Holding Period for undervalued stocks?

[TwoCitiesCapital]

Hi guys,

 

I'm about to start putting a good portion of my investments on auto by simply buying the lowest P/B stocks available to me.  No research and no exclusions. This is to hedge the possibility that I'm awful at this :)

 

I do have a question about this: most studies I've seen look at one year holding periods and rebalance. This works great but has anyone seen research that looks at different holding periods of 2, 3, or 5 years.

 

I've seen research to suggest individual picks from value managers tend to outperform the most 3-4 years after purchasing. My assumption is that this is the result of truly improved performance, market momentum, and a general change in perspective on the company by investors causing a rerating. I don't see why these wouldn't also happen for the successful cigar butts that drive the return  for the group. It'd be interesting to see if a 3 to 5 year holding period for all, or the successful ones, could outperform the single year holding period.

 

Anyone seen research on this out have experience?

 

[KCLarkin]

Hi guys,

 

I'm about to start putting a good portion of my investments on auto by simply buying the lowest P/B stocks available to me.  No research and no exclusions. This is to hedge the possibility that I'm awful at this :)

 

I do have a question about this: most studies I've seen look at one year holding periods and rebalance. This works great but has anyone seen research that looks at different holding periods of 2, 3, or 5 years.

 

I've seen research to suggest individual picks from value managers tend to outperform the most 3-4 years after purchasing. My assumption is that this is the result of truly improved performance, market momentum, and a general change in perspective on the company by investors causing a rerating. I don't see why these wouldn't also happen for the successful cigar butts that drive the return  for the group. It'd be interesting to see if a 3 to 5 year holding period for all, or the successful ones, could outperform the single year holding period.

 

Anyone seen research on this out have experience?

 

If you are just going to do a simple quant strategy, why not buy an ETF like this one:

http://www.valueshares.com/

 

Or a DFA fund based on P/B?

[Philip Morris IV]

If you are just going to do a simple quant strategy, why not buy an ETF like this one:

http://www.valueshares.com/

 

Or a DFA fund based on P/B?

 

Where did you find valueshares?  Their QVAL ETF inception was this past Wednesday 10/22/2014 with assets of $2.6M.  Cool idea, be interesting if that takes off for Wesley Gray.

[KCLarkin]

QVAL was discussed here:

http://www.cornerofberkshireandfairfax.ca/forum/books/quantitative-value-gray-carlisle/

 

 

[AzCactus]

An alternative to what you mention is Joel Greenblatt's Magic Formula Investing.  If I am not mistaken it looks for companies that have the lowest P/E combined with the highest ROE.

 

 

[TwoCitiesCapital]

To clarify the ask, I'm looking for research on automated investing over different holding periods. It doesn't have to be based on P/B, it could be magic formula, or EV/EBIT, or P/E, etc. I just want to know the research thats been done.

 

That being said, from what I've seen, a simple P/B method outperforms significantly with no adjustment. Greenblatts formula, from what I've seen, isn't as good and even he makes adjustments when applying it. I'd rather not derail the discussion with alternative ways of doing this because that's not the question I was looking to have answered.

[KCLarkin]

The alternatives matter because some methodologies will be more appropriate for longer holding periods. Momentum, for example, would not be a good choice for longer holding periods.

 

To answer your original question, I haven't seen any research on longer holding periods. I think the sample size becomes too small for most academic researchers to use.

 

I have heard that MF works well with 2 to 3 year holding periods. I've always suspected that quality (ROC) matters more for longer holding periods but have not found any research that confirms this.

[scorpioncapital]

If you do Graham style P/BV, then the holding period is equal to your desired rate of return which is equal to the average undervaluation of the group of stocks divided by the number of years to return to book value. I'd add a fudge factor for perpetual discounts, which are common in these kinds of stocks. If you desire 15% per year and the undervaluation is 20%, then it would have to get there in about 1.5 years, otherwise, presumably you'd sell or lower your expectations.

[TwoCitiesCapital]

The alternatives matter because some methodologies will be more appropriate for longer holding periods. Momentum, for example, would not be a good choice for longer holding periods.

 

To answer your original question, I haven't seen any research on longer holding periods. I think the sample size becomes too small for most academic researchers to use.

 

I have heard that MF works well with 2 to 3 year holding periods. I've always suspected that quality (ROC) matters more for longer holding periods but have not found any research that confirms this.

 

Thanks for the response. Of course the alternatives matter and I'd realistically like to research for each one; however, people were beginning to debate whether I should be do quant value funds, MF, etc as opposed to P/B which had nothing to do with the original question.

