AAII Home AAII Blog

Are Simpler Stock Strategies Better?

image_pdfimage_print

Investor-Update

A member recently asked me if a screening strategy with fewer criteria performs better than one with many criteria. As irony would have it, a few days later after I was asked this question, Wesley Gray and his colleagues at Alpha Architect published a paper on SSRN comparing several of the value-oriented AAII Stock Screens to a simple valuation model. The study’s results are not an apples-to-apples comparison to the way we track the performance of the screens (I’ll discuss the differences momentarily), but it did find that only our Piotroski High-F Score screen fared as well as a screen that simply seeks non-financial stocks with low ratios of EBITDA (earnings before interest, taxes, depreciation and amortization) to TEV (total enterprise value).

Valuation is among the biggest drivers of stock returns. A strategy solely focused on low valuations will have good returns if it identifies enough stocks.

The challenge with any strategy is making it investable. It is quite common for an analysis of indicators to divide the results into deciles, or 10 evenly split groups ranked from lowest to highest. Even if the universe of stocks studied for the analysis is narrowed in some fashion, each decile may still contain far more stocks than the average individual investor is willing to hold or can cost-effectively hold. (In Gray’s study, the EBITDA/TEV screen identified an average of 96 stocks.) There is also a behavioral aspect to consider: How willing are you to hold stocks that are otherwise unattractive?

Read more »

 

Leave a Reply

Your email address will not be published. Required fields are marked *