners of all these funds are "the majority of the UK citizens" you want "taking control of their own investments", that is redeeming their fund holdings for a self-managed quant portfolio. In your dream scenario there will be no clunky large investor left.
What I never understand is why certain people (including Stockopedia itself) can't seem understand there is a third way.
I find certain shares using SR/Guru screens then read-up on them.
From other sources I have read (SCVR for example, but there are many others) I find shares that interest me, then I check them out using the Stockopedia screens.
What I NEVER do is just use one source.
I strongly suspect that is what the majority here do, but the evangelists want to make it seem otherwise.
Phil
Hi Phil,
I don't disagree. If it works for you keep at it, but when people say there is only one way, I'll stand up and present evidence to the contrary.
In the vastly overwhelming majority of cases e.g. from investment websites or investing books, the advice is learn to read accounts, dig into company reports, learn the sectors, listen to the management teams, speak to other investors, etc.
The vast majority of potential investors, e.g. your relatives, your plumber, postman, etc. are not sophisticated investors but they too should have access to the market and a strategy that enables them to build and manage their wealth. I know from direct personal experience that Stockopedia enables that and in fact I'm confident that I could for example present a NAPS strategy to my 10 year old daughter and she'd get it.
Imagine if we could get to a point where the majority of the UK citizens were taking control of their own investments using a simple quant strategy. It would massively transform their life options and be a huge benefit for the country as people's wealth increased.
So call me an evangelistic if you want but it feels as if Stockopedia is a breath of fresh air.
Best of luck
Phil
P.S. The reason I keep highlighting my fantasy fund is that it provides evidence and a history of my transactions. Why should anyone listen or give credence to anyone's opinion if they can't provide evidence of the efficacy of their approach? Tis madness surely?
Outperformance (above index returns) is a zero sum game at the aggregate level: you can only gain what someone else is losing. Stocko makes it easy for you to identify people who are weaker than you basically, which is by definition not something that can work for everybody.
"Imagine if we could get to a point where the majority of the UK citizens were taking control of their own investments using a simple quant strategy. It would massively transform their life options and be a huge benefit for the country as people's wealth increased."
Surely in this scenario their average return would roughly equate to that of a low fee market tracker.
Very interesting but probably a contrarian strategy is best left to those with time and patience.
Not sure I agree. Stocko provides good analysis but I don't think that anyone would use it as the sole determinant of the investment decision. I use it sometimes as a starting point, sometimes as an indicator the I am 'on the right track' but only as one of the sticks in the bundle of information about a Stock leading up to an investment decision..
Maybe I have misunderstood your comment.
Investment decisions need to be based on data AND be supported with studies of company reports, dividend prospects and other fundamental market information.
The Achilles heel of stockopedia is that it promotes investment decisions based on data alone.
Hi Peter,
says who?
what evidence do you have to support the claim?
I'd say embracing naivety is a distinct advantage to stroking one's ego and then getting it badly wrong.
By the way the Stockopedia data IS the fundamentals and can be screened against sector/industry competitors.
Warm regards
Phil
Says me. The evidence is logic, by making a study of the fundamentals it is possible to avoid many mistakes that contrarian investors make. The article states "being a value contrarian can be painful, it’s a strategy that has proved to be very successful for some of those who apply it".
Lets take the example of BT where Q4 2017-18 finals report makes worrying reading for any existing or prospect BT shareholder.
Page 11 of the report states:
BT and the Trustee of the BT Pension Scheme (BTPS) have reached agreement on the 2017 triennial funding valuation and recovery plan. The funding deficit at 30 June 2017 is £11.3bn, with the increase from the 2014 valuation mostly due to a fall in long-term real interest rates.
The deficit will be met over a 13 year period, maintaining the remaining period of the previous recovery plan. The deficit contributions have three components:
• Payments within the three years to 31 March 2020 totalling £2.1bn, in line with the amount due under the previous recovery plan. £850m of this was paid in March 2018 and the remaining £1,250m is to be paid by 30 June 2019.
• A further £2.0bn contribution, due to be funded from the proceeds of the issuance of bonds, which will be held by the BTPS. The bonds will be issued as soon as practicable.
• For the 10 years from 1 April 2020 to 31 March 2030, annual payments of around £900m.
