29 October 2009

It's 1997. What works VMO, Beta or Secret Sauce?

It's not 1997 although looking at the averages today they haven't made much progress since then. But they have moved a lot. You know what would have happened to a buy and hold investor. What about factor investors? Here are three charts showing three High Low portfolios since 1997. The Ford VMO factor tries to separate quality stocks from junk. But after twelve years no difference> Why? Investors sold their good names last fall because they could and then bought the weak names with enthusiasm this year, if they could. Of course the assumption of monthly rebalancing made the rebound almost as big as the tumble. In reality not many people had the fortitude or funds in March to make this happen.

The beta chart separates all stocks in the S&P 500 into those with Beta above and below 1. (The VMO bins only look at names in the top and bottom 20%). Well you can see that high Beta stocks did best over time. This worked because again the rules forced rebalancing even during steep market declines. Dividend payments are not included.

The final chart showing Test highs and lows uses a special combination of factors which I'd be glad to share with you if interested. It worked best. In a backtest. Secret sauce is always best.

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