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Greenblatt is a winning formula in Europe

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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Food for thought

The following are the link a bit 'of articles I've read in the last week and that I consider interesting. Since the lyrics are not in Italian, I loved my brief summaries. The overall tone, as we shall see, is marked by a certain pessimism. In the field remains the most optimistic strategist of investment banks, the reliability of forecasts which, unfortunately, is not to be excessive illusions.

The strategist, but not too optimistic

The Blog Bespoke Investment Group reported in a table (see below) the latest updates from price target for the S & P index 500 indicated by the main strategist of investment banks. Compared to earlier this year, when the target average was 1,632 points by end 2008, optimism was a bit 'attenuated. The consensus forecast now stops points to 1519, representing an increase of 10% over current levels.

not because he thinks I take note that these price targets are useful references for investors. On the contrary, I expect to be able to return later this year in this post to take note of what they were unfounded.


The financial sector lost the leadership of the S & P 500

Reports an article Bloomberg that after a collapse of 31% the end of 2006 financial sector ceased last week to be the first to capitalization S & P 500 index . It 'was in fact passed by the technology sector . Both sectors account for just over 16% the market index. Third in importance, with just under 15%, the energy sector .

The financial sector had become the first U.S. market in late 1995, when they replaced the top consumer goods. They had been temporarily overcome by technology in the bubble years, but the Nasdaq had regained the leadership in 2002.

And 'round inflation

In an article titled Inflation's back, the 'Economist reported as two-thirds of the world will in the coming months to live with inflation in double digits. The immediate cause is the continual increases in the price of oil and raw food . But the problem has deeper roots that might create a crisis situation such as that of the '70s.

Anchoring the U.S. dollar of many developing countries forces them to imitate the expansionary monetary policy of the Federal Reserve . This combination of low cost of borrowing in the U.S. and rigid exchange rates in emerging markets is a dangerous cocktail.

At the global level - refers to the Economist - the real interest rates are now negative . Monetary policy has never been so expansive '70s. But if low interest rates may be justified for America, which is on the brink of a recession, not at all to the economies of many developing countries operating at the limit of their capacity and have long are overheating.

With inflation rising a bit 'everywhere, the danger is that they move upward from the expectations by striking vicious wage-price spirals . Then a hard landing, or a hard landing for the global economy would become difficult to avoid.

Recession in the U.S.? For Buffett will be long and deep

Around Europe in search of investment opportunities, Warren Buffett talks with Spiegel Online and declares that, in America, the recession "will be deeper and will last longer than many expect. " bankers, he says, had prepared a" poisoned potion, "of those who usually like to sell to others. But they found themselves having to drink themselves.

The collapse in house prices without end

In a speech in Vancouver on May 13 Janet Yellen, president of the Federal Reserve Bank of San Francisco , has torn apart the illusions of those who own plan a subsequent stabilization of the housing market American. "The indicators - he said - link to the downside."

Stocks of unsold homes are so high that can not hope for a quick recovery in construction activity. Despite the significant decline in prices (first chart below) - the main proceedings dell'impennata nella percentuale di mutui in sofferenza (secondo grafico qui sotto) – i contratti future e il rapporto ancora molto alto tra prezzi e affitti (terzo grafico qui sotto) inducono a pensare che la discesa delle quotazioni è destinata a durare a lungo, almeno fino al 2009 inoltrato.




(i grafici sono a cura della Federal Reserve di San Francisco)

Trichet ammonisce che gli shock economici non sono finiti

In un’intervista al Wall Street Journal , il presidente della ECB Jean-Claude Trichet argues that "the accumulation of shock" resulting from the credit crisis and rising oil prices and food commodity "is clearly not over."

Poptropica Cheats For The Hunted House

How much is the excess risk of self-confidence

He wrote me notes expressing a player, and motivated civilians, one of my post. What makes me happy. Constructive criticism is to stimulate and enhance the views. He, however, hit a particular the nickname of prettysmart , as a business card that I found it too difficult and too - as we shall see - risky.

Non conosco la persona che si cela dietro a una tale ammissione di talento fuori dal comune. E dunque non è di lei che parlerò. Ma del piccolo dettaglio di un nick vorrei approfittare per introdurre un grande tema che da tempo intendevo affrontare, e cioè quello dell’ eccesso di fiducia nei nostri mezzi e dei guai che ne possono derivare per un investitore .

Il campo d’indagine, come molti già avranno capito, è quello della finanza comportamentale , nata negli anni ’70 grazie alle ricerche di due psicologi cognitivi, Amos Tversky e Daniel Kahneman .

Dai loro studi, nell’ultimo quarter of a century, has developed a particularly fruitful line of reflection on the limits of our cognitive abilities and decision-making, which ultimately undermine the most fundamental assumptions of classical finance.

