Quantitative Value Investing Strategies in Japan During the Year 2013
Found via COBF
Quantitative value investing strategies, or investing strategies that compare a company’s financial statement fundamentals relative to the company’s current market price to pick companies to invest in, are not new. Benjamin Graham, the father of security analysis and value investing, recommended a few of these strategies in his seminal books The Intelligent Investor and Security Analysis. Since his initial work, others have improved upon what he found, creating and analyzing a variety of other quantitative value investing strategies. In this paper we look at how well eight of these strategies performed in the Japanese equity market during the year 2013, when the Japanese equity market was dirt cheap by any measure, but where we otherwise could not invest intelligently due to language barriers.
Quantitative Value Investing Strategies – Introduction
On December 4th, 2012, the first trading day of that month, the Japanese Nikkei closed at 9,458.18. This was less than one-fourth Nikkei’s highest-ever closing price, 38,915.87, hit over 20 years earlier on December 29th, 1989. It was also below what the Nikkei traded at during most of the first decade of the 2000s.
However, if one was able to look past the negative sentiment in the market, there were some serious bargains that could be found. Many stable companies that had been profitable for decades were trading at fractions of their cash balance net of all of their liabilities. And their cash balance was growing larger every year.2 Other companies had been increasing their book values at rates in excess of 15% per year, but were trading at their book value or less.
I started researching Japanese stocks at this time. Unfortunately, my understanding of the Japanese language is limited and it was nowhere near the level it needed to be to do the research required to evaluate individual Japanese companies as investments. Instead of giving up on investing in Japan, however, I decided to look at taking a more quantitatively based approach to investing there instead.
Quantitative value investing strategies pick investments strictly by comparing a company’s financial statement-based fundamentals relative to the company’s current market price. Most of the strategies tend to measure companies using some value metric, such as the price-to-book (P/B) ratio, and then rank all of the companies in a given market based on how cheap they are based that metric. Most of the strategies then lump the cheapest stocks together in a “basket,” and invest in each company in equal amounts. A “basket,” when talking about quantitative value strategies, is generally either a certain number of stocks (say, the top ten, thirty, or fifty cheapest stocks based on a specific metric), or each of the stocks in a certain quantile of the market.
While I ended up not investing in Japan during 2013, I learned a lot while doing the research for it. In this paper, we explore what I found.
First, we will look at the history of quantitative value investing strategies and what research has already been done on them. Next, we will look at how the data used in this study was collected and how it was processed to come up with each quantitative value investing strategy’s stock selections. Then, we will look at the eight different quantitative value investing strategies in depth, exploring how they are constructed and work. Finally, we will analyze how each of the strategies performed during the year 2013. This paper is addressed to an audience that understands basic accounting and finance. More complicated topics and terminology will be explained as they are introduced.
Quantitative Value Investing Strategies – Prior Work
Quantitative value investing strategies are not new. Benjamin Graham was one of the first to recommend them. His strategies ranged from softer, more heuristics-based strategies to more hard, strictly quantitative strategies. An example of the former was his strategy for whittling down the stocks in the Dow-Jones Industrial Average to pick only the safest ones.
See full Quantitative Value Investing Strategies in Japan During the Year 2013 in PDF format here.