Introducing the “Boss score” (Boring sexy stocks) – part 1
Introduction:
As I have discussed a couple of times, in value investing screeners can be a helpful tool if you use them right. In theory one has two possibilities: One can use screeners in order to create a more or less automatic investing strategy or one could use a screener for idea generation.
Screeners for automatic investment strategies
In order to come up with a screen for an automatic investing strategy, you have to do a lot of number crunching and backtesting. Mostly you end up with something which combines a few single attributes (P/E, P/B, past perfomeance) which have performed best in the past. Usually there is a periodic requirement (for instance every year on June 30th) to redo the analysis and adjust the portfolio.
Many people, especially with a mathematical background, like this kind of investing, because it doesn’t really require to know anything about the companies. To be fair, it requires a lot of discipline to hold through this aproach especially if the startegy doesn#t work for a subsequent number of years
The most famous startegies of this kind are strategies like “Dogs of the Dow”, Greenblatt’s Magic Formula and the results from O’Shaughnessi’s epic book (which still is on my pile to read).
In a very interesting article Joel Greenblatt is comparing the performance of “fully automatic” accounts versus accounts where peple manually followed the Magic Formula. Not surprisingly, the auotmatic system outperformed by a wide margin. The reasons for this underperformance seems to be relatively clearly market and/or strategy timing. People buy more after good performence and sell after bad performance.
Without having proof for that, I would nevertheless assume the follwoing: In my opinion many of the strategies work in the long term, but only few people are actually “mentally equipped” to follow them through.
For me personally, it wouldb e really hard to invest in companies I don’t really like so i guess I would not hold through the magic Formula for instance.
Screens for idea generation
Another type of screener would be a screener, which, based on certain pre defined attributes, tries to identify interesting companies to be analysed further. Those screens are not back tested but rather rely on subjective assumtions what could make a stock intersting.
The “Magix Sixes Screen” I often use for instance is a good possibility to find potential “fallen angels”. The only stock out of this screen where I really invested, Autstrada, didn’t work out, so why bother further with those screens ?
As I discussed several times, I have certain ideas what risk characteristics my portfolio should have. For instance I prefer below market volatility because this helps me avoid any market timing actions even in the worst times. As I have only a limited amount of time per day to work on analysis (maybe 1-2 hours) and I want to have at least 20-25 different investments, one has to think about how to distribute the capacity best.
My “special situation” investments are usually rather “high maintenance”, so I prefer for the rest of the portfolio more “low maintenance” stocks. Low maintenance for me means the following primary characteristics:
1. company has a stable unexciting business with respective results over a long period in the past
2. company is cheap compared to “intrinsic value” to limit downside
3. company has shown historically that it adds value above cost of capital
So in the end, I am looking for companies which have a boring (non-volatile) business model and a sexy (cheap) valueation..
I think additionally it makes sense to define what I am not necessarily looking for in the first place
– deep value turnaround situations (too risky)
– net nets (usually no ongoing value creation)
– “moat” stocks (too crowded)
– growth stocks (too risky)
In the next post I will follow up how I actually calculate the “Boss” Score.
value and opportunity 
Ein niedriges P/B an sich ist meines Erachtens nicht sehr aussgekräftig, siehe auch die Statistiken in O’S neuestem Buch.
Der SPruch
On Wall Street, you pay a very high price for a stable track record.
stimmt natürlich.
Aber zu einem suche ich nicht an der Wallstreet und zum anderen suche ich genau dies Unternhemn, die vielleicht günstig sind.
Zu Installux: Ich glaube das Modell würde in dem Fall immer noch einen guten Score liefern.
Klar ist, dass die Stablität der Ergebnisse eines Unternehmens viel über dessen Qualität aussagt. Ich bin mir nicht sicher, ob diese auch immer der Schlüssel zum Investmenterfolg ist.
On Wall Street, you pay a very high price for a stable track record.
Ich gebe zu, bei gegebener Historie sieht z.B. Installux bei 4/5 vom Buchwert nicht allzu teuer aus. Wenngleich sie 1993-1997 auch etwas verschnupft waren (weißt du warum?).
