Wes Gray and crew at Empiritrage have pumped out some great papers over the last few years, and their Man vs. Machine: Quantitative Value or Fundamental Value? is no exception. Wes et al have set up an experiment comparing the performance of the stocks selected by the investors on the VIC – arguably the best 250 special situation investors in the US – and the top decile of stocks selected by the Magic Formula over the period March 1, 2000 through to the end of last year. The stocks had to have a minimum market capitalization of $500 million, were equally weighted and held for 12 months after selection.
The good news for the stocks pickers is that the VIC members handed the Magic Formula its head:
There’s slightly less advantage to the VIC members on a risk/reward basis, but man still comes out ahead:
Gray et al note that the Man-versus-Magic Formula question is a trade-off.
- Man brings more return, but more risk; Machine has lower return, but less risk.
- The risk/reward tradeoff is favorable for Man, in other words, the Sharpe ratio is higher for Man relative to Machine.
- Value strategies dominate regardless of who implements the strategy.