If this were not enough we need to ask where the growth is coming from in a capital intensive industry.
I fully recognise that investing is not a precise science, but, "Embracing naivety" is never going to cut the mustard as a strategy.
Cheers,
Peter.
Well Peter it might surprise you to know that I know next to nothing about the companies I invest in, I avoid company commentary over and above quarterly revenue, eps and margin details and I definitely avoid the opinion others 'in the know'. I never read company reports!
My fantasy fund which mirrors my personal investments (with the exception of the starting pot of £1m) has been running for over 5 years and has an annualised return of 26%.
This is why I asked for evidence to support your position. Logic doesn't cut the mustard for me, I prefer evidence and in this case I can demonstrate that your argument that strategic naivety is a problem isn't actually true. Quite the contrary in my opinion.
Best of luck
Phil
Hi Phil,
Your fantasy fund is doing very well to yield 26% PA.
My investments yield about 10% PA.
I'm not prepared to risk my hard earned money in companies I know nothing about or to trade with the regularity the constituents of your fantasy fund.
Best wishes,
Peter.
Sounds like you should be risking more in companies that you know less about. Ah Warren Buffet did he not lose $444 million in Tesco's?
10% pa is ok but some of the guru screens are making well over 20% over the last 5 years. You don't have to blindly follow Stockopedia but I find it helps picking winners, my performance has improved no end since joining about 3 years ago. You can also see the performance figures for the top decile (90-100), about 155% over 5.25 years. Have you read this article: https://www.stockopedia.com/content/new-year-naps-top-stocks-for-2018-and-the-benefits-of-ignorance-291403/ 2017 NAPS returned about 45%.
Hi Herbie47,
Your observation that Warren Buffet lost $444 in Tesco is correct. This demonstrates the fact that unexpected events, (meat traceability scandal, rival budget supermarkets, recession, failed overseas expansion and an accountancy scandal) in the case of Tesco can bring a company to its knees.
I read the article you cite and was impressed that such a simple strategy could apparently produce such stellar results of 20% compound annual performance over 5 years. However the devil is in the detail:
1. - If we could invest and achieve 20% PA then this would yield a gain of 519% over 10 years and 3,834% over 20 years. The implication of this is that an initial investment of £10,000 would become £61,920 in ten years and £383,380 in 20 years. Seems to good to be true, I smell a rat!!
2. - To successfully implement the strategy involves the investor doing a lot of trading each year. The article does not explain the what the exit criteria is for each stock held within the portfolio.
I'll stick to my strategy for the moment and try to improve my pedestrian performance of only 10% PA until I fully understand the naps strategy.
Regards,
Peter Craven
Hi Peter, If you are referring to the Naps portfolio then these are rebalanced annually, so there is hardly any trading. If Guru screens yes there is quite a bit of trading in some of them but the performance figures do not include dividends. All I'm saying is there is a lot of information on Stockopdia that many find useful. I would do some more research. You don't have to do a NAPs. You can set up some virtual portfolios and see how they run.
I don't really agree about Tesco, he bought after a profit warning, there was already known problems there. It was $444m his biggest ever loss.
I must confess, when I first read this article, I thought "so what?" - so it's nice to see that it has generated an interesting debate.
And quite possibly make a whole host of other mistakes based on your own study, analysis and judgement surely? (You are effectively backing the idea that your judgement is 'better' than the collective that makes up the market)
So just to take your example of BT, you cite lots of pertinent information about the pension deficit and its impact on cashflows over an extended period.
Now I am no believer in the "Efficient Market Hypothesis" by any means, but I have to say that all of that information is very well know by the market and there's a very fair argument to say that this is 'all in the price' (and some).
On the other hand the general doom and gloom about pensions possibly fails to take in to account several factors : interest rates are rising which will reduce the modelled liabilities of pension schemes, longevity seems no longer be increasing (perhaps even contracting), investment returns from the BT scheme assets have generally outperformed the more conservative future assumptions that they are allowed to make.
Improvement on the underlying scheme assumptions could potentially be a trigger for an improvement of sentiment.
BT has also recently announcement a massive reduction in middle-management and back office functions - so far the market seems to have greeted this as proof that the business is broken, but once those savings start to kick in and the stickier revenue streams continue regardless a different view may emerge.