Angenommen, sie hätten letztes Jahr Verluste gemacht. Sagen wir, das Eigenkapital wäre um 5% geschrumpft. Das würde sicher viele Anleger aus der Aktie treiben. Sagen wir sie stünde dadurch bei 2/5 vom Buchwert.
Wäre die Situation aus Investorensicht dadurch nicht interessanter?
schon klar. Ich wollte nur verdeutlichen, dass der P/B aspekt beim Score eher untergewichtet ist.
Eine Coca Cola Aktie z.b. wäre nach meinem Screen bei 5,4 mal Buchwert fair bewertet.
Daran sieht man, dass der “treiber” des Models eigentlich weniger das P/B Verhältnis ist, sondern die Stabilität der Ergebnisse und die EK Rendite.
MMI
Hi memyselfandi, der Kommentar war nicht als Kritik an deinem Ansatz, sondern an der ausschliesslich mechanischen Anwendung eines P/B Screeners zu verstehen.
Der Kauf von Aktien mit niedrigem Preis/Buchwert befreit einen nicht davon, die zukünftige Ertragskraft des Unternehmens einschätzen können zu müssen.
Ist dies nicht möglich, macht ein Investment in Coca-Cola vielleicht mehr Sinn. Tausche “geschenkten Buchwert” gegen “geschenkte Einschätzbarkeit”.
Hallo,
ich weiss nicht ob Du die Posts alle gelesen hast, aber ich suche nicht aktien mit niedrigen Preis/Buchwert, sondern möglichst konstanter EK Rendite.
Zudem hatte ich ja ausdrücklich erwähnt, dass der Score nur ein Stratpunkt für weitere analysen ist.
MMI
Hello,
I did not make any adjustments, because I just wanted to do a quick check and took some of the lowest P/B-ratios on the yahoo-screener. Except for two financial institutions (which formula-investors usually do not use I have to admit), all the others are “normal” companies that do not rely solely on intangibles:
Unicredit, Credit Agricole, Beate Uhse, Italcementi, Solon AG, Cogeme, Panaria, Estavis, Wienerberger, Praktiker, Peugeot etc. were some of the stocks.
This is not academic research of course, but just something to keep in mind.
Chinese companies: I do not want to spread rumours or mention too many names, but it has been said, that for example some investors were not happy with the events at Vtion Wireless during the last 18 months… .
That is the big question.
Hi Oskar, Did you use book value from the balance sheet or did you adjust it? At least for intangible assets?
IFRS gives much room for management to “adjust” the book values.
Do you know for sure that the chinese campanies listed in Germany are fraud companies? I have been looking into them and think they are undervalued if the provided reports are accurate.
I also use the quantitative approach for idea-generation and try to eliminate those ideas, that do not make sense if one includes information that is not quantitative. It is no big surprise for example, that quite often chinese fraud-companies will show up as good quantitative investments on those screeners.
The logic behind the quantitative strategy attracts me and I hope to have the mental abilities to follow through. However, one needs to build personal experience to question some of the information on the sreeners out there. One thing that strikes me is that although some people argue, that they have done backtests etc., I never found the actual list of stocks for each year, that would have been bought for the portfolio. I wonder why that information is never given… .
The simplest screen (and one that was researched by TweedyBrowne in a memorandum) is P/B. Last year in March I created a virtual portfolio of the lowest P/B stocks in mixed industries I could find quickly (15 stocks). That portfolio lost 48% (incl. dividends) in 2011 and is down roughly another 8% in 2012. This turns 1€ invested last March into 43 cents today (!). The benchmark (Stoxx Europe 600 total return) would have turned that same 1€ into roughly 85 cents. I will continue to track this performance for the fun of it, but it is hard for me to imagine at the moment, how these companies, many of them with flawed or outdated business-models (i.e. Beate Uhse AG) are ever goig to make a wonderful come-back.
Only long-term research will tell.
hi oskar,
you are mentioning a good point here which has always bothered me: I also miss for the “winning strategies” the detailed list of stocks and the rebalancing.
With regard to low P/B:One should not assume that such a startegy works every year. Howver a -50% return shows that the strategy seems to be a very risky one.
mmi