Tuesday, March 17, 1998
The Daily Workshop
Report
by Robert Sheard
(TMF Sheard)
LEXINGTON, KY. (March 17, 1998) -- Jim Lynn (OGIM) has been doing some back-testing of ideas we've been tracking and discussing in the Workshop area. Today he finished a recent test for our Low Price/Sales screen from 1989 through 1997. Unfortunately, we didn't have the data for Jim to take this particular test back any further, but to let you know what Jim found in that brief period, here's a copy of his results. I'll let Jim speak for himself here. Please thank him when you have a chance for all the work he's put into our Workshop. -- Robert Sheard
Here's a Saint Patrick's Day present for everyone --
Robert has kindly used his Value Line database to select the top 10 stocks (year by year) for the PSR strategy (VL #1 timeliness stocks with Price/Sales Ratios below 1.5 and positive 1-year earnings growth, ranked by 26 week Total Returns/Relative Strength) which has done so well over the last two years.
Unfortunately, this strategy doesn't do so well in a back-test. Over the nine-year period, it has significantly lower returns and reward/risk ratios than the pure 26-week Relative Strength strategy. Curiously, the pure RS strategy is especially better than PSR in the weak market years of 1990 & 1994. (See below.)
However, by expanding PSR to include Value Line #2 stocks (just like Keystone) the returns and reward/risk ratios are much improved, yet still below 26-week RS.
Since the #1 ranked stock (highest 26 week total return) has negative returns, it has been removed in all three strategies.
Five Stocks (#2 - #6)
RS PSR1 PSR1&2
1989 43.1 10.2 63.2
1990 29.4 8.5 8.5
1991 109.8 53.8 59.1
1992 20.8 16.2 10.1
1993 55.8 31.0 26.6
1994 43.7 8.2 14.3
1995 59.6 42.9 42.9
1996 22.9 24.7 73.1
1997 70.3 74.9 78.3
CAGR 48.5% 28.3% 39.3%
Sharpe 1.649 1.047 1.328
Nine Stocks (#2 - #10)
RS PSR1 PSR1&2
1989 46.7 11.0 60.8
1990 28.9 4.7 3.6
1991 84.4 59.1 45.2
1992 25.6 10.8 9.3
1993 47.8 9.1 23.4
1994 19.8 -1.2 9.4
1995 42.0 33.8 27.1
1996 18.1 31.7 43.7
1997 38.8 44.7 69.6
CAGR 37.9% 21.2% 30.6%
Sharpe 1.676 0.839 1.166
There is a saving grace for the PSR strategy (using VL #1 & #2). By combining it in a 50/50 mix with the pure RS strategy, we can smooth out the market's cycling back and forth between growth and value approaches and produce the highest reward/risk ratio ever posted.
To put it a different way, the 50/50 mix would have quadrupled your investment since January of 1995!
50% 26 Week RS (#2-#6) and 50% PSR1&2 (#2-#6)
1989 53.2
1990 19.0
1991 84.4
1992 15.4
1993 41.2
1994 29.0
1995 51.3
1996 48.0
1997 74.3
CAGR 44.6%
Sharpe Ratio 1.766
Not bad for a low-maintenance strategy and a 12-month holding period!
Good fortune to all -- Jim Lynn
[Robert Sheard is the author of the forthcoming book, The Unemotional Investor, due out from Simon & Schuster on May 12. To pre-order your copy, please visit Amazon.com, where it's available at a discounted price.]