Taking these two factors together with the recent share price falls, I would argue that BT currently looks like a much better investment than it has in years.
And there is the rub, both of us have done additional research and applied "common sense" judgement, but one of us has to be wrong!
I don't fully agree with your initial assertion that Stockopedia "promotes investment decisions based on data alone" , but to the extent that it does it also promotes the idea of diversification.
It is really just a tool though and you can use it how you like
Going back to Ben's article :
That demonstrates the real power of "dumb data".I do agree though that if you are going to run a very concentrated portfolio you will absolutely want to do much more research (but at the same time run the risk that you introduce your own biases which may or may not be helpful).
On the other hand though, what I have taken away from Stockopedia over the last few months is the idea of being much less concentrated in my investments and instead let the law of averages replace my judgement, whilst in the meantime I get (hypothetically) to spend more time on the beach.
There will always be died in the wool, heavy researching "stockpickers" in the market, but the longer I play with the tools Stockopedia have to offer, the greater the likelihood that there will be one less stockpicker about.
Hi Gromley,
I agree the power of dumb data can be awesome on occasions and it appears to work be more reliable the applied to larger portfolios.
I'm still very much on a learning curve and have achieved modest success out of a mixture some real duds including Tesco, Drax, BT and Vodafone but great performers like Rio Tinto, Croda and St James Place.
Thanks for your thoughtfull reply.
Cheers,
Peter
How do you know anymore about the future than the next person!
Hello underscored,
I use data and fundamental analysis using reports and so on to make investment decisions. Like you I cannot predict the future. Company share prices can react negatively due to investor sentiment or unexpected events.
The data driven approach promoted by stockopedia does not know any more than any other rank about the future. I might remind you though that Buffet said "Beware of geeks bearing formulas".
Regards,
Peter Craven
Hi Gromley,
I also have come round to the idea that for the average investor ( I class myself as such) it is better to be less concentrated than more so. For people like Paul Scott who have oodles of ability to fully scrutinise a company from an accountancy view and who also know people who are smart and shrewd investors then concentration and 'belief' work well. Well when it comes to looking at company accounts I admit to being a thickie! Even if I were to be in possession of all the right data it would do me no good as i would not be able to use it meaningfully to make investing decisions. i have a couple of screens set up on here that look to find companies with basically 3 things
1 High stockrank
2 high yield
3 high momentum
Essentially my portfolio has 'bought the market' in stocks that fall into this category (about 150 stocks as things stand) and I intend to just let the averages play out. Since adopting this approach there are a couple of things I've noticed against my previous approach.
1 better returns
2 lower volatility
3 Much reduced exposure to profit warnings!
If stocks rise to an average yield ( c.3%) I sell them
If they fall below SR80 and remain below for a month or two, I sell them.
I buy new risers above SR90 that have a decent yield ( 4% or greater)
The price action between buying and selling is of no interest to me ( im happy to sell losers)
That's it really, I find the ones that end up as profit warnings generally have drifted out of SR80 a wee while before they warn! Beyond that I do no or very little fundamental analysis as quite frankly it has no predictive power for me and i also believe if I know it then the market knows it and the price will reflect this.
Its a pretty mechanical process which I like as it avoids those feelings of guilt and regret that come with selling losers and not having bought winners!
The big take from this for me is that without stockopedia my 'method' would be damn near impossible!
I don't think the stockranks are that great at locating contrarian ideas because they are too heavily skewed by cyclical factors. Barratts is a perfect example, over a period of several years the share price has gone up while the p/e ratio has gone down and the yield up; the market is predicting the top of the cycle for the share. Strictly speaking I suppose a bet that the top of the cycle is some way off is a contrarian one if the market says the opposite, but it lacks the true value element that seems an intrinsic part of most contrarian strategies.
the time to buy Barratts would have been between 2008 and 2012 when probably the value rank would have been low because the business was making less money, paying less dividends and its landbank would have attracted a lower valuation, so higher p/e ratio, lower dividend and higher price to book.
I am a huge fan of this site and the data and tools it provides but this is an example of where a purely data driven approach has limitations.
Hi HotSocks,
For me the challenge with Contrarian's is two fold:So Itend to steer clear of that type of stock as there are so many stocks out there that are appreciating right now and compound interest is an incredibly powerful investment tool.
Best of luck
Phil