Equity Strategy Guiding Principles
Value beats growth over time
- Not all the time and not even most of the time which makes value investing hard
- Focus on companies with strong cash flow in relation to share price
Dividend Paying Stocks Outperform non-payers over time
- Focus on the sustainability of the dividend – not the absolute yield
- Dividend growth strategies perform best of all
Quality stocks beat Junk
- Focus on overall financial health of the balance sheet
- Helps to mitigate market downside
The single largest market anomaly is that low volatility stocks outperform higher volatility stocks over time
- This is related to the previous principle. You save enough money in down markets to enhance the compounding power of gains over time
- This is especially true in international markets
Momentum works
- Focus on recent relative outperformers not stocks on recent 52 week low list
- Investors systemically underreact to recent positive or negative news
Small stocks beat large over time
- This is a function of higher growth rates but…
- These companies are often highly cyclical and indebted and much more volatile
Companies with “Moats” outperform over time
- This is an output of some sort of sustainable competitive advantage
- But the durability of moats is shrinking over time
Market Timing does not work consistently over time
- The problem isn’t only when to get out but when to get back in because,
- The best market returns mostly occur in the midst of the worst economic conditions
Passive strategies generally outperform active strategies
- This is particularly true after tax/trading cost considerations are taken into account for active strategies
- Passive strategies enforce discipline and will more likely remove emotion (which is almost always a problem when making financial decisions) from the decision making process
Costs Matter
- The lower the better particularly in very efficient markets like large cap US
- Costs include bid-ask trading slippage, broker/manager/custodial fees, taxes