Underperformance

Hi All,

While doing my end of the year updates, I have noted that my collective portfolio has consistently underperformed the SP500 now going on 7 years.

This has happened in both bull and bear years, and I have not been chasing the “hot new screens,” but rather have been pretty steady using the 10-year previous returns of the screens and updating this every two years or so.

While I am not yet ready to completely abandon MI (having done this for over 20 years now), I am looking to re-evaluate how I do MI. I am looking at some of the recent deep screens that outperform marginally, rather than a collection of the shallower screens that outperform better in backtesting.

Question: what have you switched to, and how well has it been working?

About me: very steady income and employment (academia), at least 10-15 years to retirement, expenses coming (college) 8-10 years down the pipeline.

–Gabriel

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I have switched to GTAA4 or 6 + 1 top “fixed-income” class. My MI blend became less and less a portion due to underperformance and relative expansion of other approaches/asset classes. It underperformed for another 3-4 years to the point where the hobby just became a waste of time.

So, i’m still mechanically investing/managing; just not using these old screens.

FC

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I have switched to GTAA4 or 6 + 1 top “fixed-income” class

Can you elaborate FC, or point to more info?

my collective portfolio has consistently underperformed the SP500 now going on 7 years.

You obviously not alone as evidenced by the declining popularity of the MI board.
I too was observing my performance declining even as I was being more selective with the screens using only screens that were working much deeper than I was going, using ranking rather than just hard thresholds. Techniques that in the past helped us all outperform the market with lower drawdowns look like they are being arbitraged away.
Like FlyingCircus I too started moving over to TAA using ETF’s, much less effort with decent results. Most interesting is that for a couple of years I too used the same GTAA4. On 9/3/2019 I posted that I had been using a modified GTAA AGG4 type strategy adding a little extra philosophical economics type
modifier to the safe/aggressive decision for several years to part of my investments. I spent a significant amount of time going over the different TAA’s, their pre and post discovery data. Then Allocate Smartly came along and did all the research more professionally than my efforts. I have scrapped their website and put together my own evaluation of their published strategies and built my own scoring system. But after all that I decided to not over bake the cake and just subscribe and let them do all the work (after I pick the mixture, I want them to use). A blend of Generalized Protective Momentum, Risk Managed Momentum and Risk Premium Value.

With a little less allocated to a few Equities that I believe have a long-term edge.

RAM

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Though it’s true the great majority of screens have not worked very well in the last several years, you might cut yourself at least a bit of slack.
The S&P 500 has been an extremely difficult target in the last few years because of the outstanding performance of a few giant firms that dominate it.

As an old-school example, take the Value Line 1700 universe, equally weighted, as a proxy for the set of typical stocks an MI screen might be picking from.
The S&P 500 beat the VL equal weight by 6.3%/year in the six years to the pandemic bottom (!).
Those using MI screens were likely to feel bad if using the S&P as their benchmark, even if their stock picking was quite a bit above random.
Then, of course, we saw one of the biggest deep-V bungee bottoms of all time, which reliably breaks any screen using momentum.

So, for this stretch especially, perhaps a better test of one’s success: have the absolute returns been pleasant enough?
And do you have sufficient reason to believe that will continue to be the case?

As for how to do MI successfully, or more successfully, it remains hard.
My approaches have been to concentrate on a deeper, simpler screens with very modest goals.
Aim for 20% outperformance and you’ll underperform; aim for 4% outperformance and you might actually get it.
Pick a few factors that seem to continue to hold up, even if they don’t offer huge advantage.
Each person’s style and research will lead to different conclusions, but a couple of factors I’ve found to have some utility through the recent hard stretch:
A universe that excludes at least some stocks furthest from 52 week highs.
High ROE, though not necessarily just the highest few.
Five year sales growth has been outstanding as a predictor. That may fade somewhat as the cycle turns, but it has always been pretty good.
Cash is never a bad thing.
And some quirky things–Medical devices continue to be good bets, and very high P/B firms do much better than you might expect.

The LargeCapCash screen is new, but has beat the S&P by a bit in its first 8 months since the post.
That’s after friction, 40 stocks deep, 2 month cycle, Top 40 HTD 45 as suggested.
It uses little except ROE and cash. Long run backtest S&P plus about 4-6%/year.
Like most of the things I look at these days, it aims to be boring, with just a small and safe long run advantage.

