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That makes no sense. The last 10 to 20 years have seen a bullish round of momentum stocks negatively correlated to value loaded stocks. Value has consistently

That makes no sense. The last 10 to 20 years have seen a bullish round of momentum stocks negatively correlated to value loaded stocks. Value has consistently lost money in the last decade except for short times during momentum crashes in 2018 and 2023. Either your definition of value is inconsistent with the rest of the world, or your analysis is biased. Considering your sentence: > an algorithm to mass-analyze all the stocks on the US market I guess you reinvented some variation of"low vol" or "small vs big" signal. If you want to say you've beaten the S&P, you would have to show me a long short, beta neutral portfolio that does so using the same investment universe in a point in time manner.

jrockway 4y ago
An algorithm could be anything, right? Maybe they analyzed the middle school report cards of executives and majority shareholders, and tied that to value over time in a way that the S&P 500 did. Maybe there's some telling data point that people have never looked at before. I agree that predicting future price based on the current price has likely been tried to death by billions of hedge funds, but who knows, maybe they found something new that nobody has ever noticed. And, you can come up with the best stock trading algorithm in history and still not have the capital necessary to execute it, so it's possible that portfolio results don't matter. I'm not saying anything is likely here, merely that we have nowhere near enough data to even speculate or offer advice.
- Galanwe 4y ago
  > Maybe they analyzed the middle school report cards of executives and majority shareholders, and tied that to value over time in a way that the S&P 500 did. You are talking about ad-hoc signals here. Of course there are a lot of them that beat the benchmark, it's the basis of active management. But we're not talking about any signal here, we're talking about "value" - a signal so well known, studied and persistent we call it a "factor", and often decompose beta/sector/country adjusted residual returns _just_ based on a set of 4/5 of these factors.
carabiner 4y ago
Most finance comment threads on HN don't make sense. Just wait for Jumpcrisscross to drop in and forget the rest.
lordnacho 4y ago
The issue with backtesting this sort of thing is the data: - Was survivorship bias accounted for? If you don't have a list of stocks that includes dead issues (bankrupt, merged, or closed) then all your value stocks will be the ones that had a bad period and then miraculously recovered. Your backtest would buy those and make money, while not seeing the ones that had a bad period and then went to zero. This also means you have to track whether the stock was tradable, whether due to the exchange announcing a freeze, or the market just seizing up as participants decided not to risk much. If your strategy does shorting this is going to cause even more pain as you look for historical hard-to-borrow data. - Was the data backfilled? This is the hardest one to drag out of data sales people, because they often just don't get it. If I have a company that reports its Q2 earnings about six weeks into Q3, is the data labelled as coming out in Q2? Because if it is, I'm backtesting on future information. Also firms that are in trouble may also have timeliness issues in getting their numbers out. The real reason why the index effect is gone is actually simple. For years now there's been a bunch of traders who build their models around the effect. Their methods are common sense: screen the market for firms that are not yet in the index, and rank them according to how likely they are to get included. Buy a lot of what you're certain will get in, a bit less if you're less certain, and so on. The effect of this is to give you a smoothed out effect so that you can't just hop on board right before inclusion anymore. It also seems likely that the big index investors actually hire a few of these experts to optimize their purchases. In fact I had a chat with a guy who did this yesterday. It turns out to follow an index, you don't need to buy the whole index. Stocks tend to move together so you can cover most of the principal components with just a tiny amount of stocks. You're not going to do this by buying the little stocks at the bottom of the index, you buy the big ones at the top.
FredPret 4y ago
Makes perfect sense. There were massive increases in certain SP500 stocks, but the majority goes nowhere. On the whole, if you have the financials of all companies, and apply certain variations of the cigar-butt strategy, you get out ahead. This not only makes sense logically but also works in backtesting. Value investing is a wide term that includes many strategies. Some of them have made quite a lot of money, very consistently.
- Galanwe 4y ago
  > if you have the financials of all companies, and apply certain variations of the cigar-butt strategy, you get out ahead > This not only makes sense logically but also works in backtesting. No, it does not work at all in backtests. That's exactly what I'm talking about: a long short, normalized, rank based on e. g EPS. A typical value signal.
  - FredPret 4y ago
    Doesn’t work at all? Using “a common value signal”? There are many value signals that can be used. Some of which print money.
    - Galanwe 4y ago
      > There are many value signals that can be used. Some of which print money Please share portfolio weights of such a signal, so that I can check the value exposure and adjusted returns.
      - edgyquant 4y ago
        The burden of proof is on the person claiming no form of value investing will have passed a backtest over the last decade. That’s you, not the other person.
        Galanwe 4y ago
        > The burden of proof is on the person claiming no form of value investing will have passed a backtest over the last decade Says who? In my book the burden of proof is on the argument being the less in line with general consensus. Value being a bad investment in the last decade is not an argument, it's a fact. Value is not something you find, it is a defined factor with academic consensus on the definition. You can have some leaway and build a portfolio highly correlated to value, but that only goes so far. Claiming to have found a good value signal is then akin to claiming being able to doing consistently good factor timing on value. This is a feat the top hedge funds on the planet would be weary to claim. Allow me to be skeptical when someone on HN claims to have done so with "basic value indicators" and found something that "prints money".

