All-Star Screens

The Portfolio all-star screens (I won’t include CANSLIM here since the results are all over the map depending on your starting date) all outperformed the market during the period 2006 to 2011; in the last five years, only two of them have outperformed the market (O’Neil and Zweig). Also, the screens that performed the best during the former period (Graham, Buffet, Greenblatt) have been among the worst performers lately. This is the case no matter what measure you use: CAGR, Sharpe, alpha, etc.

I’m not sure what to conclude from this, if anything. I had assumed that one way to estimate the future performance of a strategy based on strong theoretical bases would be that strategy’s past performance. I have been proven wrong in this instance. Any thoughts?

  • Yuval

Value investing has not worked well for some time. The key question is if you believe in value investing, because if you do, recent performance should not be concerning, even multiple years of underperformance. The long run is longer than you think.

An analogy might be your reaction when the stock market has a major correction. Would you stay the course, rebalance back into stocks, or sell? My opinion is that any investor who believes in the equity premium would rebalance back into stocks, at a minimum.

“would be that strategy’s past performance”. As Alan says, your definition of ‘past’ is important.
I am rereading Graham’s Intelligent Investor now. I always find something new in it in rereading.
He makes the point that strategies can go in and out of favor, depending on the short term mindset of ‘investors’ (who he really means to be speculators).
The recent out-performance of Netflix, Amazon, Facebook, Tesla, and Google has been illustrative. They are all higher cap stocks that drive SPY performance. Amazon, Tesla and Netflix have poor profit history and yet ‘investors’ have pushed them up. Graham will say that sooner or later they have to show ‘regular’ profits to justify their lofty valuations. It just takes time. When the speculators become investors then these companies may correct. We will see.
I think keeping the risk free rate (UST3MO) low for such a long time has kind of hosed up the markets and peoples perception of risk. It has made speculators out of a lot of people. IMHO.