Beating the market with data-driven strategies.

Summary

This video explores how individual investors can outperform the market using factor screens and systems, as highlighted by a study by Stockopedia. Despite the difficulty of beating the market, especially for active fund managers, the study demonstrates that focusing on quality and momentum factors can significantly enhance returns. It also emphasizes the importance of using screens to narrow down investment options and the role of Stockopedia's Stock Rank system in simplifying the investment process, ultimately encouraging investors to adopt a disciplined approach to portfolio management.

Takeaways

• 📉 Over 77% of actively managed funds in the UK and more than 95% globally failed to beat their benchmarks over the last decade, indicating the difficulty of outperforming the market.
• 💡 Individual investors have the advantage of being more nimble and flexible, with a wider range of investing options to potentially grow their accounts rapidly.
• 📈 The study by Stockopedia suggests using factor screens and systems to consistently beat the market, emphasizing the importance of a structured investment approach.
• 📊 In the US market, momentum was the top-performing factor over the past 30 years, with quality in second place, both outperforming the S&P 500.
• 🔍 Stock screening can significantly narrow down the list of potential investments, making it easier for individual investors to build their portfolios.
• 🧐 A Buffett-style portfolio built using screeners outperformed Berkshire Hathaway's public portfolio, highlighting the power of systematic investing.
• 🌐 The performance of different factor screens can vary greatly between markets, as seen in the contrasting performance of quality and value in the UK versus momentum and growth in the US.
• 🔄 The use of random stock selection from screen results for portfolio building showed varied outcomes, emphasizing the importance of screen criteria in determining investment success.
• 📊 Quality emerged as the top-performing factor in Stockopedia's study, with value underperforming slightly, and growth significantly underperforming the benchmark.
• 🛠️ Combining factors, such as adding quality metrics to growth screens, can significantly improve portfolio performance, as seen in the improved median returns.
• 🤖 Stockopedia's Stock Rank system simplifies the screening process by ranking stocks based on various metrics, allowing investors to easily apply filters and select top-ranked stocks.

Q & A

What is the main focus of the study discussed in the video?

The main focus of the study is to explore how individual investors can use factors screens and systems to improve their chances of beating the market, as it has become increasingly difficult for active discretionary fund managers to do so.

Why is it challenging for active fund managers to beat the market benchmarks?

It is challenging because markets have become more efficient over time, and more than 77% of actively managed funds in the UK and over 95% globally failed to beat their respective benchmarks in the last 10 years.

What advantage do individual investors have over professional fund managers according to the video?

Individual investors have the advantage of being more nimble and flexible, with a wider range of investing options to grow their accounts rapidly, without the constraints that large funds like Berkshire Hathaway have.

What role do factors play in portfolio management as per the study by Stockopedia?

Factors play a crucial role in narrowing down the list of potential investment candidates by following an investment philosophy that focuses on specific characteristics that favor the targeted market.

How did the different factor portfolios perform in the US markets over the past 30 years up to 2021 according to the video?

The momentum factor portfolio highly outperformed, growing a $10,000 investment to close to $900,000, while the quality portfolio was the distant second, still outperforming the S&P 500 but only growing to approximately $500,000.

What is the significance of using a screening process in building an investment portfolio?

The screening process is significant as it helps to narrow down the multitude of stocks provided by a factor into a manageable list, making it less exhaustive for individual investors trying to build their portfolios.

How did the Buffett-style portfolio compare to Berkshire Hathaway's public portfolio in the study by Stockopedia?

The Buffett-style portfolio outperformed Berkshire Hathaway's public portfolio by a wide margin, with a 10,000% return compared to a 100% extra return on the Berkshire portfolio.

What is the importance of the 'Stock Rank' system provided by Stockopedia?

The 'Stock Rank' system is important as it ranks stocks using various metrics, making it easier for investors to select stocks based on quality, value, and momentum factors, thus simplifying the stock analysis process.

