The euro is finding its mojo again. Estonia yesterday joined the common currency. In the days of Communism, the Baltic country was always closest to freedom and capitalism, mainly because its weird language is close to Finnish. Estonians watched Finnish TV to learn what was going on in the real world.
Also helping the euro was the successful auction of Spanish treasuries. More about Spain for paid subscribers only is to be found below.
Be careful of magic formula investing, like this example.
Formula Investing launched four new separately managed account strategies, of international companies for individual and institutional investors, based on Joel Greenblatt’s fundamentally-based quantitative value methodology of selecting stocks. These supplement Formula Investing’s existing retail and institutional domestic value strategies, which have already amassed over $100 mn since launch in 2009.
The new strategies consist of two international and two global approaches for individual investors and institutions. All use a newly created proprietary database of company financial data to rank and select stocks from 26 countries. Each of the four strategies includes stocks from Asia, Europe and the Americas, while the two global strategies also include US stocks.. “Ever since we started Formula Investing last year, our clients have asked us when we would apply the same disciplined, quantitative approach to international stocks,” said K. Blake Darcy, CEO, Formula Investing. ”As a result of the painstaking creation of an international database of company financial information, we were finally able to apply our fundamentally-based quantitative methods to these four new strategies.”
Formula Investing will purchase stocks for client portfolios directly. This enables portfolios to hold more than just ADRs, increasing the range of stocks purchased. Individual clients can invest in the international or global strategies starting at $250,000, while the institutional offering starts at $5 mn.
These new approaches demonstrate a commitment to providing a suite of investing styles that help individuals and institutions invest in a value strategy. The money management firm employs strategies developed by its co-founder, Joel Greenblatt, a money manager.
Formula Investing constructs client portfolios of value stocks with the objective of outperforming broad market indices long term. Stocks are chosen based on a combination of their relative cheapness and quality, as measured by earnings yield and return on capital. Formula Investing was co-founded by Greenblatt,
New York Times bestseller “The Little Book That Beats the Market”.
What would my Qwafafew buddies say?
Backtesting is an art not a science, because data is neither realistic nor current, Marcus Bogue, PhD warned. I quoted him yesterday on the risks of using Reuters or Compustat databases to backtest strategies like Mr. Greenblatt’s. The risk is restatement–of income data, balance sheet data, and cash flow data. These are the metrics value investors count.
Bogue’s research shows that historical data on more than 40% of all companies (European or American) turn out to have been inaccurate when reported, and have had to be restated in stock databases. Asian restatements (essentially from Japan and South Korea) are marginally lower but still significant.
In response to my question, he said that these are not trivial restatements. Auditors require a restatement only if the change is “material” which means we are not talking about single digit percentage changes. Bogue also says that stale data is as likely to understate performance as overstate it. And you cannot assume that a given time lag will let you capture all the corrections.
The larger cap indexes (like the S&P 500) are more error prone than databases covering all traded companies in a market. And the database errors accumulate and pile up and lead investors astray.
Restatements occur for lots of reasons: acquisitions and diverstitures, changes in accounting rules, and good old fraud (remember Enron?)
The further back you go the worse the data, explains Bogue. Historical database numbers are 50% likely to have been restated. And when you are checking against an index, another quant warns, be careful of dead companies. Databases from 50 years ago are full of companies which disappeared entirely, about 8500 of them. So the remianing covered companies benefit from survivor bias.
Sorry, but there is no magic formula after all.
As for exchange-traded fund magic, remember these instruments were only invented in the past decade so they provide no guidance to future prices.
All this chat about charts has triggered a recommendation for paid subscribers, who should have some slightly dented cash from our sale yesterday. And from another trade we recommend today.
