Beating the market with data-driven strategies.
Summary
TLDRThis 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
- π 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.
- π‘ Individual investors have the advantage of being more nimble and flexible, with a wider range of investing options to potentially grow their accounts rapidly.
- π The study by Stockopedia suggests using factor screens and systems to consistently beat the market, emphasizing the importance of a structured investment approach.
- π 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.
- π Stock screening can significantly narrow down the list of potential investments, making it easier for individual investors to build their portfolios.
- π§ A Buffett-style portfolio built using screeners outperformed Berkshire Hathaway's public portfolio, highlighting the power of systematic investing.
- π 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.
- π 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.
- π Quality emerged as the top-performing factor in Stockopedia's study, with value underperforming slightly, and growth significantly underperforming the benchmark.
- π οΈ Combining factors, such as adding quality metrics to growth screens, can significantly improve portfolio performance, as seen in the improved median returns.
- π€ 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
π 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.
π 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.
π 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.
π 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.
Mindmap
Keywords
π‘Efficient Markets
π‘Active Discretionary Fund Managers
π‘Benchmark Returns
π‘Factors
π‘Momentum Portfolio
π‘Quality Portfolio
π‘Screening Process
π‘Buffett-Style Portfolio
π‘Guru Screens
π‘Portfolio Rebalancing
π‘Stockopedia Stock Rank
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 Β£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
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