jrockway 4y ago

An algorithm could be anything, right? Maybe they analyzed the middle school report cards of executives and majority shareholders, and tied that to value over time in a way that the S&P 500 did. Maybe there's some telling data point that people have never looked at before. I agree that predicting future price based on the current price has likely been tried to death by billions of hedge funds, but who knows, maybe they found something new that nobody has ever noticed. And, you can come up with the best stock trading algorithm in history and still not have the capital necessary to execute it, so it's possible that portfolio results don't matter. I'm not saying anything is likely here, merely that we have nowhere near enough data to even speculate or offer advice.

Galanwe 4y ago
> Maybe they analyzed the middle school report cards of executives and majority shareholders, and tied that to value over time in a way that the S&P 500 did. You are talking about ad-hoc signals here. Of course there are a lot of them that beat the benchmark, it's the basis of active management. But we're not talking about any signal here, we're talking about "value" - a signal so well known, studied and persistent we call it a "factor", and often decompose beta/sector/country adjusted residual returns _just_ based on a set of 4/5 of these factors.

carabiner 4y ago

Most finance comment threads on HN don't make sense. Just wait for Jumpcrisscross to drop in and forget the rest.

lordnacho 4y ago

The issue with backtesting this sort of thing is the data: - Was survivorship bias accounted for? If you don't have a list of stocks that includes dead issues (bankrupt, merged, or closed) then all your value stocks will be the ones that had a bad period and then miraculously recovered. Your backtest would buy those and make money, while not seeing the ones that had a bad period and then went to zero. This also means you have to track whether the stock was tradable, whether due to the exchange announcing a freeze, or the market just seizing up as participants decided not to risk much. If your strategy does shorting this is going to cause even more pain as you look for historical hard-to-borrow data. - Was the data backfilled? This is the hardest one to drag out of data sales people, because they often just don't get it. If I have a company that reports its Q2 earnings about six weeks into Q3, is the data labelled as coming out in Q2? Because if it is, I'm backtesting on future information. Also firms that are in trouble may also have timeliness issues in getting their numbers out. The real reason why the index effect is gone is actually simple. For years now there's been a bunch of traders who build their models around the effect. Their methods are common sense: screen the market for firms that are not yet in the index, and rank them according to how likely they are to get included. Buy a lot of what you're certain will get in, a bit less if you're less certain, and so on. The effect of this is to give you a smoothed out effect so that you can't just hop on board right before inclusion anymore. It also seems likely that the big index investors actually hire a few of these experts to optimize their purchases. In fact I had a chat with a guy who did this yesterday. It turns out to follow an index, you don't need to buy the whole index. Stocks tend to move together so you can cover most of the principal components with just a tiny amount of stocks. You're not going to do this by buying the little stocks at the bottom of the index, you buy the big ones at the top.

FredPret 4y ago

Makes perfect sense. There were massive increases in certain SP500 stocks, but the majority goes nowhere. On the whole, if you have the financials of all companies, and apply certain variations of the cigar-butt strategy, you get out ahead. This not only makes sense logically but also works in backtesting. Value investing is a wide term that includes many strategies. Some of them have made quite a lot of money, very consistently.

Galanwe 4y ago
> if you have the financials of all companies, and apply certain variations of the cigar-butt strategy, you get out ahead > This not only makes sense logically but also works in backtesting. No, it does not work at all in backtests. That's exactly what I'm talking about: a long short, normalized, rank based on e. g EPS. A typical value signal.
- FredPret 4y ago
  Doesn’t work at all? Using “a common value signal”? There are many value signals that can be used. Some of which print money.
  - Galanwe 4y ago
    > There are many value signals that can be used. Some of which print money Please share portfolio weights of such a signal, so that I can check the value exposure and adjusted returns.
    - edgyquant 4y ago
      The burden of proof is on the person claiming no form of value investing will have passed a backtest over the last decade. That’s you, not the other person.
      - Galanwe 4y ago
        > The burden of proof is on the person claiming no form of value investing will have passed a backtest over the last decade Says who? In my book the burden of proof is on the argument being the less in line with general consensus. Value being a bad investment in the last decade is not an argument, it's a fact. Value is not something you find, it is a defined factor with academic consensus on the definition. You can have some leaway and build a portfolio highly correlated to value, but that only goes so far. Claiming to have found a good value signal is then akin to claiming being able to doing consistently good factor timing on value. This is a feat the top hedge funds on the planet would be weary to claim. Allow me to be skeptical when someone on HN claims to have done so with "basic value indicators" and found something that "prints money".