any thoughts about my sim

Hi all!!

Just I would like to have some thoughts about my last sim. It is based on the book “The five rules for succesful investing”, just I take some advices that appear on the book and try to translete to P123.

I experimented with two ranking systems, one multifactor, and another one with just one factor (FCF/Sales), and more or less works the same.

What do you think? How would you improve it?






I am all for more free cash flow as a valuation technique - but why do you have highest amount of free cash flow per share as a factor?
I don’t understand what that can tell you as it is dependent on # of shares. Sort of like price per share - only meaningful in context or as a ratio. The only way I can think of this being useful is if free cash flow per share is positive … or if you are fundamental weighting (going for large stocks based on economic significance as opposed to cap size).

I like that is is crazy low turnover.

Monday - you are using the USA stock universe but are not providing any buy rules for liquidity or minimum price. I suggest, as a minimum, the following Buy Rules:

Price > 5
AvgDailyTot(60) > 200000

If the results are still good then you might have something.

Steve

Oh… you right!!!

I didn’t think on it before.

To be honest just I place the FCF/Share as a factor because I tried some of them, well all the ones with FCF, and this one works pretty good in the sim, but now It appears to me like a nonsense.

Thanks Hammerling.

Hello Steve.

I tried, adding the buy rules you suggest and the performance even improve a little.

But as Hammerling say maybe there is a nonsense in my ranking factor…

Monday - what rule are you trying to implement with FCF from the book?

This is more of an aside, but the top holding TPL is a land trust. Can’t recall if it sends K1s for taxes, but many trusts do send K1s, and if that is a consideration you want to avoid you can exclude trusts by using “Universe(MasterLP)=False” (I think that will catch TPL and similar, but not sure).

If you want to exclude industries and sectors, you can also do that by putting those exclusion lines in the Universe itself.

If you’re using 5Y ROE and 5Y ROA as buy rules, maybe also trying putting that into the ranking system itself. Same with NetProfit Margin - maybe try that inside the ranking system to see if it helps. In general, I find that ranking on something is often more powerful than having that factor as a screen buy rule.

I’m unfamiliar with the ItemA(QTCO,0)>ItemA(QTCO,1) code, but it looks like you want to sell if something has increased for 3 quarters in a row. Again, maybe put that in as a ranking factor also so the ranking system selects against it.

Anyhow, just some thoughts to try.

Also try rerunning it while putting TPL on ignore; it may be skewing your results.

No no, there is not a defined rule in the book, just the author gives a lot of importance to FCF, then I tried to work with FCF in some ways.

Thanks a lot for your thoughts, but what is the problem with the land trust and the K1s?? I don’t get the point…

It might not be an issue, but I found K1 forms to be a pain around tax time - but my situation was one of a few smaller positions I traded that required me to learn deal with tax issues I didn’t understand. Instead of dividends showing up on your broker’s 1099 you can get separate forms directly from the company. Some companies are slow sending the K1 out. I recall something about treating payments as returns of capital instead of dividends. I had some in retirement accounts which I wasn’t sure how to deal with, and my tax software wasn’t very helpful. If you do your own taxes it may require learning some new things. I’m always nervous with dealing with complications around taxes and decided to stay avoid them unless I was going to take a large position and hold.

FCF is dead.

Prove me wrong.

I actually do not know the answer on this. I assume it is dead.

But if true, this implies it is a changing market. I am interested in how the market changes.

Is it like: “The King (FCF) is dead long live the new King (ratio of your choice).” With the new king being another older king: like price to sales.

If it is a bunch of old things becoming new again then what is the place for bootstrapping that puts together bunch of potential futures drawn from the past. Or bagging (Bootstrap AGGregatING).

If you add robust metrics it is Bootstrap Robust AGGrregatING.

But that would be BRAGGING (the literal name in use).

Just a thought based on your, probably correct, premise.

-Jim

Come on, help us a little, if FCF is dead, what is alive???

Well, I don’t do taxes on my own, but since I live in Spain I guess the procedure it’s different to me, not sure anyway. Thanks, it’s good to know that.

So what’s alive now :slight_smile: ?

I’m not sure about FCF per se, but the currently accepted method of stock valuation is Discounted Cash Flow (DCF). The problem with DCF is that its use is dependent on long term growth estimates that are more or less a guess, except in the context of a narrative that the analyst believes in. That being said, current thinking has it that DCF is somewhat useful for companies with a wide economic moat and consideration for the spread in analyst growth expectations. By choosing a conservative growth estimate at or near the bottom of the range of estimates, a reasonably conservative valuation can be established for wide moat companies.

This is exactly what Morningstar is doing with their wide-moat index, reflected in the Van Eck ETF MOAT. The effectiveness of this strategy has been demonstrated over time (see attachment). However, the benefit is a small alpha relative to the SP500. Most P123 users are trained to expect massive alpha which is not realistic.

Summary - DCF (and Free Cash Flow) is not dead, but expectations need to be tempered.

Steve