Friday Reads

Below is my Friday investment reading list:

April/May Safe Haven Play – It Is That Time Again!

If US Stocks Are Expensive, How Do I Protect Myself? Mebane Faber

Imagine: Brokers Who Work for Investors – Barry Ritholtz

Not-So-Great Expectations: Why Real Interest Rates Won’t Soar – Research Affiliates

Lumber, Gold, and Volatility in Equities – Pension Partners

Does Smart Beta = Smart Asset Allocation? The Capital Spectator

Understanding Dual, Relative, and Absolute Momentum – Dual Momentum

Human Innovation is Winning the Race Against Scarce Resources – Pragmatic Capitalism

Looking Back at Risk Parity’s Golden Age – Econompic Data

The “Impossible Trade” is working – The Reformed Broker

From Alpha Architect:

Tactical Asset Allocation with Market Valuations: Magic of Myth?
Tactical Asset Allocation and Low Volatility Stocks
Attention Value Investors: How to Predict Accounting Trickery
Are Value Investing and Momentum Investing Robust Anomalies?
Momentum Investing: A Simple Bond Momentum Strategy

From ETF.com:

Swedroe: ‘The One-Page Financial Plan’
Swedroe: Carry & Trend Effects Up Close

More on this topic (What's this?)
Optimizing Your Asset Allocation
2014-Q4 Performance Review
Read more on Asset Allocation at Wikinvest

Graham Value Portfolio Update

In January 2012 I announced a new portfolio, a Benjamin Graham “inspired” value stock portfolio.  The Graham portfolio is an attempt to add a value strategy to Scott’s Investments, which is otherwise focused on momentum, trend, income and market timing strategies. The portfolio tracks returns for a portfolio of 15 stocks selected based on a variety of valuation metrics.

The criteria used to select the stocks are listed below.  The tool used to perform the screen and backtests are courtesy of  Portfolio123 (“P123″).

The actual screen factors are below:

  • Liquidity filter: No OTC Stocks
  • Market capitalization > $100 million
  • Eliminate companies classified in the Miscellaneous Financial Services Industry, most of which are investment companies and funds and not the kind of stocks this all-star tended to seek
  • Current ratio must be at least 1.5
  • Long-term debt must be no higher than 10% above working capital
  • EPS must be above breakeven in each of the last four quarters and in each of the last five annual periods
  • Trailing 12 month EPS most be above EPS in the latest annual period
  • EPS in the latest annual period must be above EPS in the prior year and five years ago
  • The company must have paid common dividends in the last 12 months

The ranking system used as a basis for selecting the top 15 based among those stocks that pass the Graham screen are below:

  • Valuation – 60% of total
  • Trailing 12 month P/E (15% of this category)
  • Price-to-Book (15% of this category)
  • Price-to-Tangible Book Value (35% of this category)
  • Operating P/E, defined as Market Capitalization divided by Business Income, which is Sales minus Cost of Goods sold minus Selling, General & Administrative Expense and omits unusual items (35% of this category)
  • Earnings – 40% of total
  • 5-year EPS Growth Rate (50% of this category)
  • EPS Stability, defined as the standard deviation of EPS over the past 16 quarters, lower being better (50% of this category)

Stocks are sold when they drop below the 75th percentile ranking based on the ranking system above. Improvements in the screening and testing platform (via Portfolio123) allows a change in the sell/turnover rule from previous updates.

I began tracking this portfolio real-time on January 13th, 2012. As of April 16, 2015 it is up over 58%. A real-world application of this portfolio could also utilize stop losses in order to prevent large drawdowns in single positions. However, for the purposes of tracking the portfolio results, all positions are bought and held until rebalancing.

Below is a 14+ year backtest results for this screen  using a quarterly rebalance, assume the next day’s opening price as the execution price, and .50% slippage to help account for bid/ask spreads. Backtests include the 75th percentile sell rule (stocks will only be sold when they drop below the 75th percentile ranking):

(test data courtesy of Portfolio123)

Graham Graham2

The current holdings including stocks being sold 4/16/15 are listed below:

 

Current Positions Symbol Name Purchase Price Purchase Date Unadjusted Percentage Gain/Loss
Sell BGFV Big 5 Sporting Goods Corp 15.32 4/15/2014 -17.82%
Sell BWC The Babcock & Wilcox Company 33.85 4/15/2014 -4.70%
hold HFC HollyFrontier Corp 45.9 4/15/2013 -17.39%
Sell ALG Alamo Group 39.72 10/15/2014 55.59%
hold CLMS Calamos Asset Management Inc. 12.67 4/15/2014 -1.74%
Sell CSH Cash America International 47.35 4/15/2014 -44.08%
Sell CTCM CTC Media, Inc 9.26 4/15/2014 -51.19%
hold AVT Avnet 41.69 1/16/2015 7.65%
hold JST Jinpan International 7.77 1/15/2014 -46.07%
Sell FF FutureFuel 11.79 1/16/2015 -8.91%
hold GPRE Green Plains 21.39 1/16/2015 40.91%
hold RCKY Rocky Brands 15.37 1/15/2014 43.98%
Sell SCVL Shoe Carnival Inc. 24.82 1/15/2014 13.94%
Sell DDS Dillard’s Inc. 91.08 4/15/2014 51.77%
Sell KALU Kaiser Aluminum Corporation 73.01 4/15/2014 5.66%

The new portfolio, including stocks purchased 4/16/15, is listed below:

 

Current Positions Symbol Name Purchase Price Purchase Date
INTC Intel Corporation 32.87 4/16/2015
MLR Miller Industries Inc 24.87 4/16/2015
hold HFC HollyFrontier Corp 45.9 4/15/2013
NOV National Oilwell Varco, Inc 55.3 4/16/2015
hold CLMS Calamos Asset Management Inc. 12.67 4/15/2014
HOFT Hooker Furniture Corp 23.81 4/16/2015
HY Hyster-Yale Materials Handling, Inc 74.8 4/16/2015
hold AVT Avnet 41.69 1/16/2015
hold JST Jinpan International 7.77 1/15/2014
HAL Halliburton Company 47.83 4/16/2015
hold GPRE Green Plains 21.39 1/16/2015
hold RCKY Rocky Brands 15.37 1/15/2014
RES RPC Inc. 15.75 4/16/2015
RS Reliance Steel & Aluminum Co. 57.74 4/16/2015
VLO Valero Energy Corporation 58.26 4/16/2015

Investment Resources for Individuals