Tag Archives: Validea

When It Comes To Growth Or Value, Have Your Cake And Eat It Too

It’s extremely common to hear investment commentators talk about “growth” and “value” as though they are polar opposites. But Validea CEO John Reese says not to buy that false notion.

“When it comes to investing’s great ‘either/or’ – that is, the growth or value debate – you can have your cake and eat it, too,” Reese writes for Canada’s Globe and Mail. “That’s because the great growth versus value debate is, in fact, a false choice. … Confining yourself to either value stocks or growth stocks is only limiting your portfolio’s potential. At certain times, you’ll be able to find more attractive growth-type picks; at other times, the market will be offering more value-type plays. Having a portfolio of growth-focused and value-focused stocks can also help smooth your returns over the long haul, since the two styles take turns leading the market.”

Reese says the “fallacy of the growth-versus-value notion goes even deeper. … That’s because implicit in the debate is the idea that any given stock is either a value stock or a growth stock, and that’s just not true.” He highlights a pair of stocks that currently get approval from the growth strategy he bases on the writings of renowned quantitative investor James O’Shaughnessy — and a separate value strategy he bases on O’Shaughnessy’s writings. One of them: AXA, a Paris-based financial company that’s involved in life insurance, property and casualty insurance, asset management and banking.


Would Lynch, Buffett, and Graham Like Apple, Facebook, and GE?

How do Apple, Facebook, Berkshire Hathaway, and other market giants stack up against the strategies used by history’s greatest investors? In his latest column for Forbes.com, Validea CEO John P. Reese takes a look at how 10 market titans fare, and the results might surprise you.

Reese notes that, historically, small stocks have beaten large stocks by a significant margin. Small stocks have an advantage because they can fly under the radar in a way that larger stocks cannot, and they usually come with an added risk premium because they tend to be less stable and more susceptible to bankruptcy. But, he says, that doesn’t mean you should ignore the big guys.

“Mega-cap stocks have advantages of their own,” Reese writes. “Their size and name recognition can give them what [Warren] Buffett would call ‘durable competitive advantages’ over their competitors. They also tend to be less volatile and safer plays during tough times. … And often times the big guys will offer nice dividends or implement major share buyback plans because of their more stable cash flows, making up for the slowing of growth that inevitably occurs when a company gets to be as big as these firms.”

So how do the 10 largest companies by market capitalization score using Reese’s Guru Strategies, which are based on the approaches of Buffett and other great investors? Apple, for one, fares quite well, earning strong interest from Reese’s Buffett- and Peter Lynch-based models. Facebook, on the other hand, misses the mark. To see how the others stack up, click here.




Value Portfolio, Meet Big Mo’

Much like a shot of nutrient-rich wheatgrass can add a “power boost” to your morning smoothie, a shot of momentum can add a big boost to your value investing portfolio, Validea CEO John Reese says.

The idea of focusing on hot stocks may make value investors, who tend to find bargain-priced stocks amid the beaten-down members of the market, cringe, Reese writes in his latest for Canada’s Globe and Mail. “But value stocks aren’t always falling. Nor are red-hot stocks always expensive,” he says. “While they are often portrayed as polar opposites, value and momentum are really two separate concepts. Value metrics give you a snapshot of what a stock’s valuation is at a given time, regardless of whether the stock has been rising or falling. You’ll find plenty of cases in which a stock is so cheap that it can get quite hot for an extended period, and still be undervalued.”

Reese says those are the kinds of stocks you want to key on. He discusses the research of quantitative investing guru James O’Shaughnessy, noting that O’Shaughnessy’s rigorous testing of various strategies has shown that the best approaches historically have included both value and momentum variables. He also cites other studies showing that a combination of value and momentum strategies has been very effective not only in the US stock market, but also in global markets for a variety of assets.

