JSE Power of Value,Part-III

PREVIOUS : Power of Value on the JSE, Part-II

We had already shown in previous research (Price:Book, an all time classic) that in the crash of 2003, low price:book stocks outperformed high ones substantially over the ensuing 5 year bull run to 2008. By replicating the Brandes Institute exersise for the JSE for multiple 5 year periods, we were hoping to provide strong confirmation of trends discovered in our 2003 tests.

We only had data going back to 2000, so we could only create four sets of deciles to measure average 5 year growth, namely 2000-2005, 2001-2006, 2002-2007 and 2003-2008. We did however also decide to measure 1,2 and 3 year average growths for each of these decile sets. Decile sizes ranged from 25-27 shares depending on year. We are pleased to perform a first for the JSE with our results shown below:

We see startling confirmation that low price/book deciles substantially outperformed high price/book deciles, for 1,2,3 and 5 year growths, with significant outperformance by decile-10 which contained shares with lowest price-to-book ratios of an average of 0.37 and less. The results on the JSE are amplified enormously compared to other larger stock exchanges where similar research has been conducted. The graph below compares annualised compound growth achieved for each decile and growth period. Note how decile-10 has 1,2 and 3 year annualised growths almost identical at 66%:

Try and understand what the above graph is saying: "If you chose any starting date between the 4 year period of 2000 and 2003, and ranked the JSE by price-to-book and built a portfolio of the 25-27 lowest price-to-book shares, your portfolio would have grown on average 871% in 5 years, or 57.6% annual compound!" Put another way : "If you started in 2000, built a portfolio of the 25 lowest price:book shares and sold them 1 or 2 years later, and repeated the process you would have earned 66% average growth per annum for each of the four times you repeated the process!"

One last point : remember that the entire test period under review is 8 years (2000 - 2008) and thus includes the 2002/3 crash and the 2008 crash, which makes the above achievements even more remarkable.

NEXT : The Power of Value, Part-IV