I’ve been
tinkering with the screener over the last few weeks and found it to be quite
straightforward to use. In terms of coverage it extends to all major global
markets in Europe, North America and Asia Pacific and over 22,000 stocks
spanning all sectors. You can work with four different factors covering various
elements of (i) valuation (e.g. multiples, various yields), (ii) quality (e.g.
margins, returns), (iii) momentum, (iv) volatility and finally (v) growth (e.g.
free cash flow or dividend).
Below is a
sample screen I’ve selected for companies (i) trade in the US, (ii) market cap
over $100m, and (iii) FCF yield up to 20%. Once you’ve done that you’ll get a list
of companies, which you can tweak and sort as you like by many of the factors
listed above. You can also set up your own templates to make your life easier.
For geeks like me you also have the option to export it to Excel where you can
live out some of your wildest fantasies with the list of companies.
In addition
to the screener the website also has a list of quant strategies that Tim
backtested and wrote about in a research paper (here and here). These strategies will
consist of different valuation metrics coupled with other quality or momentum
factors. The screener will allow you to search for stocks given a certain
strategy’s criteria and build a portfolio of them over time. As noted
above quant strategies can help your research and investment process but key is
sticking to them over time even when they might not make sense.
Overall, I
find the screener to be a very useful addition to my research process as it
covers all the key elements in terms of valuation and other fundamental metrics
that I use. The dataset is wide enough to have a great sample of global stocks
to work with. While it won’t have the robustness of a Bloomberg terminal for
instance you are also not paying $20k+ for the pleasure of financial data but
you get many of the core features in the screener.
And
now for the interview.
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Tim, you are well known in the value
investing community but for those who might be unfamiliar with your work could
you tell us a bit about your background and how you came to value investing?
In
1986, shortly after finishing school, I enrolled in a stock market
correspondence course. A year or so later I pooled my limited funds with an amount
from my father and started to invest in the real world.
Made every investment mistake
I
then went on to make nearly every investment mistake you can think of
(technical analysis, broker recommendations etc) until I read a unknown 84
page book called “Winning on the JSE” by Karl Posel an engineer and former
professor of applied mathematics.
This
book was my introduction to value investing. It broke investing down into a
logical process. The
book also made me realise that investing was not a recent human activity and
that there must be some good research and books about what has worked, not in
the short term but over long periods of time in up and down markets.
So
from about 1998 this is what I have done, studied the results of every possible
book, research paper and investment study I could lay my hands on that showed superior
long term performance – and I still do.
This
of course led me to Graham, Buffett, Dreman, O'Shaughnessy, Greenblatt, Pabrai,
Lynch, Piotroski, Antonacci etc.
All
this research led me to develop my own unique investment approach that is value
investing based.
I’ve known you for a few years and in
that period you’ve gone from stock picking to a more quant based investing
approach. What moved you to do it? What were some of the key lessons learnt
along the way?
As
I mentioned all the study and research I did made me a classic value investor.
Why I changed from pure value investing
This
however changed when I read the outstanding book by Joel Greenblatt called The Little book that beats the market,
where he introduced me to the Magic Formula. After finishing the
book I started doing a lot more reading and research into quantitative
investing and how it can be combined with value investing.
What works on European markets?
As
part of my research a friend and I in 2012 set out to find the investment
strategy that would have given you the best returns in the European markets
over the 12 year period from June 1999 to June 2011.
As
you know 1999 to 2011 was a horrible time to be an investor (not just in
Europe) as it included both the bursting of the Internet bubble (2000) the
financial crisis (2007 and 2008) as well as the European sovereign debt crisis
(2010 to 2013). We called the study Quantitative
Value Investing in Europe: What Works for Achieving Alpha.
Astounding returns +1157%
What
we found astounded me, with the best performing strategy returning 1157% over
the 12-year period.
In
fact the top 10 strategies we found generated an average return of 881%, a
return I’m sure you will also be proud of.
Valuation not the most important
The
thing about the study that will surprise you (it surprised me) is that
valuation was not the most important factor in any the best performing
strategies.
Valuation
was important but is not the first thing you should look at.
What
was more important was to first look for companies with strong share price
momentum and select the most undervalued companies from this list.
You
may be asking if the research study changed me from classical value investor to
a completely quantitative value investor.
A bit of both
The
answer is I became a bit of both.
I
still enjoy analysing companies and have of course remained a value investor
but I make sure all of the ideas I analyse come from one of the best investment
strategies in the research study as well as from continued research.
But
I’ve also become a quantitative investor investing part of my portfolio in
ideas that are quantitatively generated.
In terms of your investment process, how
do you go about selecting ideas for your portfolio? Any bias towards certain
geographies, industries, company size? What are your thoughts on portfolio
composition, size limits, risk management etc?
I
use the Quant Investing screener to generate ideas.
I
may still look at an idea from a friend or fund manager I respect but that does
not happen very often.
I
am completely indifferent in terms of company size, location or industry. That
said I prefer companies where there is enough volume traded daily for me to get
in and out easily and I do not like to invest more than 20% of my portfolio in
any one industry.
Diversification
I
size positions so that they make up a maximum of 4% of my portfolio when I buy.
I keep the position as long as the company remains an attractive investment. When
it becomes overvalued or is not on my screens after a year I sell.
If
I invest quantitatively (buy a basket of companies with a high EBIT/EV for
example) I do not put more than 2% of my portfolio in any one investment. This
is because I have not done as much research on the companies.
A stop-loss limit?
Since
1987, when I started investing, I have been an on and off supporter of stop
loss limits. This changed earlier this year when I sat down and researched all
the research papers about stop-loss strategies I could find.
