Thursday, November 29, 2018

The Art of the Good Life #50 : Sturgeon's Law

Image result for sturgeon

Ted Sturgeon was a sci-fi author who claims that "90% of everything is crap" and this chapter proposes that the same applies for the stock market. 

This is useful when you decide what kind of media to indulge in. 90% of all fiction is crap. 90% of all Netflix shows are crap. In a moment of self-reflection, perhaps 90% of investment training is crap so I need to constantly improve my training slides.

While preparing stock screens for this weekend's class to demonstrate this concept, I wanted to see how many stocks fall into this category in SGX :

a) Cannot be a ADR, GDR, China Stock or a REIT.
b) Cannot have a market capitalisation below $50M. 
c) Must have revenue above 150% of the average of the remaining counters after step (b).
d) Must have an operating cash flow above the average of the remaining counters after step (b).
e) Must have number of shares outstanding above the average after step (b).
f) Of the universe in (e), choose stocks that give at least 4% dividends last year.
g) All stocks must produce a free cash flow that sustains the dividends.

These set of screens are inspired by O'Shaunessy's What Works on Wall Street so the backtest not just has some utility on Bloomberg, it has a history of working well in US stock markets.

Sadly, Sturgeon's law holds true for Singapore markets

The screens were too stringent to create a working portfolio. Only Jardine C&C, City Developments, Hongkong Land and Dairy Farm made the final cut.

This list is too short to create a diversified portfolio for my students so I need to make adjustments to my model to ensure that a model with more than 10 stocks would result. After relaxing the model, I was still able to backtest 18%+ with a larger set of large cap equities.

Still, the Final Four may be useful in my personal portfolio to anchor my REIT portfolio with some bluechips as we dive into what is possibly a bearish work economy with Brexit and a trade war looming in the horizon.


  1. Whoa, it shows the capital allocation prowess of the Jardines and Mathesons...

    Or maybe they're just lucky...

  2. Sadly, quantitative models can rarely tell luck from skill.

  3. Hi Chris,

    Can I ask what are the issues with American Depository receipts and Global Depository receipts? And for your 4 picks, some of them have noticeably high debt levels (partially offset by high operating cash flow). Do you see any issues with it?

    I re-soundly agree with your point that Singapore has limited number of truly stellar companies. Will you consider including overseas Dividend stocks as part of your dividend strategy?

  4. INTJ,

    As I use average figures and not median ones, ADR and GDRs skew the numbers upwards because they come from large global companies. This is why I exclude them from my screens.

    Generally speaking, I do not look at debt levels of companies. The markets tend to reward companies along the 3r to 4th decile for debt equity ratio signifying that responsible use of debt is actually a prerequisite for market outperformance.

    I don't like to pay withholding taxes which is why I stick to local counters.