The overconfidence, a cognitive error of normal people

The direction of this revolution has been summarized, with rare effectiveness, in a famous phrase from another of its stars, Meir Statman : "The people in traditional finance, are rational. In behavioral finance, however, are normal. "

If the 50s had left the models of condensing finance abstractions of mathematical calculations in dense, built around the human agents of which assumes perfect rationality, then, with the advent of behavioral finance, there has been large - for the first time - of the empirical studies from which it was possible to determine as our decision-making under conditions of uncertainty, are populated by systematic errors.

Often, therefore, wrong. And this is because our information is incomplete and our rationality is influenced by emotions.

Among the most frequent sources of errors there, as he writes in Matteo Motterlini good book Economics emotional , "our ability to believe that instead of knowing things we do not know at all, and to give skills and expertise beyond that which they actually have."

This is called "the trap of complacency " or" cognitive boldness, a lack of systematic review in which we tend to incur overconfidence or over-confidence in ourselves.

Research done over the years are now many and leads to unambiguous conclusions. 90% of Swedish drivers, according to one study, considers himself better than average. Or 70% of studenti di liceo americani si attribuisce capacità di leadership superiori alla norma, mentre va ancora peggio tra i professori, il 94% dei quali è convinto di svolgere il proprio lavoro meglio della media dei colleghi.

In un altro famoso test, un campione di persone è stato sottoposto a delle domande di cultura generale e richiesto di dire che fiducia avesse nelle risposte formulate. Tra le risposte ritenute esatte con un grado di fiducia del 100% solo poco più del 70% erano effettivamente corrette.

Competenza e livello di cultura non sono di per sè un rimedio contro gli errori di overconfidence. Anzi.

Prendiamo ad esempio una professione elitaria come quella dei gestori di fondi .

Research - as reported by Motterlini - asked to provide a sample for each of 12 titles if the prices would have appreciated or depreciated over a period of time. 47% of the predictions proved to be correct (less than might be expected for a simple effect of chance), but the confidence expressed by the media managers in the accuracy of their forecasts was 65%.

The dangers of investment in the activity dell'overconfidence

to infer pretty smart, just like my reader proclaims with his nickname, is therefore a global trend. But what results the door? From the point of

evolutionary perspective, being equipped with overconfidence - to an extent, maybe not exaggerated - could have been an advantage. That would have given humans the confidence that would have helped to overcome, thanks to the maintenance of motivation, especially critical environmental challenges.

In the investment world, however, the "cognitive boldness" is due to a series of troubles that have been carefully documented.

as outlined in the book Michael Pompian Behavioral Finance and Wealth Management , there are four types of errors that investors end up be induced due to a systematic over-confidence.

a) once an investment choice is made, the excess of confidence in its correctness leads to ignore the negative information that would normally serve as warning signals. The investor overconfident, in short, tends to dwell only on evidence that confirms the soundness of its decisions and ignore contrary evidence. Doing so raises the risk of negative or even catastrophic, in violation of what the two great thinkers such as Charles Darwin and Albert Einstein considered a golden rule: the constant exercise of self.

b) The overconfidence leads to ' overtrading , and that is an exaggerated activism that increases the cost to the detriment of portfolio returns. The investor "bold" feels in possession of accurate knowledge and preference that seem to constantly promise new revenue opportunities. It is, however, an illusion.

c) The investor overconfident ignores the findings of the past and tends to systematically underestimate the risks in the markets. The crises seize the unprepared.

d) The general tendency to underestimate the risk can also be seen at the portfolio level, where the investor too confident in itself does not usually take care to put in place adequate diversification . The result is a concentration of risk far exceeds the capacity of tolerance.

True knowledge

Over-confidence, then, is a serious error from which the prudent investor must learn to look at, diligently exercising their critical thinking skills and self-criticism.

considered pretty smart just cause trouble, as he teaches Charlie Munger, the acute and wise socio di Warren Buffett :

“Persone come noi hanno tratto un enorme vantaggio nel lungo periodo dal tentativo costante di agire evitando di essere stupidi anziché cercando di essere molto intelligenti. Ci dev’essere una qualche saggezza nella massima che dice: ‘Sono i nuotatori forti che finiscono per annegare'.”

Il pensiero, naturalmente, corre alla straordinaria parabola di LTCM , l’hedge fund dei “ geni ”, costituito nel 1993 dal più brillante bond trader di Wall Street in partnership con due premi Nobel. Dopo quattro anni di funamboliche performance – rendimenti annui 40% and low volatility - the fund collapsed miserably in just five weeks during the summer of 1998.

John Meriwether, Robert Merton and Myron Scholes , unlike Warren Buffett and Charles Munger, had forgotten one of the basic principles of an ancient wisdom, Confucius already (pictured above) had stated:

"True knowledge is knowing that you know what you know and you do not know what you do not know."