What were the key findings of the study for individual factors in the UK stock market?

Quality was the clear winner with a 41% median performance, value was a distant second slightly underperforming the benchmark, and growth fared poorly with a -3% return, underperforming the benchmark significantly.

How did the study demonstrate the impact of adding quality metrics to value and growth portfolios?

By adding quality metrics to the value portfolio, the median return improved, moving above the benchmark. Similarly, adding quality metrics to the pure growth portfolio significantly improved its performance, jumping from a -3% to a positive 50% median return.

What is the role of personal preferences and biases in portfolio management according to the video?

Personal preferences and biases play a significant role in portfolio management as they can lead to different outcomes when introduced into the process, making it essential for investors to let the screens do the heavy lifting and focus on building a robust process.

How can investors use Stockopedia's platform to analyze stocks?

Investors can use Stockopedia's platform to build screens across the globe using hundreds of metrics, analyze different factors like quality, value, and momentum, and even look at case studies of specific stocks to make informed investment decisions.

Outlines

00:00

📊 Market Beating Strategies with Stock Screens

The video introduces a study by Stockopedia that explores how individual investors can outperform the market using factor-based stock screens. It highlights the inefficiency of active fund managers, with over 77% in the UK and 95% globally failing to beat benchmarks over the past decade. The study emphasizes the importance of factor investing and shows how different factor portfolios have historically outperformed the S&P 500, particularly the momentum factor. It also demonstrates the power of screening by comparing a Buffett-style portfolio to Berkshire Hathaway's actual portfolio, showing that a smaller, more nimble investor could significantly outperform even legendary investors by using the right screens. The video stresses the importance of selecting the right factors and screens based on market conditions and investor style, noting that the UK market favored quality and value, unlike the US market which favored momentum and growth.

05:01

🔍 The Impact of Screening Filters on Portfolio Performance

This paragraph delves into the specifics of how Stockopedia conducted its study using quality, value, and growth factors with loose filtering criteria. It discusses the results of an algorithm that randomly selected stocks from the output of these screens, rebalancing annually, and the significant variance in portfolio returns over eight years. The study also examined the distribution of returns from running simulations thousands of times, showing a wide range of outcomes with some outlier portfolios delivering exceptionally high returns. The key findings from the study are presented in a box and whisker diagram, revealing quality as the top-performing factor, value slightly underperforming, and growth significantly lagging behind the benchmark. The study also shows how adding quality metrics to growth screens can dramatically improve performance, emphasizing the importance of filter selection in stock screening.

10:02

🏆 Stockopedia's Stock Rank System and Case Studies

The video script explains Stockopedia's proprietary Stock Rank system, which ranks stocks based on various metrics for quality, value, and momentum. It details how the system uses different ratios to rank stocks, making it easier for investors to apply filters and select top-ranked stocks. The script also presents two case studies: Plus 500, which had high rankings in both quality and value and subsequently saw its stock price more than double, and Kier Group, which had high value rankings but poor performance in quality, momentum, and growth, leading to a significant drop in its stock price. These case studies illustrate how the Stock Rank system can help investors identify potential investments and avoid poor-performing stocks.

15:03

🛑 Embracing the Stock Screen Process and Market Realities

The final paragraph emphasizes the importance of having a solid stock screening process to narrow down investable stocks based on personal preferences and to increase the chances of successful investing. It acknowledges that even with a good process, there will be stocks that significantly outperform that may be missed, but this is not a failure if the overall strategy is sound. The video concludes by offering a 25% discount for the Stockopedia platform and bespoke scanning software for those interested in trading and fundamental analysis, encouraging viewers to take advantage of these resources to enhance their investment strategies.

Keywords

💡Efficient Markets

Efficient markets refer to the concept that all available information is already reflected in the stock prices, making it difficult for investors to consistently outperform the market. In the video, it is mentioned that markets have become more efficient over time, which has increased the challenge for active fund managers to beat the market benchmarks.

