E Getting High Returns With Good Statistical Stock Picks

A writer of financial blogs has basically 2 choices. A writer and newsletter author can try to be useful for other investors or he or she can try to write stories that others want to read: entertaining stories. I must confess that I tried to do the latter in the beginning, though not very hard and only as a writer, not as a newsletter author.

Now I write about stocks that are ignored by the large investing public but that still can have great returns. Because these stocks are often unknown, obscure, and sometimes disliked they have low prices. And what is cheap usually has great returns in the stock market.

Consistency in research

The best investors are usually very consistent in their sourcing of investment ideas and in their research. I try to mimic their consistency. My sourcing of investment ideas is very thorough and consistent as I will explain below. Furthermore I write down the same points for each stock I look into: information for judging cheapness, governance related information, balance sheet related information. payouts to shareholders over the last 10 years, and substantial shareholders. Can be boring but it makes it easier to compare stocks.

Unfortunately because my research is often boring to read it can be difficult to publish it on websites like Seeking Alpha and maybe even here. That’s called editor’s selection bias.

But I keep trying to publish “boring stuff” as long as the investment value is there. I hope more and more readers of financial blogs will recognize investment value of financial writings is more important than entertainment value.

Unlike many others I do not invest based on conviction. Instead I hold many small positions. What these positions have in common is they were great stock market bets on a statistical basis when I bought them.

Great stocks on a statistical basis

So what is a good stock market bet on a statistical basis? If you ask this question to 10 different investors you will get 10 different answers. Some people like low P/E stocks, some like low P/B stocks or other favorable metrics such as low P/Free cash flow. Other people like stocks with payouts: high dividend yield stocks, stocks of companies buying back shares, or dividend growth stocks.

Many investors look for earnings quality and growth, which are subjective measures of course. Another approach is looking for the cheap stocks in certain sectors, like insurance companies, real estate, branded consumer staples products, oil, biotechnology, etc, etc.

I do not do any of this. Instead I look for good stocks from quantitative strategies from the literature. So for me a stock is a good bet if it satisfies many properties of a high returning stock strategy published by a scientist.

Because I only want the cheapest stocks I look for stocks globally. I think investing globally helps in reducing risks and also improves returns.

What is a quantitative strategy?

A quantitative strategy combines several metrics in a pretty intuitive way. Because of the combination of several metrics quantitative strategies typically have higher returns and lower risk than simple screening strategies based on a single metric.

Suppose you like low P/E stocks AND high dividend yield stocks. A quantitative strategy first sorts all stocks on P/E. Every stock gets a number. The stock with the lowest P/E gets rank number 1, the stock with the one but lowest P/E gets rank number 2 and so on. Then sort the stocks again, now on yield. Again the stock with the highest yield gets rank number 1. Now add the 2 rank numbers for each stock. So a stock with rank number 3 on P/E and rank number 200 on dividend yield gets assigned 206 as the third number. Then sort the stocks again on this sum. The new sorted list is your quantitative low P/E – high yield strategy. The stocks with the best combinations of P/E and dividend yield have the lowest combined rank numbers.

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Bill Johnson 1 year ago Member's comment

I've read your work before, it's good. Glad to see you here as well.

Susan Miller 1 year ago Member's comment

Interesting, thanks for sharing and welcome to TalkMarkets. I look forward to reading more by you!