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A Review Of The Piotroski Book/Market Model

Jul. 04, 2017 11:20 AM ETGCO, MITSY, TPCA, VALE, VIV
John P. Reese profile picture
John P. Reese


  • "Quant" strategies are all the rage with investors, but not all quantitative strategies are new breakthroughs.
  • Joseph Piotroski developed and tested a quantitative model in 2000 that showed back-tested returns of 23% annually from 1976-1996.
  • Concentrated value models, like Validea's Book/Market based on Piotroski's screen, have potential for outperformance and the recent bout of value stock underperformance is why this model has potential going forward.

Quantitative investment strategies have drawn a lot of headlines and attention in the finance world, and represent an arm of passive investing which continues to rule the market roost. Since 2009, the flow of funds into the "quant" sector has more than doubled, and a number of high-profile money managers are bulking up their quant teams and relying more heavily on computer algorithms for stock-picking.

The concept, however, isn't new.

Joseph Piotroski Ph.D., an accounting professor at Stanford University (and a market guru that inspired one of the stock screening models I created for Validea), has largely flown under the investing world radar, but has been front and center in the evolution of quantitative value investing models. Back in 2000, while teaching at the University of Chicago, he wrote an academic paper on equity investing that took Wall Street by surprise. His research focused on companies with high book-market ratios—the type of unpopular stocks whose book values (equal to total assets minus total liabilities) were high compared to the value investors assigned them (measured as market capitalization, the share price multiplied by number of shares outstanding).

There was little glamour or pizzazz in Piotroski's research findings. The consummate number-cruncher, he used a series of accounting-based measures to develop a model that would identify high book-market companies that were likely to become winners. And his paper, published only one year after he started teaching, was full of mathematical, statistical and accounting terms that would cause many a lay investor's eyes to glaze over. But the proof was in the pudding or, in this case, the balance sheet. Piotroski's study found that buying high book-market firms that passed his tests (and shorting those that didn't) would have produced a 23 percent average annual return from 1976 through 1996 –more than double the S&P 500's gain during that period.

This article was written by

John P. Reese profile picture
John P. Reese is considered an expert in the systematic investing strategies of legendary investors, including Peter Lynch, Ben Graham, Warren Buffett and others. He has been active in the development of fundamentally-based quantitative models since the mid-90s. His research on Seeking Alpha will include stock ideas, strategy and value investing pieces, behavioral finance concepts, systematic and modeling methods as well as other long term investing concepts. John is founder and CEO of Validea.com and also co-founder of Validea Capital Management. Validea Capital runs an actively managed ETF that utilizes the fundamental stock selection models of investing legends as well as a set of robo advisor allocations through Validea Legends and Validea Legends Income. John holds two U.S. patents in the area of automated stock analysis and is considered an expert in the field of quantitative stock selection using the strategies of investing legends. John is a columnist for TheStreet.com, Forbes.com and Canada's Globe & Mail and is co-author of “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies". He holds a master's of business administration from Harvard Business School and a degree in computer science from MIT.A more complete biography can be found here: http://en.wikipedia.org/wiki/John_P._Reese

Analyst’s Disclosure: I am/we are long VALE, VIV, GCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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