💡Active Discretionary Fund Managers

Active discretionary fund managers are professionals who make investment decisions based on their own analysis and judgment, rather than following a predetermined set of rules. The video highlights that over 77% of such managers in the UK and over 95% globally failed to beat their benchmarks, indicating the difficulty of outperforming the market through active management.

💡Benchmark Returns

Benchmark returns are the performance standards against which the returns of a portfolio or an investment are compared. In the context of the video, it is pointed out that actively managed funds often fail to deliver returns that surpass their benchmarks, which is a key measure of investment success.

💡Factors

In the investment context, factors are characteristics or attributes of stocks that have historically been associated with higher returns. The video emphasizes the importance of focusing on factors that favor targeted markets to improve investment strategies.

💡Momentum Portfolio

A momentum portfolio is a collection of stocks that have shown strong upward price movement over a certain period. The video script provides an example of how a momentum portfolio outperformed the S&P 500 and a quality portfolio over a 30-year period.

💡Quality Portfolio

A quality portfolio consists of stocks that are considered to be of high quality, often characterized by strong financials and good management. The script mentions that while the quality portfolio did not perform as well as the momentum portfolio, it still outperformed the S&P 500.

💡Screening Process

The screening process in investing involves using specific criteria to narrow down a large list of potential investments to a more manageable number. The video discusses how screeners can help individual investors to focus on a set of stocks that meet their investment criteria.

💡Buffett-Style Portfolio

A Buffett-style portfolio refers to an investment strategy that emulates the approach of Warren Buffett, focusing on value and quality. The video describes a study where a Buffett-style portfolio outperformed Berkshire Hathaway's public portfolio in backtested returns.

💡Guru Screens

Guru screens are investment filters or criteria inspired by the strategies of successful investors. The script mentions that Stockopedia ran guru screens on the UK stock market, which showed high returns, with the Warren Buffett screen leading the pack.

💡Portfolio Rebalancing

Portfolio rebalancing is the act of adjusting the weightings of assets in a portfolio to maintain the desired level of risk and return. The video suggests that rebalancing a portfolio by periodically running screens can help maintain performance.

💡Stockopedia Stock Rank

Stockopedia Stock Rank is a proprietary ranking mechanism that evaluates stocks based on various metrics. The video explains how this system simplifies the screening process by allowing investors to filter stocks based on quality, value, and momentum rankings.

Highlights

More than 77% of actively managed funds in the UK and over 95% globally failed to beat their benchmarks in the last 10 years.

Over 90% of actively managed funds in the US underperformed their benchmarks over the past 20 years.

Individual investors have advantages like nimbleness and flexibility over institutional investors.

Stockopedia's study aims to provide techniques for individual investors to consistently beat the market using factors screens and systems.

In the US, momentum was the top-performing factor over the past 30 years, with quality in second place.

A $10,000 investment in a momentum portfolio grew to nearly $900,000 compared to $500,000 for a quality portfolio.

Screening processes help narrow down the list of potential stocks for individual investors.

Stockopedia used screeners to build a Buffett-style portfolio that outperformed Berkshire Hathaway's public portfolio.

The Buffett-style portfolio had a 1,000% return compared to Berkshire Hathaway's 100% extra return.

Investors can massively outperform even legendary investors by using screens effectively.

The UK market favored quality and value themes, contrasting with the US market's preference for momentum and growth.

Portfolio construction is heavily influenced by personal preferences and behavior.

Stockopedia's study used a loose filtering criterion to screen stocks, resulting in a 40% return over 8 years.

Quality was the top-performing factor in the study, with a 41% median return and the lowest chance of loss.

Growth underperformed significantly in the study, delivering a -3% return and a high chance of loss.

Combining factors with tighter filters can significantly improve portfolio performance.

Stockopedia's Stock Rank system simplifies the screening process by ranking stocks based on various metrics.

Case studies demonstrate how Stockopedia's platform can be used for in-depth stock analysis.

