Boost your return with F-Score

AAII has been testing several stock screens since 1998.  Among them, one of the top performing has been the Piotroski F-Score with an impressive 29% annualized return (compared to 2.4% for the S&P 500).  What is even more interesting is that the F-Score has proven to be a powerful tool to enhance the traditional valuation strategy as well as momentum stocks.  For example:

  • A strategy that would have combined Value +Growth + High F-Score beats the Value+Growth only strategy in 34 out of 37 years
  • A strategy with High Momentum + High F-Score produces average 6 months return 13.6% higher than High Momentum + Low F-Score

TQI’s Hyper-Growth strategy combines Value, Growth, Momentum, Technical and Fundamental criteria to select the stocks with the top potential and generate superior returns in all market conditions.

Disclaimer: For general information purposes only.

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You should have “Momentum”

Several studies have demonstrated the overall long-term performance of a Momentum approach.  As a reminder, a Momentum investment style suggests to buy (short) stocks that have an acceleration (deceleration) in stock price.

An excellent research (available only on paper) conducted recently by Credit Suisse and London Business School demonstrated that since 1900, a momentum approach would have generated 14.3% versus 9.5% for the overall market.  Although these data were based for the UK stock market, the research confirms that this pattern exists in most countries (with the exception of Japan) and works particularly well in North America.

The stock selection process of the TQI’s ETF Momentum strategy includes Momentum criteria to capitalize on this opportunity.

Disclaimer: For general information purposes only.

Diversifaction Redefined

The level of correlation between asset classes has important implications for assets allocation and risk diversification.  Traditional diversification models suggest that someone should have about 25-30 stocks and invest in various asset classes (e.g.: Large Cap US, Emerging Countries equities, Real Estate Investment Trusts, Commodities, Bonds, etc). 

While there is some merits to these concepts, many of us knows that they are of little help when the market crashes like in 2008.  Traditional diversification among equity like asset classes (e.g.: Sectors, Geography, REIT, etc) is of limited use to reduce portfolio drawdown since correlations among these asset classes typically spike during market panics. 

Even the old principle of investing 60% of a portfolio in stock and 40% should be requestioned.  This principle suggests that even though bonds typically yield a lower return than stocks over the long-term, they would be justified to reduce the overall risk of a portfolio because of the low correlation between the two asset classes.  However, few people knows that the correlation between the two is not stable, and changes over time which has important implications in determining the optimal allocation.  A higher correlation implies a higher allocation to equities, given that bonds generally have lower expected returns. Various factors have an impact on the stocks/bonds correlation (i.e.: stocks market cycles, interest rates, inflationary expectations) but what is more important to remember is that, as illustrated in the graph below, the correlation has been rising since 2003 and thus the need to review the amount allocated to bonds. 

Graph 1 – Stocks-Bonds Correlation
As a reminder, a score of 1 represents asset classes fully correlated while -1 are two assets classes moving in the opposite direction.

 

The real question is if there is a better way to reduce a portfolio volatility than the traditional diversification techniques.  The answer is yes.  By combining four investment strategies and having a significant portion of the index invested in short positions, TQI has been able to produce high return with a level of risks much lower than the market, regardless of market conditions.

Sources:
The Stock-Bond Relationship and Asset Allocation
Diversification: A Failure of Fact or Expectation?

Disclaimer: For general information purposes only.

Supercharged Value and Growth Strategies

Passive index investing has received a lot of press coverage over the years and rightly so since, as we discussed in a previous post, most active fund managers don’t beat their corresponding index.

While investing in an index via an ETF is probably the best investment approach for individuals who want a decent return with minimal effort, the reality is that there are a number of investment strategies that have systematically produced much stronger results.

The American Association of Individual Investors has tested over 60 strategies since 1998.  Among the most successful strategies are the Piotroski which is value oriented and the O’Neils which has a growth focus.  As demonstrated in the graph below, investing in any of these strategies would have significantly outperform their respective value and growth index.  In fact, an initial investment of 10,000$ at the beginning of 1998 in any of these two strategies would have return over 240,000$ more as of today !!!

TQI Hyper Growth strategy combines the best of both world with some screening parameters inspired from Piotroski and the O’Neils criteria to filter winning stocks.

Disclaimer: For general information purposes only.

Invest Like a Pro

It is common knowledge that the most impressive investment returns are from Endowment funds like Yale and Harvard.  These funds on average have returned 4%-6% more per year than any one asset class.  In his excellent book The Ivy Portfolio, Mebane Faber presents a strong case for active management and why the Super Endowments allocate over 20% of their portfolio to Hedge Funds.  Among the key benefits from Hedge Funds are higher risk-adjsuted returns and low or negative correlation to traditional investments.

TQI combines active management and hedge fund investment strategies to maximize return regardless of the market trend.  In order to reduce volatility and risks, TQI is mainly allocated in investment strategy that have very low corrolation with the market.

Disclaimer: For general information purposes only.

Buy and Hold…at your own risk

In bull markets, we are all genius.  But, assuming you have a mid/long-term investment horizon, you will face bear markets as well.  Many people perform their financial planning assuming the market will return about 7% which correspond to the long-term average.  The problem is that it is a “historical average”. There is no guarantee that the market will generate such return in the future and even less over the years related to your specific investment horizon.  Once you have answered the fundamental question which is “What is your expected inflation-adjusted return to achieve your financial goals (e.g.: retirement, others) ?”, then ask yourselves what are the probability that a Buy and Hold strategy will enable you to meet that goal.  The answer is probably very low.  Can you afford to risk your future ?

Here are in summary the Top 5 reasons why a Buy and Hold is a sub-optimal strategy:

  1. Has failed over the last 10 years (secular bear market since 2000)
  2. May very well continue to underperform over the 15 next years (some secular bear market lasted over 20 years)
  3. Offers no defensive strategy when markets are down (30% of the years are down markets)
  4. Traditional asset diversification (e.g.: geographical, sector, stock vs bonds) did not prevent portfolio from crashing in 2008
  5. Last but not least: Buy and Hold generates fantastic profts…for the financial planning industry with little effort and costs…

With few simple investment strategies, it is possible to  reduce your risks of not meeting your financial goals.  TQI combines three complementary investment strategies to generate superior return at a reduced level of risk.

References: 
Cons Buy & Hold:
– Buy – Don’t Hold, Leslie N. Mansonson
– Buy and Hold is Dead (Again), Kenneth R. Solow
– Buy and Hold is Dead, Thomas H. Kee Jr

Pro Buy & Hold:
– The Power of Passive Investing: More Wealth with Less Work, Richard Ferri
– The Bogleheads’ Guide to Investing by Taylor Larimore, Mel Lindauer, Michael LeBoeuf, and John C. Bogle

Disclaimer: For general information purposes only.

Why You Should Not Invest in Mutual Funds

Over a ten year period, the S&P data shows that most active funds don’t beat their benchmark. This ranges from the ‘best’ performing category (large cap growth) where only 52.8% underperform, to the worst (small cap growth) where 67% underperform.

 Sources:

•”Why active fund managers often underperform the S&P500: The Impact of Size and Skewness.” D. Ikenberry, R. Shockley, K. Womack, Journal of Private Portfolio Management, (1) Spring: 1 13-26 1998
•http://thefloat.typepad.com/the_float/2007/06/over-diversific.html