STREET DOGS

Many studies over the years have confirmed that value-oriented strategies beat the market over longer time horizons. Several measures of value have been shown to work.

These strategies include selecting stocks based upon low ratios of price to book value, price to earnings, price to cash flow, price to dividends…. These simple value strategies do not always work. However, measured over longer periods, they do. Though these strategies have been well documented, most individual and professional investors do not have the patience to use them. The periods of underperformance makes them difficult — and, for some — impractical to implement.

Another problem with these simple methods is that, though they work well, they work far better with smaller and medium capitalisation stocks than with larger stocks.

Companies that are too small for professionals to buy and that are not large enough to generate sufficient commission revenue to justify analyst coverage are more likely to be ignored or misunderstood. As a result, they are more likely to present opportunities to find bargainpriced stocks. Once you’ve gone to the trouble of finding an interesting investment, hopefully your analysis won’t have to be any more subtle than figuring out whether an anvil fell on your head.

By not placing all your eggs in a buggy-whip, breast-implant, petrock, or huckapoo-sweater company, you can diversify that portion of your risk that comes from the misfortunes of any individual company. Prices fluctuate more than values, so therein lies opportunity.

A perennial problem is the incentive for analysts to issue buy recommendations … it’s easier to generate commissions from new buy recommendations than from recommendations to sell. — from Joel Greenblatt