Value investors
As devoted “Value Investors”, It was our intention to back-test existing- and self developed screening models on Euro zone stocks.
Since we are located in Europe, we were anxious to find out how European stocks react or what would be the outcome of applying different “Value” screening” methods on stocks and especially on a portfolio of stocks.
For this project we studied different “value investing” strategies that we could implement on our application.
We were specially attracted to existing methods; The Magic Formula by Joël Greenblatt, Joseph Piotroski’s nine point scoring mechanism, Benjamin Graham’s Net Current Asset Value and using our own ERP5.
For this paper we went back -10 Years in time and used fundamental constituents known to value investors such as Price to Book, Return on Investments, Direction of Earnings, Earnings Yield etc.
We were also curious if indeed markets are as efficient as the theory indicates they are by the modern finance.
Ongoing we were also asking ourselves questions like;
-Should we invest in an index fund rather than in individual stocks?
-Where and how can we find undervalued stocks ?
-What happens to performance, if we add more stocks to a “Value” portfolio?
-What happens to performance, if we join two “Value” screeners together?
Imagine what a full time “Value investor from Graham and Doddsville” could achieve…
The Value Investing strategies can underperform the market for several years, but in the long run they clearly outperform.
Adding consistently more stocks to your portfolio won’t make returns better (we did not study the factor volatility). This would be logic if a value strategy works and adding more stocks brings you more to the return of the market.
Analysing the returns from the EU market and the US gives the same results.
By combining different “Value screening methods” (ERP5/Piotroski and MF/Piotroski) you can increase you return. The use of comined ” value screeners” gives you an 360° angle on the concept “Value” and protects you from the possible loss of principal.
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