Value Investing

Ever Looked At Quantitative Value Investing? You Should.

Ever Looked At Quantitative Value Investing? You Should.by Tim du Toit, Quant Investing

Are you a classic value investor?

Do you get excited the lower the share price of an undervalued good company falls?

Do you love sifting through the 52-week low, lowest PE or highest dividend yield list?

Something I used to do

I am also a hard-core value investor but that is not what I do any more as I found a much better way to generate market beating returns. It is called quantitative value investing.

Lead me explain.

Started the worst way possible

If you are a long time reader of my newsletters you will know that I started investing in the worst possible way.

Because of this I made every possible mistake an investor can make.

I started using technical analysis and lost money. I then followed brokers recommendations (traded a lot) but never made any real money until I discovered value investing which I have been studying and practicing for more than 25 years.

A new way of looking at value investing

However in 2012 my approach to investing changed substantially. And it changed because of an ambitious project a friend and I completed.

The search for the best investment strategy

We wanted to find the investment strategy that would have given you the best returns in the European markets over the 12 year period from June 1999 to June 2011.

It was a horrible time

As you know this 12 year period was probably the most difficult time for any investor (not just in Europe) as it included both the bursting of the Internet bubble (2000), the financial crisis (2007 and 2008) as well as the European sovereign debt crisis (2010).

Quantitative Value Investing in EuropeWe called the study Quantitative Value Investing in Europe: What Works for Achieving Alpha.

You can find it by either clicking on the image or the name of the study (subscribers to the screener and newsletters get the study for free)

Quantitative Value Investing – Astounding results +1157%, the market only 30.54%.

What we found will also astound you.

The best performing strategy returned 1157% over the 12 year period. Over the same time period the market returned only 30.54%.

In fact the top 10 strategies we tested had an average return of 881%, a return I’m sure you will also be proud of, even if you subtract dealing costs and capital gains taxes which were not included in the above numbers.

It will surprise you

The thing about the study that will surprise you as value investors is that valuation ratios were not the most important factor in any the best performing strategies.
Valuation was still very important but is not the first factor you should look at.

This is the key

What was even more important than valuation was positive share price momentum.
With momentum simply defined as the share price change over a period of 6 or 12 months. (Current share price / share price 6 or 12 months ago).

You would have gotten the best returns if you first looked for the 20% of companies with the best price momentum over six or 12 months, and then from this group invested in the most undervalued companies.

If I didn’t do it myself I still wouldn’t believe it

As a hard-core value investor these results were very difficult for me to accept, but due to the endless hours spent looking at the numbers and writing the study I was able to convince myself to take share price momentum seriously.

We even started a newsletter

We were so convinced of the results of the research study that we started an investment newsletter which has generated very good returns.

Should you become a completely quantitative value investor?

You may be asking if the research study changed me from classical value investor to a completely quantitative value investor.

The answer is I became a bit of both, and I suggest you do as well.

I still enjoy analysing companies and have of course remained a value investor but I make sure all of the ideas I analyse come from one of the top 10 investment strategies in the research study as well as new research we do all the time.

But I’ve also become a quantitative value investor investing part of my portfolio in a lot of investment ideas that are quantitatively generated.

I do this with smaller amounts invested in each company and I use a few of the best strategies to generate ideas.

Digging in the richest vein

If you use these best tested strategies it means that you are digging in the richest vein of gold for market beating investment ideas.

If you still think classic value investing is better

If you still think classic value investing is better than quantitative value investing I was also skeptical and tested it.

You can read what I found here: A simple ratio beats the world’s best value funds.

How can you profit?

If you would like to have a look at and even implement the best strategies from the research study in your portfolio we have made it very easy for you.

You can either use the screener or if you would like us to do the work for you, you can sign up for the newsletter.

You can of course, like most of our customers, use both, the screener to get your own investment ideas and the newsletter to get ideas we have selected for you.

Your quantitative value analyst, wishing you profitable investing

Tim du Toit