Plus 500 was identified as a quality and value stock that doubled in less than a year.

Kier Group, despite high value ranking, faced quality, momentum, and growth challenges, leading to a stock price drop.

The study emphasizes the importance of a disciplined investment process to minimize disappointment in the long run.

Stockopedia offers a 25% discount for their platform and bespoke scanning software for quality stock identification.

Transcripts

in today's video we discuss another

interesting study completed by

stockopedia fine-tuning your strategy

using factors screens and systems to

improve the odds of beating the

market the markets have become more

efficient over time and beating the

market has become difficult for active

discretionary fund managers more than

77% of actively managed funds in the UK

and more than 95% globally failed to

beat their respective benchmarks in the

last 10 years the data is disappointing

for the us as well where over 90% of the

actively managed funds failed their

investors over the past 20 years by

delivering below Benchmark returns

whilst also charging Hefty

fees the irony is that we're talking

about the best mins in the industry who

Screen through zillions of documents and

data points they are often well

connected and have an army of Highly

qualified analysts at their service it's

an embarrassingly poor use of resources

to deliver such subar

performance however as an individual

investor you have an advantage you can

be much nimbler and more flexible and

have more investing options to grow your

account rapidly the study by stockopedia

aims to equip you with the best

techniques using factors screens and

systems to beat the market year after

year let's understand the importance of

factors first rather than adding too

much discretion to the portfolio

management process it's wise to follow

an investment philosophy that narrows

down the list of potential investment

candidates and there could be no better

way to do this than to focus on factors

that favor your targeted Market let's

understand this with a potent example of

us markets here is how the different

Factor portfolios have performed in the

US versus the S&P 500 in the 30 years

through to

2021 the markets highly favored momentum

with quality being the distant second a

$10,000 portfolio invested in the

momentum portfolio grew close to

$900,000 In the period when compared to

approximately $500,000 of the quality

portfolio value was a relative lagard

but still outperformed the S&P

500 my own analysis over the years has

come to the same conclusion quality and

momentum factors are the driving force

behind

returns a factor May provide a multitude

of stocks at a time May making it an

exhaustive exercise for individual

investors trying to build their

portfolio this is where the screening

process comes in handy a screen with

your set filters can narrow down the

list of stocks for example in this study

stockopedia used screeners to build a

buffet style portfolio and compared the

back tested returns with Burkshire

Hathway's public portfolio the portfolio

outperformed the Burk share portfolio by

a wide margin a 1,000 XT turn against a

100 extra return on the Burkshire

portfolio this is a theoretical exercise

because Burkshire would have missed many

small and midcap opportunities simply

because these stocks would not have

absorbed the billions of dollars that

birkshire had to deploy this primarily

shrunk Burk Shear's investable

Universe the key takeaway however is

that as an individual small investor

with no such constraint you could have

used screens to massively outperform the

legend himself stockopedia published the

results of some of the guru screens run

on the UK stock sense Inception which

showed very high returns with this

Warren Buffett screen leading the pack

followed by the screen of

screens in hindsight the easiest way to

clock such performance was to invest in

the same stocks in the same proportion

as advised in the guru screen and

rebalance that portfolio by periodically

running the screen however choosing one

or two among many screens would have

been quite difficult at Inception

there's also no guarantee that these

screens will continue to perform because

the market favored theme may change in

the future the reason why the buffet

style portfolio did so well in the UK is

that the UK Market favored the quality

and value themes while growth didn't do

well this was in sharp contrast to the

US market where momentum and growth

topped the

charts an investor no matter how

informed wouldn't have been able to

foresee this disparity in two major

world markets

in that case the portfolio construction

would have largely been dependent on

personal preferences and therefore would

be immensely impacted by individual

thought processes and behavior a patient

investor will choose value a defensive

investor will choose quality and an

aggressive investor will choose

growth let's say you figured out your

style and it's time to put money to work

