Besides the basic requirement of business predictability, we also filter for companies that are financially strong and traded at reasonable valuations by measurements such as intrinsic values and common used ratios. The four value strategies we have focused on use different valuation ratios.
1. Buffett-Munger screener: Invests in predictable companies that have low debt, consistent profit margin and are traded at low P/E to growth ratios.
2. Undervalued Predictable Companies: Invests in predictable companies that are undervalued based on DCF model.
3. Historical low P/S: Companies that have high predictability rank, but traded at historical-low P/S ratios.
4. Historical low P/B: Companies that have high predictability rank, but traded at historical-low P/B ratios.
These are the historical performances of the strategies relative to the S&P 500. All numbers do not include dividends.
|Year||S&P 500||Buffett-Munger Screener top 25||Top 25 Undervalued Predictable Companies||Top 25 Historical Low P/S Ratio Companies||Top 25 Historical Low P/B Ratio Companies|
|Outperforming the S&P||24%||32.7%||7.3%||7.3%|
Among all four value strategies, “Undervalued Predictable Companies” had the best overall performance. However, most of the outperformance came from 2009 and 2010, when the market was relatively cheap and it was easier to find undervalued stocks.
The Buffett-Munger strategy, where we invest in companies that have a strong balance sheet and the “moat” that protects them from margin erosion, shows the most consistent performance. It has outperformed the market in 2009 through 2011, and underperformed slightly in 2012. On average it outperformed the S&P 500 by 5% per year.
The strategies of investing in companies with high predictability ranks at historical low P/S and P/B ratios had similar performances over the past three years. These strategies lagged the market slightly in 2011, but outperformed in 2010 and 2012. On average, they outperform the market by about 2% per year.
We would like point out that even with the strategies that will work well over long term, it is impossible to find a strategy that will outperform the market ALL the time. While the strategy of investing in high quality companies at reasonable prices works, market can be carried by irrational emotions for years.
As mentioned before, we have just rebalanced all the portfolios. It is the time to rebalance your portfolio and invest in high quality companies at reasonable prices with these strategies.
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