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financial performance, the lessons of history

Addressing financial markets without having a ' idea of \u200b\u200b returns che possono offrire è un po’ come navigare senza avere con sé le carte nautiche, con la differenza che il secondo comportamento è punito dalla legge mentre il primo non lo è.

L’investitore, dunque, se vuole evitare naufragi, non può fare affidamento su vincoli esterni ma solo su se stesso. Sembra facile e invece si tratta di uno scoglio in più che per molti risulta arduo superare.

C’è anche un’altra complicazione. Le mappe dell’investitore non si riferiscono al mondo fisico, con la sua relativa chiarezza e stabilità. Vengono dalla storia , una maestra spesso inascoltata.

Come diceva Antonio Gramsci , "The illusion is the most tenacious weeds in the collective consciousness: the story teaches, but not students."

In fact, most investors chasing mirages and feeds on self-deception.

the warnings but I would add a boost: the investor who is willing to learn from history now has at its disposal more resources than ever before.

One of these, the best is Stocks for the Long Run of Jeremy Siegel, a book which was released a few months, the fourth edition is completely updated and expanded with new chapters (the third edition 2002, was published in Italian in 2003 under the title financial performance and investment strategies ).

Shares, the best investment

The last effort of the Wharton School professor - arrivatami America these days - has led me to revise a post, cycles and market returns , I wrote at the beginning of this blog and in which Estimates of Siegel on yields of shares and bonds in the last two centuries, thinking a bit 'up (call to re-read that post, because here I'm going to deeper issues that I mentioned just there, but I will ignore completely somewhere else - although important - which a year ago I stopped).

I wrote then that "real returns of the shares (adjusted for inflation) have been very consistent over time, and far higher than any other asset class."

The history of financial markets teaches us, then, that "there is nothing in the long run more profitable and safer than a diversified investment in equities."

This is, in essence, the lesson of Stocks for the Long Run . But Let us see in more detail e con l’aggiunta di qualche utile precisazione, partendo dai dati essenziali, che ho raccolto nella tabella qui sotto.


Siegel ha ricostruito la performance delle principali classi di asset per il mercato americano dal 1802 a oggi (azioni, bond ossia titoli del Tesoro a lungo termine, T-bill ovvero titoli del Tesoro a breve termine, oro).

Ai rendimenti nominali ha sottratto il tasso d’inflazione (indicato nell’ultima colonna) al fine di ricavare i rendimenti reali . Si tratta di total returns , e cioè di rendimenti che tengono conto del reinvestimento di interessi, dividendi e capital gain.

The two centuries have been divided into three sub-periods: the 1802-1870 when America was an "emerging market", the 1871-1925 in which America became the first power in the world, in 1926-2006 that America has consolidated its leadership through dramatic ups and downs, like the crisis of 1929 and the Great Depression, World War II and the economic boom that followed.

The postwar period has been further broken down into three shorter periods, corresponding to the recent bull and secular bear market in the stock market: 1946-1965 (bull), 1966-1981 (bear), 1982-1999 (bull).

The lessons of history

We are now ready to derive from the table a number of key observations:

a) The performance of dominates the actions of other assets. Siegel calculates that an equity investment of one dollar in 1802 would have reached a value of $ 12.7 million at the end of 2006.

By comparison, all other assets obtained disappointing results. A dollar invested in bonds generates a return of only $ 18.235, a dollar invested in T-bill not exceed $ 5.061, a dollar invested in gold stops at $ 32.84, providing barely maintaining the purchasing power of the original.

b) In the long term (ie for periods exceeding 50 years), the return on shares is extraordinarily stable , close to that 6.8% real which is the average for the two centuries covered study by Siegel that for sixty years more recently, by the end of World War II to the present. That

6.8% acts as an anchor for the markets, so much so that two analysts of the first magnitude as Andrew Smithers and Stephen Wright , in their book Valuing Wall Street , the ' called "Siegel's constant". What is should yield such stability is not clear. A convincing theory for now, does not exist.

c) The constancy of performance of the shares is in contrast to the great instability of bonds, both long-and short-term. Over the past 80 years, bonds and T-bill were affected before low interest rates during the Great Depression, then the high inflation of the '70s.

