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