Value Investing Strategies with Lower Risk and Turnover

by: Scott's Investments

The purpose of this article is a final follow-up to my value investing screen/backtest based on reader comments and suggestions. To review my previous articles, I backtested a value strategy based on the following criteria starting in 1/1/2002 which rebalanced every 4 weeks and assumed .5% slippage.

  • Price to Book < 1
  • Return on Equity Last 12 Months > 0
  • Return on Assets Last 12 Months > 0
  • Total Debt to Equity < 40%
  • Current Ratio > 3
  • Price to Free Cash Flow Trailing 12 Months <15
  • Projected Earnings Next Fiscal Year > 0
  • No OTC Stocks

I backtested the same value investing strategy but which purchased passing companies only if the S&P 500 Index was also above its 200 day moving average.

The goal was to reduce risk by staying in cash when the overall market is in a downtrend. This potentially reduces overall returns but can reduce drawdowns and general investor angst. Regular readers know I am generally a fan of this type of investing as a means to increase risk-adjusted returns. The primary inspiration for this type of strategy is Mebane Faber, author of The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets and creator of AlphaClone.

$100 invested in this strategy on 1/1/2002 turned to $574.70 assuming .5% slippage, no commission, rebalanced every 4 weeks, and no return on cash balances. For returns which ignored the underlying indices moving average please see my previous articles here and here. A visual representation is below (click to enlarge):

Secondly, I decided to run the screen on a longer timeframe in order to reduce turnover. The portfolio was rebalanced every 3 months. This screen was not run using the 200 day moving average requirement and all qualifying stocks were held (in other words, I did not limit the number of stocks as in some examples from my previous two articles). The results are not as impressive as a 4 week rebalance but still beat the benchmark. $100 turned to $321.30 (click to enlarge) :

However, when limiting the number of positions to no more then 5, ranked by the lowest return over the past 26 weeks, the returns are better on a 3 month rebalance. $100 turned to $749.50 (see below, click to enlarge) and when ranked by the lowest returns over the past 13 weeks $100 turned to $424.

Finally, a reader suggested comparing my results to a different benchmark. Using the same timeframe, $100 invested in the Russel 200 Index turned to $129.60. This excludes dividends. When we compare this to an investment in IWM, the iShares Russell 2000 Index ETF, on 1/1/2002, the return with dividends would have been $142.38. These results are better then the S&P 500 Index benchmark but still far below any of the results posted in this article or my

previous two articles


As I noted previously, the screening/backtesting tool was StockScreen123, which is currently in Beta. Thus, please do your own due diligence before making an judgments, assumptions, or investment decisions based on data provided here. I have no position in the stocks mentioned. Below are the current results of the original value screen:

Free Trend Analysis
Ticker Name Here
ACET Aceto Corporation Here
ALG Alamo Group, Inc. Here
CRDN Ceradyne, Inc. Here
DWSN Dawson Geophysical Company Here
LAKE Lakeland Industries, Inc. Here
NWPX Northwest Pipe Company Here
AOB American Oriental Bioengineer Here
INET Internet Brands, Inc. Here

Author's Disclosure: No Positions

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