Disclosure:
Truthfully I generally have little or no money in MI most of the time these days.
I create and test and track and rank and select screens continually, but I don’t have much money in it.
I have done so well for so long with Berkshire that it has dimmed my interest in other approaches.
(over 20% IRR for over 20 years)
When it’s cheap I own a whole lot, when it’s not I own less. Rinse and repeat.
When it’s really cheap I go in with both feet, with an embarrassing amount of my portfolio in deep in the money call options.
Some years are truly ghastly, but I know it’ll come back a year or two later.
The attraction is that the financial results are remarkably steady, and it’s not too hard to create a yardstick for the value of a share.
Because of the way I invest, I find those are more important than a high rate of growth.

Jim

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I have done so well for so long with Berkshire that it has dimmed my interest in other approaches.
(over 20% IRR for over 20 years)
When it’s cheap I own a whole lot, when it’s not I own less. Rinse and repeat.
When it’s really cheap I go in with both feet, with an embarrassing amount of my portfolio in deep in the money call options.
Some years are truly ghastly, but I know it’ll come back a year or two later.
The attraction is that the financial results are remarkably steady, and it’s not too hard to create a yardstick for the value of a share.

Berkshire has been on a relative tear lately, up 15% in six weeks, while the rest of the market has been pretty awful. How do you view its value at this point?

Elan

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Sure, ges -
2020 YE summary with description of GTAA approach: https://discussion.fool.com/my-2020-year-end-portfolio-34711055…

Simplified summary:
2021 Results
GTAA-6: 16.1% (Success: it outperformed the appropriate benchmark VBINX’s 10.7%).
In general, I target up to 60% of the port to equity-type “risk” asset classes, and 40% to fixed-income classes including cash depending on the same 8m MA criteria. General rule is reallocate monthly within a few days of month-ends. Details of using the 8M MA / absolute and relative momentum discussed previously.
https://discussion.fool.com/circusport-yearend-21-update-3501367…

December '21 asset-momentum “timing” decision summary: https://discussion.fool.com/what-i39ve-done-based-on-gtaa-349931…

HTH,
FC

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Berkshire has been on a relative tear lately, up 15% in six weeks, while the rest of the market has been pretty awful. How do you view its value at this point?

A little more expensive than has been typical, though not wildly so.
On my figures, 12% more expensive than the average valuation multiple in the post-credit-crunch era, about 7% more expensive than the average since 2003.
Offsetting that is that the end-2021 figures aren’t out yet, and they’ll likely to be very good, so my value estimate is getting a bit stale.
Consequently it is probably not 7-12% more expensive than usual, but somewhat less.

Also, depending on your definitions, it’s arguably still trading for a bit less than what it’s worth, since it’s usually cheaper than seems justifiable.
One conceivable definition of true fair value would be the price you’d pay to get inflation + 6.5%/year in the next five years.
That’s what the average US stock has given in the average year in the past, give or take: the historical monkey-with-a-dartboard rate.

Here’s something more than a wild guess but less than a prediction–
A rational expectation for BRK would be very close to nothing for a year or even slightly down, then a trend of inflation plus 8%/year, plus or minus a percent.
I have shrunk my (over large) position a bit this past week.

It should be noted that this same style of analysis would give a MUCH worse expectation for the S&P 500.
My figures suggest that if the S&P 500 were trading at the average multiple of smoothed earnings since 1997, it would be at 3199 today, a drop of -31.4%.
Any other base year prior to 2011 would give a lower index level and bigger required drop, so that’s about the most optimistic notion of normal for the past.
Maybe things are different this time, but without that assumption the rational forward expectation is unusually poor.
If forward returns correlate with starting valuations in a way similar to the average since 1995,
one would expect a seven year real total return from here of about inflation -1.2%/year.
Think of that as the average real total return for random ending dates 4-10 years out, annualized back to today as a seven year rate.
I’m not saying that the forward valuation levels will resemble those of the past. But if they do, that’s a reasonable outcome to expect.

Jim

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I wonder of a lot of use (including me) used more MI years ago when we were younger and could afford to take more risk. Fortunately a lot of us did well. Now that we’re older, whoever feels like they “won the game” are willing to settle for less risky (and less time consuming and simpler) strategies to simply achieve halfway decent returns with less risk. That’s what I’m doing; mostly switched over to a portion using a GTAA approach and a larger portion that is mostly a general global asset diversification of ETF/funds in the “moderate growth” category.

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