Overall, the transition from low and stable inflation era of the gold standard the highest price dynamics of the era of fiat money (or legal tender) has depressed real returns of fixed income securities.

d) L ' gold has followed the trend over time in the general level of prices in the economy. In periods of high inflation protection offered , but nothing more. In the long run its real yield has been shown to almost zero.

e) Returning to actions, stability of yield in the long run gives way to a variability of results is more pronounced as it reduces the 'time horizon . The

volatility in equity markets in the short term is unknown. As is well known that it tends to be more pronounced in downturns, when the economy is in recession. But the table also shows that for periods of ten or twenty years, stocks have offered returns very different from the norm. In

bull market of 1982-1999, the most extraordinary in the history of the Stock Exchange, the average return was a real extraordinary 13.6% per annum. But the market cycle was followed by the disappointment suffered by investors in the previous fifteen years, between 1966 and 1981, when the annual real returns were negative even ( -0.4%).

should be added that in the last two centuries, the longest period of negative real returns for the stock market did not exceed 17 years, while bonds had negative returns for cycles of 30 years.

f) When is therefore that the investment in shares can ensure both high profitability relative constancy of results? Siegel's studies show that to achieve this ideal condition, where the high performance is married to the low risk , the investor must go over a twenty-year horizon.

E 'beyond this threshold, it is stated that the equity markets, until now, without exception, the principle of regressione verso la media ( mean reversion ), per cui a fasi caratterizzate da rendimenti inferiori alla media ( bear market secolari) seguono fasi di rendimenti superiori alla media ( bull market secolari), e viceversa.

Grazie alla mean reversion dal 1871 le azioni hanno fatto meglio delle obbligazioni nel 95% dei periodi ventennali e nel 100% dei periodi trentennali . L’ultimo ciclo trentennale in cui i bond, nel mercato americano, riuscirono ad avere un rendimento medio annuo superiore a quello delle azioni si concluse nel 1861 , prima della guerra civile. Poi, un evento simile non was repeated.

g) From the above, and the above table, we can derive some guidance for future ? In a world of legal currency, monetary stability which is subject to political influence, the bonds probably will not be different But from the very middle of the last 80 years, nominal yields between 4% and 5%, inflation between 2% and 3%, real returns of around 2%.

And actions? The table shows how the super-bull market of 1982-1999 yields declined in recent years are gone but not enough to bring them into line with the average long-term: 9,0% medio del periodo 1982-2006 resta al di sopra del 6,8% storico.

Un modo speculare di affrontare questa questione parte dall’osservazione che al rendimento del 6,8% corrisponde un P/E di mercato di circa 15 volte . Quello è il livello medio, il fair value di lungo periodo. Ma il mercato azionario americano continua oggi a scambiare a un multiplo ben più elevato. Resta, cioè, sopravvalutato .

Siegel , per la verità, ritiene che i più bassi costi di transazione, le minori tasse, la maggiore facilità a diversificare i portafogli internazionalmente e la maggiore stabilità macroeconomica siano tutti fattori che potrebbero giustificare più alti multipli di equilibrio da qui in avanti, forse prossimi a 20 volte piuttosto che a 15 volte gli utili.

Se così sarà, i rendimenti reali attesi potrebbero scendere verso il 5% nel lungo periodo dal 6,8% del passato. Se invece non sarà così, il mercato potrebbe dover completare il bear market iniziato nel 2000 ed eliminare in tal modo la residua sopravvalutazione prima di riprendere un nuovo ciclo espansivo.

Nell’uno e nell’altro caso, ritorni reali non inferiori al 5% annuo garantirebbero la permanenza di un equity premium , e cioè di un vantaggio dell’investimento equity than bonds, at least 3 points , unless the war but in line with the average of the last two centuries.

U.S. markets and international markets

remains to be addressed, in conclusion, one last question. All the analysis done so far concerns the American market. But who assures us that it is also important to invest in other countries? After all, the U.S., over the past several decades, there have been a reality at all typical. They were instead the richest country in the world, the only true superpower.

doubt is legitimate but fortunately there are those who demonstrated both in substance and unfounded.

Three British economists - Elroy Dimson , Paul Marsh and Mike Staunton - published in 2002 a research on stock returns and long-term debt in 16 countries , titled Triumph of the Optimists : 101 Years of Global Investment Returns .

results, updated to 2006 are summarized in the chart below, taken from Global Investment Returns Yearbook 2007 , by ABN Amro .


As you can see, the returns on shares and bond, in the U.S. Were above average but not by much. Three out of 16 countries have done better than them Sweden, Australia and South Africa. countries in the bottom of the standings ( Belgium, Italy , Germany, France , Spain, Japan ) are, in general, including those who suffered the most devastating destruction during the two wars world.

Worst of all, when looking at stocks and bonds in the complex, is the result of 'Italy with an annual real return of only 2.6% for equities and negative, of' 1.8 % , for bond. Will perhaps explain why the task of another post. The effects of war, Italy has joined a protected economic system, corporate, statist, which has generally paid little and not so much the shareholders that holders of public debt.

For Italian investors that these results provide one more reason, if any were needed, to appreciate the benefits of portfolio diversification outside the narrow borders.