 

I had noticed the same thing when I was doing my paper portfolios in MF but my 20 stocks for 3 years probably isnt conclusive or expansive enough to even really consider as evidence. Just trying to figure out if I should stick with the annual rebalance or cut fees and increase performance by holding for 2 or 3.

[TwoCitiesCapital]

If you do Graham style P/BV, then the holding period is equal to your desired rate of return which is equal to the average undervaluation of the group of stocks divided by the number of years to return to book value. I'd add a fudge factor for perpetual discounts, which are common in these kinds of stocks. If you desire 15% per year and the undervaluation is 20%, then it would have to get there in about 1.5 years, otherwise, presumably you'd sell or lower your expectations.

 

This seems to presume the stock will correct in that amount of time. What if it's still undervalued by 20% after 1.5 years? Do you hold it or sell for another 20% discount that may or may not appreciate.

 

Further, this doesnt sound easily applied in an Auto investing type strategy. It's hard to know the discount for each individual in a basket and would require research and time and adjustments. You certainly could simplify to average portfolio metrics to determine undervaluation but I wouldn't want to make individual trading decisions based off of average metrics across the portfolio.

[Philip Morris IV]

QVAL was discussed here:

http://www.cornerofberkshireandfairfax.ca/forum/books/quantitative-value-gray-carlisle/

 

That's interesting, thanks.

 

I'm surprised they launched an ETF with such low AUM.  I imagine regulatory costs would preclude profitability at <$3M AUM?  But good for them if they can get more inflows.

[cobafdek]

Anyone seen research on this out have experience?

 

For some research, see p. 27 from Damodaran:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042657

 

For experience, you probably already know about Schloss and his average holding period of 4 years.

 

And I recall from an old Whitman/Third Avenue Value shareholder letter, his preferred holding period is forever, and usually sell mainly when they replace with better values, if any.

 

Good luck to you (and me)!

 

[CorpRaider]

QVAL was discussed here:

http://www.cornerofberkshireandfairfax.ca/forum/books/quantitative-value-gray-carlisle/

 

That's interesting, thanks.

 

I'm surprised they launched an ETF with such low AUM.  I imagine regulatory costs would preclude profitability at <$3M AUM?  But good for them if they can get more inflows.

 

Press release says they're going to seed it with $50MM of the assets currently managed in separate accounts (a couple hundred million).  They've been running a few strategies via SMAs since 2012, I think.  All info is on the websites.

[KCLarkin]

For some research, see p. 27 from Damodaran:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042657

 

If I am reading this correctly, he is saying that the studies had a time horizon of five years not a holding period of 5 years.

[scorpioncapital]

If it's still undervalued after 1.5 years, you would sell or accept a lower return. Time is ticking on these kind of stocks. If it doesn't reach your expected value in 'n' years, like an option, it's considered a loss even if you can hold it forever.

 

I would think excel can produce the average, that seems the most automated. Least automated is having to pick and choose.

[yadayada]

you either buy from a sucker or sell to a sucker . I rather not do both. If you buy net nets and you want to sell at book value, your basicly buying from a sucker and selling to a sucker. Decreases the odds of a good return imo. If you exploit inneficiences in the market you should probably sell when you can still make a slightly outsized return vs the market on the security. If you think long term markets are efficient, then you should not have to rely on dumb buyers.

[Packer16]

Monish has a 2 to 3 year rule unless you can reliably say that the value has been impaired, a good starting point in my book.

 

Packer

[TwoCitiesCapital]

Thanks for all of the responses. I have a gut feeling that holding the stocks for 2 years has a good chance to outperform a one year time frame simply due to momentum for the successful stocks and reduced trading costs/turnover.

 

If I'd like to look into this myself, is there a good database that would hVe the relevant information on prior stock prices, P/E, P/B, split, spinoff, dividends, etc to be able to back test? Anyone have a recommendation?

[anders]

I think this is one of the hard parts in investing.. when to sell..?

 

I dont think there some universal answer on holding period.. the question that correlates to holding period was also asked by warren buffett to graham when he was younger.. (what is the mechanism in the market that corrects the value)

 

I think I have an interview with Graham somewhere saying he held his position for 4 years and then sold it if the company price didnt jumped back to book.. could be why schloss adopted 4year rule..

 

I have shares like BAC that appreciated to book and then surpassed in a year. I ve had a great company for 4 years but the price just keeps on getting hammered.. Ive had companies with price decline and sold it after 3 years, then see it doubling year after.. Ive had companies that gone down in price over 50%, then next month getting bought out 200% above...

 

Its so difficult to know when to sell.. I guess my point is to stop focusing on when to sell and instead put all your focus in doing correct purchases... which basically leads to when buffett says: "Have the purchase price be so attractive that even a mediocre sale gives good results"  ;)

 

Rgds