To recap I am a fan of James O’Shaughnessy’s book “What Works on Wall Street” and I am also a fan of his son Patrick’s “Invest Like the Best” podcast series. Given this I am trying to create a simple version of their multi factor screen that they suggest would produce the best returns.
I am screening for;
EV/EBITDA - Minimum of 0.1 and max of 10
Price to turnover Max of 4
Relative to Index (6 months) momentum of 5%
Mkt Cap minimum £10m
I then sort for the lowest EV/EBITDA and buy the lowest 5.
(For more details on all of the above please see my previous O’Shaughnessy article on the 06/07/17. See below in the blog timeline or click on the O’Shaughnessy tab)
For my initial 6 month period my 6 month return was 22%. Against a FTSE small cap return of 9.3%
For my second 6 month period my returns where significantly negative.
On the 3rd July 2017 I bought;
7.000 STM for £3,126.95
3,000 Sportech for £3,242.82
34,000 Tern for £2.952.35
32,000 Sylvania Platinum for £3,067.15
120 Wizz Air for £2,921.35
I held these for 6 months and sold on the 11th January 2018. Though in the period Sportech did a Return of Capital that needs to be included;
STM £2,578.05 = Loss £548.90
Sportech £2,349.65+£870 (RoC) = Loss £23.17
Sylvania £3.139.35 = Gain £72.2
Tern £932.23 = Loss £2,020.12
Wizz Air £4,265.45 = Gain £1,344.10
Overall loss £1,175.89 (-7.7%)
In a period when the FTSE small cap returned +5.3%
In all honesty I am not sure what to make of these results.
It may be that 5 is too concentrated a holding and 25 (the number recommended in the book) really does need to be the target number.
It may be that I have oversimplified the factor approach or put in the wrong factors.
It could also be that the strategy period really is too short.
Equally it could just be a bad period. Nobody never gets it wrong.
Given I cannot be definitive on why such a poor result in stage 2 I am continuing the experiment in its current form and bought 5 new holdings on the 11th January 2018.
It may be worth considering that 22-7.7 = 14.3% return overall against the FTSE small cap of 14.6% for the same period. Given my figures include all dealing costs and actual spreads my return overall may on fact be slightly beating my chosen benchmark. It is not a ringing endorsement but it is worth consideration.