You
can find the article here: Truths
about stop-losses that nobody wants to believe
The
conclusion of the research is, especially if you use momentum to get investment
ideas, that a stop loss strategy adds a lot of value. With a trailing stop loss
level of 15% to 20% giving the best results.
Because
limiting losses helps you a lot with the psychological problems we face as
investors, mainly the pain of losses, I recommend that you seriously consider
implementing a stop loss system for your portfolio.
There are numerous studies on the
outperformance of quant based value approaches, however key here is the limited
interference of human actions in the process. How closely do you adhere to the
recommendations of the tool to build a portfolio? Do you ever find yourself
saying "there is no way this stock is going into the portfolio”?
That
is a good question and something that is very hard to do.
If
you get a list of company names from the screener and you do even the slightest
amount of research, even if you just read the company names, it will lead to
you changing in the investment process.
So
you must either do no research at all or lay down strict rules about what
exactly you want to research before you invest.
That
said if you choose 20 investments from a list of 40 companies the screener
generated based on your investment strategy that is also fine. If your strategy
is good the investment ideas will give you a satisfactory return.
You
can read about all the best investment strategies we have tested here: Best investment strategies
Could you tell us a bit about the idea
behind Quant Investing? When did you start developing the tools, what are some
of the core features and who do you see as your key audience? What are some of
the new features that you are working on and planning to roll out in the
future?
I
am always looking for ideas and insights that can increase my investment
returns. But to make sure that the ideas really work I needed a database to
test ideas.
As
I did not find anything that fit my needs (and budget) so I decided to build it
myself. So that is how quant-investing
was born.
This
allows me maximum flexibility and the ability to try out all ideas I read about
or think of.
I
had to get a good data source, which you know is expensive, is why I make the
screener available to other like-minded investors for a small monthly payment.
This
does not mean the screener only has tools I use, I am always glad to include
the ideas of subscribers to make the screener as useful as possible.
Reason for good strategies and data
quality
Because
I use the screener to invest my own money is the reason why subscribers can be
sure the data quality as well as the performance of the investment strategies
are good.
I
eat my own cooking.
Useful for all kinds of investors
When
we developed the screener we included ratios and indicators so that it can be
used by as many different types of investors. Whether
you are:
- Growth,
- Value,
- Short term momentum,
- Smart Beta
- Net Net or
- Dividend investor
The
screener will definitely be able to give you interesting investment ideas.
New developments - Large companies on
steroids
We
recently added a feature to the screener where you can select market leading
companies, basically large companies on steroids. The idea comes from James
O'Shaughnessy’s excellent book What Works on Wall Street.
Value rank
We
also just finished development of a valuation ranking system we called Q.i.
Value that ranks companies based on a combination of the best valuation ratios
we have tested including the work from the research paper Quantitative Value Investing in
Europe: What Works for Achieving Alpha.
It
ranks the whole universe of companies in the screener (22,000) using four
valuation ratios and thus helps you to select the most undervalued companies. Q.i.
Value is calculated with the following ratios indicators:
- EBITDA Yield
- Earnings Yield
- FCF Yield
- Liquidity (Q.i.)
You
can find more information here:
What makes this screener stand out from
other screeners?
The
first thing you will notice when you use the screener are the four filters (or
funnels) that allow you to select up to four ratios and then use a range slider
(for each ratio separately) to choose the range of companies you want to
include.
The
image below gives you an example of how easy it is to screen using four filters
(or funnels):
Over 83 ratios you can use
The
four ratios mentioned above are just examples. The screener has more than 83
ratios and indicators you can use to search for companies that exactly meet
your investment strategy. You
can find a list of all ratios and indicators here: Glossary.
For those who are interested where can
they find more information about the site and what’s the best way to reach you?
Here
are the best places to look at on the website.
Information
on the best investment strategies we have tested: Best strategies
The
latest ideas we have researched and other interesting articles: Quant Investing Blog
Where
you can find pricing information and sign up to get your own investment ideas: Join today
Your FREE guide to screening
If
you click on the following link you can download a free guide, in simple to
understand English, to help you make the most of any screener. To
download your personal copy of the guide simply click the following link: Guide to screening
Any questions?
If
you have any questions please feel free to email me at tim@quant-investing.com.
Any quant investing books that you enjoy
reading and would recommend to others?
A
really interesting book I read recently was Dual
Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk
by Gary Antonacci
Other
good books you want to take a look at are:
The
Little Book That Still Beats the Market by Joel Greenblatt
What
Works on Wall Street by James O'Shaughnessy
Quantitative
Value by Wesley Gray and Tobias Carlisle
Tim,
anything you’d like to say in closing?
Each
investor has his or her own unique approach to investing and that is a good
thing else we will all be buying the exact same companies.
This
is also the reason why we programmed the screener with over 83 ratios and
indicators to ensure you find something that fits your investment strategy.
The
idea with the screener is to allow you to, as easily as possible, find
investment ideas that fit your investment style.
We
test strategies all the time to give you an idea of what works and
what not.
Please
note we do not do this to change your investment style but just to help you
with ideas to improve your returns.
And
who does not want that.
Let
me end on a more philosophical note.
Investing
is not a difficult skill to master but it is more difficult than it looks.
If
you are interested in investing your own money my best advice is to ignore the
popular media completely. Read books and research studies by other investors
that have been successful over long periods of time in up and down markets.
Learn
from each of them but build your own investment strategy by taking the best
from what you've learned that makes sense to you. Each person has got a
different temperament and invests in a different way.
However
if you follow time-tested investment strategies and build your investment
strategy on what has worked you cannot do anything else but have outstanding
returns over long periods of time.
Thanks Tim!
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P.s. If you are an investor, fund manager, analyst, fellow blogger etc and interested in having an interview posted on the site do drop me a message.
For the purpose of transparency, neither this blog nor me benefit financially from any of you choosing to sign up.
