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Monday, March 9, 2009
Tuesday, February 17, 2009
JSE Power of Value,Part-IV
PREVIOUS : JSE Power of Value,Part-I
PREVIOUS : JSE Power of Value,Part-II
PREVIOUS : JSE Power of Value,Part-III
Let us examine some other interesting and important data about our research for 2000-2008 and how low price/book shares outperform the market.
First, the research shows better outperformance for smaller cap stocks less than R1Bn (roughly 65% of the smallest stocks on the JSE), especially for decile-10. This is shown below, and the graphs for 1,2 and 3 year growths are very similar to the one below.
Secondly, decile-10 consistantly and convincingly outperformed the ALSI group in each period of growth, for both large and small-cap universes. As shown below the small cap group outperformed the market 4.9x on average, over 1 year, whilst the All-cap group out-performed the market on average 2.7 times over five years.
Thirdly, standard deviation (volatility) for market out-performance among the 4 different sets of data shows a remarkably minute 0,25 for the 5 year growth period. As to be expected, volatility for overall market out-performance for shorter growth periods is much higher.
The most important observation from the above is that over four subsequent sets of 5 year growth periods, the lowest price/book decile (decile-10) with average maximum price/book ratio of 0,37 out-performed the ALSI by an average of 2.6 times with a tiny standard deviation of 0.25. This gives us high confidence that a strategy of constructing portfolios of 25-30 shares with the lowest price/book ratios not exceeding 0,37 should out-perform the general stock market indices by at least 2.35 times over a period of 5 years.
PREVIOUS : JSE Power of Value,Part-II
PREVIOUS : JSE Power of Value,Part-III
Let us examine some other interesting and important data about our research for 2000-2008 and how low price/book shares outperform the market.
First, the research shows better outperformance for smaller cap stocks less than R1Bn (roughly 65% of the smallest stocks on the JSE), especially for decile-10. This is shown below, and the graphs for 1,2 and 3 year growths are very similar to the one below.
Secondly, decile-10 consistantly and convincingly outperformed the ALSI group in each period of growth, for both large and small-cap universes. As shown below the small cap group outperformed the market 4.9x on average, over 1 year, whilst the All-cap group out-performed the market on average 2.7 times over five years.
Thirdly, standard deviation (volatility) for market out-performance among the 4 different sets of data shows a remarkably minute 0,25 for the 5 year growth period. As to be expected, volatility for overall market out-performance for shorter growth periods is much higher.
The most important observation from the above is that over four subsequent sets of 5 year growth periods, the lowest price/book decile (decile-10) with average maximum price/book ratio of 0,37 out-performed the ALSI by an average of 2.6 times with a tiny standard deviation of 0.25. This gives us high confidence that a strategy of constructing portfolios of 25-30 shares with the lowest price/book ratios not exceeding 0,37 should out-perform the general stock market indices by at least 2.35 times over a period of 5 years.
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
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
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