putting all of your capital in one

screen is easy when there are a few

stocks however this will only happen

when the screening rules are very tight

when those rules are loose it will throw

too many names and there would be a

scope of discretionary stock picking

that will lead to varied outcomes for

different

investors let's delve deeper into the

study to understand this stockopedia ran

UK stock screens on these three common

factors quality value and growth with a

very loose filtering Criterion which

threw a large number of companies in

results an algorithm then randomly chose

20 stocks from the results and built a

portfolio that would be rebalanced at

the beginning of the next year the

system ran the same screens the next

year and chose 20 random stocks to build

a new portfolio from the liquidation

proceeds of the previous

portfolio the algorithm repeated the

exercise for 8 years and the portfolio

ended up returning 40% for the period

due to a wide number of possibilities in

this investing approach stockopedia ran

the simulations multiple times

in the first three runs the portfolios

delivered quite varying returns with the

second portfolio ending negatively and

the thirds delivering closer to a 300%

return in 100 runs the results were

quite tilted in favor of outliers as can

be seen in this histogram there were

several outlier portfolios delivering

85% returns in the period which was the

top quartile return in the

study moving a step further when the

portfolios were run $10,000 times the

distribution looks like this most times

the returns were below 60% with still

many instances of outlier portfolio

returns let's now turn to the key

findings of the study for individual

factors here is a box and whisker

diagram of the results for all three

factors the diagram shows the median

Return of the strategy here with the

blue box showing 25 to 75 percentile

returns and these lines or Whiskers Show

with a full range of returns excluding

outliers which are then shown here in

blue dots The Benchmark return foot C

all share in this case is here at the

blue dotted

line quality was the clear winner in

this study with 41% median performance

and value was a distant second

underperforming The Benchmark by a small

margin surprisingly growth fared badly

in the study delivering a -3% return

hugely underperforming the The

Benchmark on the downside the results

were not too different as the worst

Return of the quality portfolio came in

at negative 31% as compared to A- 40% of

the value portfolio and a 61% of the

growth

portfolio another metric that Vindicated

the results was the chance of loss which

was highest at 55% for the growth

portfolio and lowest at 4% for the

quality

portfolio the Value Port folio fell in

between the two at

177% one can also use a combination of

these factors to further tighten the

filters and shorten the prospective list

of stocks to make stock analysis easier

along the same lines stockopedia tweaked

the screens a little bit by adding

quality metrics to the value portfolio

which LEDs to a better outcome in the

value portfolio as the box in the

diagram moved up with a medium return

above the benchmark

similarly when quality metrics were

added to the pure growth portfolio it

significantly altered the results with

the median return jumping from a -3% to

a positive 50% which is 9 percentage

points higher than the pure quality

portfolio the key takeaway from these

results is that a lot depends on the

filters you put to screen stocks in any

Factor we saw that growth which should

ideally be leading the pack in any

Market underperformed when the growth

filter was too loose it was only when

the rules were topped up with that of

the quality screen that the results

changed

meaningfully putting such tighter

filters will also be in an Investor's

favor as this will narrow down the list

of qualifying

stocks only a few investors end up

mechanically investing in the portfolio

thrown by the screen most investors have

the propensity to make the final choices

themselves discretion in portfolio

management will always be a little

contentious because as soon as human

factors are introduced to the process

the outcomes change based on personal

preferences Styles and biases two people

can look at the same screen and build

entirely different portfolios with

entirely different results therefore

it's always in the Investor's best

interest to let the screens do the heavy

lifting and focus on building a

process stockopedia provides a great

platform to build screens across the

globe using hundreds of metrics to make

it even easier for investors stockopedia

has built a proprietary ranking

mechanism called stock rank which ranks

stocks using and analyzing different

metrics for the three most used screens

quality value and

momentum in the quality ranks the system

uses nine different ratios to rank the

stocks from best to worst these rankings

start from 1 and go up to 99 with 99

being the best so let's say if you put

greater than 90 as the quality rank

