The Motley Fool Discussion Boards
Investing/Strategies / Mechanical Investing
|Subject: Re: SoWR and New Relative Value Screen||Date: 2/10/2013 9:21 AM|
|Author: mungofitch||Number: 241520 of 264131|
I like the overall approach, in particular the use of "within industry" rankings.
suggestions would be appreciated
Here's a simple one:
Why seek high volatility?
If you leave that out at 20 stocks deep it gives higher CAGR, steadier
returns (lower rolling six month downside deviation) and a slightly simpler screen.
As a general rule, and contrary to much academic claptrap, less volatile stocks have better performance.
That list of weights sure does look like it has been pretty carefully [over?]tuned.
To get an idea of how much that matters, I tried a detuned version with
all the weights set to 1 except free cash flow which is clearly the heavy one.
(that choice itself wasn't tuned, it's the only thing I tried)
At 20 stocks deep CAGR drops from 44 to 36 and pseudodowndev rises from 14 to 18
At 10 stocks deep CAGR drops from 51 to 41 and pseudodowndev rises from 19 to 25
So it looks like the tuning is giving both higher and steadier returns.
To the extent that it's useful or harmless tuning, that's fine,
but real life results won't be as good as either of those.
One might also try a detuned version with (say) only two weightings of
either "high" or "low" for all the different parameters.
Maybe weight 1 for some and a single weight (2.5?) for all the others, something like that.
Have you tried a "no financials" version?
Nothing to do with the financial crisis, but more because things like
revenue and free cash flow don't mean nearly the same thing at a bank.
There are similarly good reasons for perhaps considering no-utilities and
no-mines/materials versions, as they are not the "plain product or service"
firms for whom so many great metrics are useful (sales, cash flow, free cash flow, ROE).
This is fairly strongly slanted to being a growth/momentum shoot-for-the moon screen: sales growth, EPS growth, momentum.
It would be interesting to contrast it with a companion value screen built the same way.
Longer lookback momentum, more value parameters like current EY,
average earnings last N years as a % of price, dividend yield, ROE.
Not sure if this will help, but unlagged company momentum works well,
and so does lagged momentum for a single company.
RRS is a lot like lagged momentum. One of the rankings potentially worth
putting into the mix is a percentrank of simple no-lag short-lookback RS of the industry versus other industries.
This is the "salmon" approach: going against the stream as you want to
de-emphasize (allow weak) short term performance of a company within
an industry having strong short term performance.
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