A lot of factors broke down in 2008-2009

A lot of factors like Earnings Momentum worked in reverse over this period.

Which factors have you removed from your system because they did not work in 2008 and 2009?

Do you expect that factors such as Earnings Momentum will work poorly this time around?

Charles,

This is a port ranking system that I used to use with its normal universe. I kept all of the earning revisions factors and functions, set everything else to zero, normalized and ran a rank performance test for the last two years.

Think what this means. If analysts think a company will do better with its earnings the company’s stock will perform worse in the market.

I am talking about the spike down at the right arguably the top 1% (200 buckets) might be (relatively) spared.

If anyone thinks there is not a “regime change” then I want them to come up with a new word or acronym.

BTW, I am good with FUBAR if P123 wants to use that as their officially approved acronym for this.

Best,

Jim


The problem with earnings momentum is it is historical. Even a lot of analysts may be slow to foresee the new trends as well. Any type of momentum breaks down when the future conditions do a 180 from past conditions. The factor fails to work because the market re-prices stocks downward in an anticipation of loss of earnings momentum. In these scenarios evaluating future prospects becomes more important than assuming a continuation of past trends.

I would argue that stocks with high future earnings and sales growth have more of that future expectation priced into the value of the stock. When those expectations vanish there is a lot more for the stock price to adjust since so much of its price consisted of those future expectations.

Also stocks that have been beaten down more into the super value bin may provide the greatest margin of safety since they already had low expectations, provided they have reasonable future prospects.

Jeff

Jeff,

I absolutely agree with this. And that is indeed what my rank performance test is looking at. !00% agree.

The reason I think there is a regime change is that making sure it is a value company does not seem to help much anymore. Not when I try it anyway.

Bottom line as to when I will be using that ranking system again (even though it made me a lot of money in the past): I am agnostic.

Best,

Jim

Jim,

The big question is will we get inflation? That’s going to really drive big changes in investment preferences if we do. That would upend the last 10 years of investment trends. If that has happens I think you will see a greater emphasis on companies which can generate good returns in the present rather than speculative returns 5 to 10 years from now.

It’s a form of value, but I hate to call it that. Value with quality and sustainable future expectations that can maintain or outpace inflation?

I think value is harder to find, because good value doesn’t stay cheap long. Poor value does stay cheap, but you don’t want to own those companies because they don’t have decent growth prospects.

Maybe those opportunities are coming, though. Not yet but over the coming months perhaps.

Jeff

“You never want a serious crisis to go to waste.”

Using earnings momentum during that time arguably ignored that a crisis was going on.

Well said.