filter to screen stocks the system will

show the top desile of quality stocks

and eliminate every other stock from the

potential stocks

list similarly the value stock rank

system uses these six ratios to rank

stocks these ratios fall under three

categories earnings assets and

income lastly there is the momentum

screen which focuses on ranking stocks

based on their price and earnings

momentum the momentum rank uses nine

different ratios four for Price momentum

and five for earnings momentum making

the system rather

robust the rankings make the job much

easier for an investor instead of

putting a barrage of filters and

criteria the investor can select any

factor and simply put a rank filter to

get the list of stocks also one can

combine different factors by putting in

far fewer

filters stockopedia also highlighted a

couple of case studies showing how the

average person can use their platform to

do stock analysis if they want to take a

deeper look at some of the names from

the

screeners for example here is a

fundamental and Technical snapshot of

plus 500 a stock that showed up in the

quality and value screen back in

2017 the stock had a quality ranking of

95 and a value ranking of 89 the return

ratios Vindicated the high quality rank

of the company and low readings on most

valuation ratios depicting the

undervalued nature of the

stock a high Petroski F score

highlighted improving efficiency

productivity and liquidity for those

interested in the Petroski score we

produced a video solely focused on its

principles and performance over

time the company also displayed an

extraordinary long-term earnings growth

trajectory with 65 5.8% earnings per

share over the last 6 years and 78% over

the last 3 years the operating margins

and return metrics remained consistently

at elevated

levels Additionally the company

frequently beat analyst estimates and

the management remained confident in the

company's Outlook as can be seen in

regulatory releases by the company the

Management's confidence also percolated

into generous BuyBacks amounting to £59

million since

2017 the company also adopted an

aggressive yet effective marketing

strategy that propelled its

growth in a nutshell the company

displayed robust quality

fundamentals excellent growth and

valuations expectation beating

results and regular share

BuyBacks making it a perfect quality and

Value stock to to be included in the

portfolio the stock also followed suit

and more than doubled in less than a

year the second case study was Kier

Group which ranked very high on the

value parameters but languished on

quality momentum and growth

parameters the company was extremely out

of favor with the markets as its stock

price fell from 9 to4 in just one year

its operating margin was under pressure

at 3% and was barely positive in The

Last 5 Years its return ratios were

below the industry average and quite

volatile the company was also facing

liquidity pressure with its current

ratio below 1X and quick ratio at 0.62 x

with a high increase in

debt average shares were also increasing

highlighting shareholder dilution to

raise money for a cash guzzling

business the bad shape of fundamentals

led to downward earnings revisions by

analysts covering the stock and the

downward spiral was further accentuated

by the resignation of the company's CEO

to top it all up the industry was in bad

shape with its peers going Belly

Up in a nutshell the company had a

downward momentum Under Pressure quality

liquidity concerns management changes

and collapsing

peers unsurprisingly the stock tanked

further to less than 50p in 2020 before

recovering to 130 now remember it is

often the case that expensive gets more

expensive and cheap often gets even

cheaper and Kia group certainly got

cheaper in my opinion the study is a

clear example of how to make your job

much easier as an investor or Trader

filtering out poor performing companies

help you significantly narrow down the

list of investable stocks based on your

preferences to make that job even easier

stock edia stock rank system lets you

set those screens with relative ease

saving you from getting confused with a

sea of usable fundamental metric whilst

moving the odds of success into your

favor finally no matter which strategy

you choose there will always be some

High Flyers that you will miss in stock

markets but that's not a tragedy if you

have a decent process and you follow it

well there will be little scope for

disappointment in the long run despite

facing volatility in the short run

for those looking to take advantage of a

25% discount in the stockopedia platform

simply use the links below for those

with a bias towards trading whilst also

including key fundamental aspects we

also offer bespoke scanning software

looking for Quality stocks breaking out

of

consolidation again simply use the links

below thanks for watching and as always

if you find Value in the videos please

do hit the like button which in turn

will help the algorithm find you