Value Effect
Process:
Fair Weather Strategies' portfolios are biased towards value stocks wherever possible.
When deciding whether to invest in an equity investment, we place a high emphasis on four key value factors that have historically, and over long periods of time, been associated with superior returns. Those four value factors are low price to sales, low price to earnings, low price to book value and low price to cash flow.
Research:
Research: In his book, What Works on Wall Street, James O'Shaughnessy divided up the universe of all U.S. stocks above $150mn market capitalization into deciles based on their valuations. He then tracked the returns from subsequently holding each stock for 12 months. Four valuation measures in particular (see chart above) were most striking in that they showed a clear relationship between cheaply valued stocks and high returns and conversely, between expensive stocks and low returns.
A Brandes Institute paper entitled “Value vs Glamour: The challenge of expectations” shows that from 1968 through 2008, the average annualized return for the most expensive decile of US stocks (as defined by price to book value) was 6.9% while the least expensive decile returned 16.2%.
Past performance is no indicator of future return. There is no guarantee that applying a moving average strategy will either increase your portfolio’s return or lower its volatility as compared to any other strategy. Some securities and market environments are particularly unsuitable for trading using a moving average system. A moving average strategy will likely incur higher commissions than a buy and hold strategy and may or may not increase your taxes relative to buying and holding.