“The idea of combining value and momentum in a single stock-picking strategy makes a lot of sense,” Reese writes. “Momentum is a powerful force in investing. We human beings have a tendency to follow the crowd, which means today’s winners tend to keep winning. The problem occurs when the crowd pushes the winners far past fair value – tech stocks of the early 2000s are probably the best example of that. At some point (and there’s no way of telling precisely when), momentum won’t be enough to keep a vastly overvalued stock rising; when that happens, it’s often as though investors realize that the emperor has no clothes – that the stock is worth nowhere near what people have been paying it – and the trend can reverse. Before you know it, all of your gains can be wiped out. When you combine momentum with value, however, you avoid the risk involved with those high-flying, overpriced stocks, while still getting the benefit of the market’s momentum.”

Reese looks at a trio of stocks that currently have both strong momentum and attractively priced shares, and which also get strong interest from his “Guru Strategies,” which are based on the investing approaches of Warren Buffett, O’Shaughnessy, and other highly successful investors. Among the stocks he highlights: JetBlue Airways, which passes his Peter Lynch-based model.

Don’t Get Spooked By Value Stocks

Value stocks may have underperformed growth stocks for several years now, but Validea CEO John Reese says investors would be wise not to pronounce value investing dead anytime soon.

“Given that it’s Halloween season, it seems appropriate that value stocks are starting to stage a comeback in the United States,” Reese writes in his latest column for Canada’s Globe and Mail. “Much like the villain in a scary slasher flick, value stocks have been beaten, battered and, by many, presumed dead. They’ve been losing to growth stocks since mid-2006, marking the longest stretch of imbalance in the growth/value cycle in more than three decades,” according to Credit Suisse.

Reese says that in theory, value investing should in fact “have been killed off a long time ago.” Given the amount of studies that show value investing wins over the long haul, and the length of time that those studies have been fairly well known, the value advantage should by now have been arbitraged away, he says. But, despite value’s recent struggles, that’s not the case. “In fact, even people who invest in value funds don’t take advantage of the premium that value stocks tend to earn,” Reese writes. He offers data showing how value fund investors underperformed the funds in which they invested by a significant margin from 1991 through 2013. “Alleged ‘value investors’ weren’t helping close the gap between value and growth returns – they were actually adding to the gap by ditching their funds and buying hot, expensive picks and letting cheap value stocks get cheaper,” he says. “And lower prices mean better prospective returns for value stocks when the value/growth leadership switches back to value.”

Reese says that sticking to value stocks is difficult, because many of them are the types of stocks that have negative headlines hovering over them. But, he says, that’s why they earn a premium over the long haul, and why the value premium isn’t likely to die. If you stay disciplined and focus on value, history shows you can beat the market over the long term, he says.

Reese looks at a trio of value stocks that his Guru Strategies are high on right now. Included among them: Pilgrim’s Pride, which gets strong interest from his David Dreman-based strategy.


How Your Brain Hurts Your Returns — And What You Can Do To Stop It

What’s the biggest obstacle to investment success? Validea’s John Reese says it may well be our own brains.

“The capabilities of human beings’ brains are staggering,” Reese writes in his latest piece for Forbes.com. “Over the course of many millennia, the development of our brains has allowed us to outsmart dangerous predators, build enormous cities and create complex machines like computers and automobiles. Our brains let us think abstractly, plan for the future and create emotion-provoking art and music.”

“But,” he continues, “when it comes to investing, our brains have us hardwired to fail.” He says that our alertness to danger signs, ability to recognize patterns, and tendency to follow the crowd may have helped us in our evolution, but they hurt us in the investment world. “So many factors go into the broader market’s or an individual stock’s daily movements that one day’s gain or loss means little to longer-term prospects. When our stocks go down, however, our brains see that as a sign of danger. When stocks go down for a couple days in a row, we see a pattern that we fear will continue, and we want to sell,” he says. “Our tendency to follow the crowd also works against us. When a company is making negative headlines and investors are selling in droves, we feel like we are alone against the world if we own the stock. If the masses are piling into a certain stock, we want to join in. But when just about everyone is rushing headlong into a stock, it can get wildly overvalued–and history shows us that wildly overvalued stocks tend to come crashing down.”

