As a continuation to my Value Investing Master Class given to me free of charge by BigFatPurse, I spent some time in the National Library Bloomberg Terminals yesterday to see if a similar strategy may yield superior returns when applied to the local stock-market over the past 10 years.
As I'm a beneficiary of a good deed, I have to find a roundabout way to return the favor to BigFatPurse but would still benefit my readers, so I won't replicate the exact strategy shared as it would affect their business negatively, I think readers who are impressed can invest a price equal to restaurant meal for two by signing up for their course. Instead I took the broad concept to create a filter which employs a strategy similar in spirit to BigFatPurse to see market out-performance takes place.
The back-test was done over the 10 years. ( 2004 - 2014 )
The portfolio is equal-weighted.
Rebalancing of the portfolio takes place annually to reduce the impact of brokerage fees.
All companies are domiciled in Singapore to get rid of S-Chips.
My filters are as follows :
a) P/B ratio < 1
b) P/E ratio < 15
c) FCF yield > 0%
d) Debt to Equity ratio < 100%
The resulting performance was superb. About 40-50 stocks were shortlisted under this criteria.
Mean return = 26.98%
Standard Deviation = 13.53%
Sharpe Ratio = 1.29 ( Above 1 is fairly decent )
If we assume normality of returns, having a bad year with 2 standard deviations down would still return slightly below 0% so it's a pretty defensive combination of stocks.
Relative to this performance, the performance of the STI over the past 10 years was barely 7%.
Suppose when you start instituting this Graham-like strategy and it returns an extra 3% a year, with a portfolio size of $100,000, it's an extra $3,000. The model predicts an out-performance of almost 20%, making the strategy worth $20,000 a year.
This is my objective evidence to conclude that the value of the course pays itself several times over.
Disclaimer : One observation from traders is that back-tests can be overly optimistic. The likely performance of a trading strategy in practice would be below back-tested numbers but still above average market returns. If you wish to employ my screen on Bloomberg, I advise starting with a portfolio of at least $100,000 and buying at least 25 stocks to achieve diversification.