The results are in for all six of the defensive portfolios which ran from 31 December 2012 to 31 December 2013:
FTSE 100 and S&P 500 returns calculated over the same time period as are the portfolios from Yahoo! Finance inclusive of dividends
Here are the details on the strategies used for these portfolios as well as the quarterly updates:
- 3 Benjamin Graham Screeners Put To The Test – Part 1
- 3 Benjamin Graham Screeners Put To The Test – Part 3
- Testing Benjamin Graham; First Quarter Results 2013
- Testing Benjamin Graham; Second Quarter Results 2013
- Testing Benjamin Graham; Third Quarter Results 2013
So, What Happened?
- The strategies performed better on US stocks rather than UK stocks due to insufficient diversification across the UK portfolios (too many companies that were either miners or connected to the mining sector)
- Both the UK and US Relatively Unpopular Large Company strategies outperformed their benchmark indexes
- The US Asset Value Portfolio achieved the highest return at 48.89% over the twelve month period with the majority of the return achieved in the third quarter : 45.19%
- The average return from all six portfolios for 2013 is 20.27%, beating the FTSE 100 by 7.63% and lagging the S&P 500 by 8.93%
- The best performing small cap was US stock Broadwind Energy (BWEN) at 331.19% which grew to 98.62% by the end of the first quarter, 107.80% by the end of the second and to 241.28% by the end of the third quarter.
- The best performing large cap was UK stock International Consul Air (IAG) returning 114.84% growing to 34.21% by the end of the first quarter, to 41.61% by the end of the second and to 79.01% by the end of the third quarter.
Not bad for stocks chosen using a third party screener based on a set of no more than five value metrics and/or principles.
The lessons to be learned from this experiment are that value investing works, but only when stocks are sufficiently diversified.
1 Year Price Chart For Broadwind Energy (BWEN)
Chart from Yahoo! Finance
How Investing Results Can Be Improved
With reference to the above price chart for Broadwind Energy, most investors would probably have panicked and sold their position in Broadwind on the way down between $5 – $6 probably beating themselves up by not selling out at the peak at around $10.
The toughest part of value investing is watching the value of your stocks fall, even and especially when they’ve hit massive highs.
These defensive strategies of buying a portfolio of stocks just once a year, selling them all and then repeating the process again the next year takes the psychological pain out of actively managing portfolios because the value of stocks can swing wildly from overvaluation and optimism back to undervaluation and pessimism again as much as they like since you’re only going to buy and sell stocks just once every 12 months regardless of where their values end up.
But even this is tough; would you be able to simply not look at the value of your stocks except for once a year?
I must confess to checking the top performing stocks in each of the portfolios on occasion throughout the year making a special ‘list’ on my smart phone using the Yahoo! app.
In hindsight that was a silly thing to do given the very strict ‘rules’ of not being able to do get rid of or add stocks to any of the portfolios through the year which is one of the strengths of such a defensive value investing strategy: it forces you to choose only the ‘best’ stocks at inception that is, those stocks that exhibit low valuations based on simple value investing metrics and principles.
In this case improving your investing means doing less but making sure you’re choosing stocks based on their cheapness relative to their intrinsic value and absence of large amounts of debt.
- 2 Essential Attributes Of A Value Investor
- What Has Worked In Investing
- How To Research Undervalued Stocks
- Get A Free Value Investing Tutorial From A Professional Money Manager