Jump to content

Deep Value Screens with very high returns


rukawa
 Share

Recommended Posts

Looking at Tweedy Brown's: "What has worked in investing" and other investing literature there are 3 deep value strategies I have found that have returns significantly greater than 20% (usually around 30%):

 

1) Negative enterprise value.

50 percent returns over a 40 year period according to Alon Bochman

 

2) Grahams net-nets

35 percent returns over 30 year period according to Tobias Carlyle and Oppenheimer

 

3) P/B < 30% of market cap

30 percent returns over 10 years. See table 4/5 of tweedy brown study.

 

My view is that all 3 strategies tend to very heavily favor very small cap companies. Probably 70 percent of the companies have market caps under 50 million.

 

I am looking for additional deep value screens with similar return characteristics. Any ideas?

 

Link to comment
Share on other sites

I posted one a couple years ago about a net net strategy that performed horribly in the 80s.

 

It would be interesting to look at the companies that passed these screens in the past and compare them to what you would get more recently.  My guess is that investors who stuck with strict rules on valuation had to accept lower quality as multiples increased.  That's not to say that you can't find some great values with these screens but I think you'll need to do more sifting than in the old days.

 

The  quants will disagree with me though.  Most of them are of the opinion that trying to handpick the results from the screens lowers returns.  My question is, if these kinds of returns are obtainable, why hasn't anyone replicated them with real money?  The people I've seen earn good returns with value investing worked at it and read reports.

 

By the way I believe Tobias Carlisle has a book about this stuff.  I haven't read it but I've heard good things about it.

Link to comment
Share on other sites

Hey all:

 

One of the problems with these screens lately has been the inclusion of Chinese reverse merger scams and "for profit" edukation scams.  Most of these blew up bigly in the end...but they were on many of these low book/low P/E screens.

Link to comment
Share on other sites

My question is, if these kinds of returns are obtainable, why hasn't anyone replicated them with real money?  The people I've seen earn good returns with value investing worked at it and read reports.

 

All the returns are in the small caps < 50 million. Most of the people you hear about are fund managers. A real money implementation of this strategy would only work for small time investors with probably a few million bucks to invest. You basically never hear about these people.

 

The people you hear about are people that are interesting and often the result of survivorship bias etc. They tend to be dominated by concentrated investors who often appear to be geniuses because they had some amazing insight no one else had. Often though they were just lucky. Net-net investing is simply not that exciting, interesting or a good display of someone's genius.

 

My guess is that investors who stuck with strict rules on valuation had to accept lower quality as multiples increased

 

Positive earning companies have substantially worse returns than negative earning companies for net-nets probably due to mean reversion. Screening for quality generally lowers returns hugely. Quality works well for large caps....not so much for small ones.

Link to comment
Share on other sites

I wish I could find the article I linked to in the old post, but it appears it doesn't exist anymore.  DTEJD1997 just pointed out a more recent example of how this can end in disaster.

 

I wouldn't say quality necessarily means positive current earnings for the past year or even the last few years.  I think it depends on a lot of factors, some of which may be hard or even impossible to put in a screen.

 

 

Link to comment
Share on other sites

One of the issues I see with deep value strategies like this is that it's hard to account for what percent of the companies invested in contributed to the outsized returns making them appear excellent while conducting a backtest but hard to execute in practice.

 

The entire 13-year study sample size was 645 net current asset selections from the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and the over-the-counter securities market. The minimum December 31 sample was 18 companies and the maximum December 31 sample was 89 companies. The mean return from net current asset stocks for the 13-year period was 29.4% per year versus 11.5% per year for the NYSE-AMEX Index. One million dollars invested in the net current asset portfolio on December 31, 1970 would have increased to $25,497,300 by December 31, 1983.

 

A similar analogy is found in Angel Investing where an investor creates a portfolio of say 30 startups. Most, 80% or more, are likely zeros, 10% breakeven, 5-10% are doubles or triples, and you might get lucky and have one or two that are 10x or more that make up for the rest of the portfolio's losses. Similarly, an investor conducting a deep value strategy like this might miss, for a variety of reasons, the handful of stocks that contribute to outsized returns or at the other end avoid some of the zeros skewing actual results.

 

I still think in general you're likely to do better than larger index's if you're able to find and invest in a number of extremely cheap small cap stocks, I just think that the strategy is harder to actually execute than backtesting implies because of illiquidity and qualitative biases of investors. For instance:

 

The companies operating at a loss had slightly higher investment returns than the companies with positive earnings: 31.3% per year for the unprofitable companies versus 28.9% per year for the profitable companies.

 

A "smart" investor might have avoided those losing money for example.

Link to comment
Share on other sites

This strategy hasn't worked well for the past 5 years. I keep hearing great returns with these kinds of screens but I haven't seen anyone claim big success these days.

Several years ago I played with a couple of deep value screens and backtested for 20 years with good performance (25-30%, excluding any ADRs/foreign listed), but they haven't come close to SP500 index for the past several years. If you look at Gotham funds, where Joel Greenblatt runs them with Magic formula, they haven't been doing so hot either. As matter of fact I would say the past 5 years have been a humbling experience for a lot of the value investors.

 

FUND NAME TICKER MONTH TRAILING 3

MONTHS YTD 1 YEAR 3 YEAR SINCE INCEPTION ANNUALIZED SINCE INCEPTION CUMULATIVE INCEPTION DATE

Gotham Absolute Return GARIX 0.22% 1.72% 2.56% 9.92% 1.48% 8.72% 47.66% August 31, 2012

Gotham Enhanced Return GENIX 0.45% 3.59% 5.40% 17.11% 5.45% 11.23% 51.71% May 31, 2013

Gotham Neutral GONIX 0.29% 0.29% -0.29% 3.28% -1.58% 1.93% 7.26% August 30, 2013

Gotham Index Plus GINDX -0.16% 4.56% 5.46% 20.73% N/A 11.03% 24.35% March 31, 2015

Gotham Absolute 500 Fund GFIVX -0.27% 2.98% 3.37% 9.51% N/A 5.85% 16.92% July 31, 2014

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...