Many people are interested in running a simple strategy that outperforms the market without doing any fundamental or technical research. It shouldn’t have surprised me at all as there’s an entire “smart-beta” industry built around this desire. Smart-beta products are based on strategies that have been found by academic researchers to outperform. To make them scale the strategies are usually watered down versions and I have sincere doubt they work after the people who provide the smart-beta product take their fees. The good news is that you as an individual investor don’t need a strategy that scales at all. Outperforming the market without much research is substantially easier when you are investing million as when you are managing billions.
The bad news is that most of the strategies still require some re-balancing which will take time but if you set up an efficient process to do so it should not require much more than an hour or so each quarter of the year. Depending on the strategy a bit more or a bit less. The strategies are designed with U.S. investors in mind. For U.S. investors it is much better to trade stocks only after having held on for a year. Therefore usually a one year re-balancing frequency is usually used. European investors would likely increase returns by rebalancing on a quarterly basis or more often if trading costs don’t skyrocket too much.
The Net-Net Strategy
The net-net strategy has been devised by Benjamin Graham and popularized through his seminal investment classic The Intelligent Investor. Companies are valued based solely on net current assets. It focuses on current assets. It takes cash and cash equivalents at full value but reduces accounts receivables by a percentage and reduces inventories down to a lower amount as well. Total liabilities are deducted from the total without adjustments. The result is the company’s net-net valuation figure. There are several screeners on the web that do a decent job of providing you with a list of net-nets.
Xiao, Arnold: Testing Benjamin Graham’s Net Current Asset Value Strategy in London
Damodaran: Value Investing: Investing for Grown Ups?
My fellow Seeking Alpha contributor Ruerd Heeg runs a subscription service where he provides a detailed list of the best global net-net ideas.
Quantpedia estimates a 31% annual return for the strategy.
Magic Formula Strategy
The Magic Formula strategy is taken from “The Little Book That Beats The Market” by the super investor Joel Greenblatt. What’s great about this strategy is that it combines value investing with quality investing. Most of the other strategies described on this page work because you are buying crap that virtually no one desires to own and therefore it is being traded below its intrinsic value. The magic formula uses the return on invested capital metric to screen for quality companies. A free selection of qualifying stocks is available through the magic formula website. Many available screeners also provide a version of this screen. The quality overlay lowers the returns of this strategy but makes it easier to implement. If you are a fearless beast and can implement any type of strategy the next one down may suit you better.
Quantpedia estimates a 12.15% annual return for somewhat similar strategies.
The acquirers multiple is a value strategy that screens for companies based on Enterprise Value / Operating Earnings and the strategy behind it is explained in detail in the book Deep Value: Why Activists And Other Contrarians Battle For Control Of Losing Corporations. The strategy is fairly similar to the magic formula one but it is harder to implement because most people have trouble buying and holding to its selections long enough. If you are able to trade mechanically and buy the selections it may work very well for you. The acquirers multiple website offers a free screener with selections taken from the 1000 largest stocks in the U.S. If you have a decently sized portfolio its worth it to subscribe to the complete screener selection. The screener uses superior data to that of most services out there and the version including smaller companies should do substantially better over time.
Quantpedia estimates a 17.56% annual return for similar strategies.
- None of these strategies will work all the time
- All of the above are a variation of value strategies that are correlated to each other
- There are not always enough net-nets available to run a diversified portfolio
- Due to tax consideration U.S. investors are usually re-balancing once a year. Other may be better off re-balancing more often.