Six months ago I went to the presentation of the Italian edition of little book that beats the stock market of Joel Greenblatt, and then I wrote a post that quickly became the most widely read of this blog. The article summarizes the work of Greenblatt and praising his winning formula, a condensed genius of the tradition of value investing based on two simple criteria of value and quality as the profits / price and the return on capital. The reaction of readers, as I mentioned, was of great interest, but also brought to light a question which I did not know an answer satisfactory. The Formula - as shown by Greenblatt - had allowed the selection of stock portfolios that have had great success in the U.S. market. But in Europe was just as effective?
Then I was only able to argue with recourse to rationality. The reasons for the success of the formula were fundamental . The European equity market is not, in essence, different from the American. So there was no reason to believe that the formula does not work here too.
The limit for this answer, of course, was that there was no feedback empirical. There was no confirmation of the facts .
Now I've found the proof. And I am pleased to communicate to my readers. He's in a book published a few months in English and I arrived at home these days, Behavioural investing of James Montier .
On Montier and its credibility as a scholar I would like to first say a few words. For years, for work, I read the report of the strategist City of London and Wall Street . Montier I was immediately regarded as one of the sharpest analysts, original and credible.
Young, era già global equity strategist di Dresdner Kleinwort , che ha poi lasciato per andare a occupare la posizione di global strategist a Société Générale .
Ma la sua atipicità è sempre stata quella di essere un value investor e un grande esperto di finanza comportamentale , due tratti anomali in un analista sell-side . Figure così eccentriche emergono se sono straordinariamente dotate. Negli ultimi tre anni, Montier ha vinto per tre volte di fila il premio Extel come miglior strategist, una specie di Oscar della City.
Tornando a noi e al Piccolo libro , investing in Behavioral I found the winning formula of Greenblatt Montier had devoted a study in 2006, in collaboration with Sebastian Lancetti , a quantitative analyst at Dresdner Kleinwort.
Outperformance and low volatility
The research involved 750 market securities American, European , British and Japanese , covering the years 1993 to 2005 , and was intended to verify their if the formula had Greenblatt validity and robustness "outside the borders of the United States, where it was originally tested.
The findings, described as "impressive " by Montier, may be summarized thus:
a) During the period considered winning formula has allowed to select a portfolio of securities anywhere that has largely outperformed indices market. Compared to the U.S., the ' outperformance was even more pronounced in other regions, particularly in continental Europe and Japan .
b) Everywhere all'outperformance has married a volatility, and hence a perceived risk, lower than the market.
c) The use that Greenblatt ago, as a parameter value of of multiple EBIT / EV (EBIT / Enterprise Value) instead of the more common E / P (earnings / price) is proved amply justified. In all regions, except in Japan (where the two multiples have the same effect), the EBIT / EV has obtained superior results.
d) L ' EBIT / EV alone achieves long-term results even better than winning the Formula , especially in the U.S. and Britain. There
However, a problem which is why Greenblatt recommends its use in combination with a quality parameter such as ROC (return on capital). Alone, the EBIT / EV is more volatile and select portfolios that underperformed for a longer and more pronounced.
During the 13 years covered by Montier, the underperformance compared to the indices would have been unacceptable to many investors during the bubble of the century (when the madness for the technology sector led the bulk value to ignore titles ) .
s) At the end of his book, Greenblatt suggests that those who want to do itself but has no access to data for the calculation of EBIT / EV and the ROC (as defined by Greenblatt) instead of using the most common E / P and ROA (return on assets ). The results, according to Montier, confirming the goodness of the views of Small book.
performance, compared to the original version of winning formula, it is less bright, but still allows, with a lower volatility , to beat the market indices of 4 points in the U.S., five and a half points in Europe Continental, 6 and a half points in Britain and more than 9 points in Japan. The combination of E / P and ROA is more effective than use of ' earnings yield (E / P).
Investing is simple but not easy
Montier study confirms that the strategies value help beat the market, and that indicated by Greenblatt does it better than others.
Why this continues to happen, despite the apparent pervasiveness and ease of application of a recipe as the one proposed in little book, which if adopted would need to see more from reduced its effectiveness, is well explained by the same Greenblatt and confirmed by Montier.
The use of two simple multiple selection, almost mechanical, securities is too "boring" for many investors expect that by investing instead emotions, challenges and rewards of that 'instinct for the bet "we already talked about John Maynard Keynes .
addition, the value investing requires patience and a long-term approach . By winning the Formula of Greenblatt worse can happen to the market for years. In a world of investors so "myopic" to want to also measure the goodness of their daily results, the value investing proves too frustrating.
short, if the little book is so effective is because, as Warren Buffett says , " investing is simple but not easy."
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