Using some suggestions from Charles Rotblut, a vice president at the American Association of Individual Investors, Reese looks at some ways that investors can battle their brains to better their portfolios. For example, Reese looks at how having strict rules for when to sell stock can help one avoid several behavioral biases. “Indeed, choosing when to sell may be the most difficult part of the entire investment process,” Reese says. He notes that he uses a system in which he buys and sells stocks purely on quantitative factors, and only our regularly scheduled days. “On my regularly scheduled buying/selling days, I sell the positions that are no longer among the most highly rated stocks according to my models, and I replace them with new stocks that are,” he says. “In addition, I have a strict stop-loss system that is based solely on quantitative factors as well. By using a purely quantitative, rules-based approach to selling, I ensure that the endowment effect and other behavioral traps can’t impact my decision on when to sell a stock.”

Reese also looks at a handful of stocks that get high marks from his quantitative Guru Strategies, each of which is based on the approach of a different investing great. Among them: Blue-collar staffing firm TrueBlue, which gets high marks from his Peter Lynch-based approach.


Focus on Long-Term Food Trends, Not Short-Term Factors, Reese Says

One of the keys to successful investing is knowing the difference between long-term trends and short-term disruptions. That’s what Validea CEO John Reese says, and he says investors who can do that can take advantage of some opportunities in food-related stocks right now.

While food prices are down globally over the past year, the factors pushing them lower – Russia’s embargo of US products, China’s slowdown, bird flu fears, and the strengthening dollar – are all relatively short-term factors, Reese says in his latest Forbes.com column. Longer-term trends point toward higher food prices, however, he contends. Growing world population, increasing middle classes of emerging countries, stressed water supplies, and climate issues all should put upward pressure on food prices over the long run, he says, referencing some of the work that top strategist Jeremy Grantham has done on this issue.

“Grantham sees all of this leading to higher food prices over the long-term. While food companies’ profits depend on a number of factors, higher food prices should in general help food producers,” Reese says. “Investors, however, have been more focused on the shorter-term issues I mentioned above, causing many food-related stocks to fall in recent months. That should be creating long-term opportunities, and investors who can identify fundamentally sound food stocks have the chance to make some nice gains over the long haul.”

Reese examines a handful of food stocks that his Guru Strategies, investment models that are based on the approaches of Warren Buffett and other great investors, are high on right now, and which could benefit from the long-term food industry trends. Among them: Fresh Del Monte Produce.

A Disciplined Market-Timing System That Nearly Doubled The Market Over Four-Plus Decades

Trying to time the market often leads to big problems for most investors. But Validea CEO John P. Reese says that, in the hands of a highly disciplined investor, a rules-based market-timing strategy can yield stellar results, as it has for him.

“With market timing, the danger is less about the activity itself and more about how you go about it,” Reese writes in a column for Proactive Advisor magazine. “Many market-timers have little knowledge about how the market moves over time, they jump in and out of stocks or indexes based on what everyone else is doing. Their decisions are based on emotion rather than research or logic — and that usually leads to trouble.”

Reese, on the other hand, developed his timing model after he thoroughly back-tested 16 different market-timing strategies. “The strategy that showed the best results was an asymmetrical timing model,” he says. “On the sell side, the market has to close below certain key technical levels and selling needs to be accelerating, which will show up when a shorter-term moving average crosses below a longer-term moving average. The buy trigger is less stringent –it only requires the market to close above a certain shorter-term technical level. As a result, the strategy has a bias toward being in the market and not selling too quickly.”

Reese’s back testing shows that a disciplined investor who invested $100,000 in the S&P 500 in 1971 and then moved in and out of the market based on the strategy’s signals would have had just over $3.7 million by the end of August 2015, compared to $2.1 million for an investor who bought and held the index.

While the strategy has worked exceptionally well over the long haul, Reese says it can be a difficult one for investors to follow. “Because it waits for a significant uptrend to be confirmed before buying, it may not capture a portion of the gains that occur early in a bull market – and those are often quite strong,” he writes. “In addition, testing shows there is a 60% chance the buy/sell signal will be wrong. The long-term data indicates it is worth it to deal with the head fakes, but seeing consecutive incorrect signals as the market advances higher can be difficult for even the most disciplined investors.”



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