To Cut or Not To Cut

In Value Investing, you NEVER cut losses. If you have analysed the company and have determined that it is a good buy, and you bought it. If it goes down, you should be buying MORE of the stock. Since it is cheaper now. Well, that's provided everything is still the same since the time you did your analysis.

But for most novice investors, including this blogger, our analysis is usually flawed. There is probably something that we missed. Remember the market is not stupid. In fact we all know the saying don't we, "The market is always right." If you bought a stock, and it falls 20-30%, chances are something is wrong with the company, at least in the next few mths (well the market is very short-term focused also). And it pays to redo your analysis.

Well if you are willing to wait out the storm (which may take years), then all is well, it may go down 20-30%, but eventually it will come back, and it will surpass your cost price, in time. If you are a true blue value investor, and you think the co. fundamentals have not change when you decided to buy it back then, and if you got the GUTS, then BUY MORE of it.

For those not so true blue value investors, well you may want to follow some trading rules, ie to cut loss at a certain level. Some recommend 10%, some 15% below the price you bought, depending on how much pain you can endure. Hehe. But remember the tighter the cut loss level, the easier it gets triggered and the easier you get whipsawed. Btw whipsaw means you sell after the stock tanked 15% and then it goes to rally 100% and you go and bang your head on every wall you see.

Cutting loss is actually also rational in some ways bcos you can buy more of the stock at a cheaper price. If the stock is now $10 and you used $1000 to buy 100 shares. It drops to $5. And you use another $1000 to buy 200 shares. So you have 300 shares.

But if you cut loss when it drops to $8. You get back $800. It drops to $5 and you use the original $800 plus another $1200 you get to buy 400 shares! In both cases, you spend $2000 but if you cut loss and buy back at a lower price, you get more shares!

Having said that, it is not easy to cut loss bcos of the psychological factor. This is well studied in behaviour finance. People tend to hold on to their losses far longer than they should. And they take profits too early. Bcos if they cut loss, they have to admit they were wrong, realized their mistakes. But if they simply hold on, it's not realized, there is still HOPE that it will turn around. Vice versa, for profits, once they locked in, they would have proven a point, they got it right. And the right to brag about it later on. So pple always take profit too fast. It is in the wiring of our ape evolved minds. A seasoned investor tries to overcome this malfunction and makes the money.

Of estimates and consensus thinking

I attended an investment session where the instructor asked the class (of around 20 pple) to estimate the size of Thailand vs Singapore. Was it 50x bigger? Or 100x bigger? Or 500x or what?

He wanted to prove a point. The true answer will lie in the range of everybody's estimate. Bcos someone was bound to get it right. Well his point was quite valid, in the end, the answer did lie within the range of everyone's estimate.

But what was more striking to me was that most estimates are wrong and some VERY WRONG. For those dying to know how big is Thailand vs Singapore, well it's actually 73x. The closest estimate was 50x. And only one guy got that close. Some had it 10,000x. My estimate was 400x.

This made me think very deeply about the nature of estimates. And more specifically, estimates of future earnings of listed companies. We know that the sell-side or brokers have their army of analysts to forecast listed companies' earnings for next yr, or 2 yrs out. Maybe, just maybe the analysts' estimates on a listed company's EPS that we, and most investors rely on, might usually be wrong as well. And it's logical that they should be wrong. Bcos estimates, by virtue that they are estimates, are usually wrong!

Of course, you may argue that analysts have access to information since they get to talk to industry people, competitors, company management etc. Well the analogy with Thailand vs Singapore may not be quite right today, since we have Google and Wikipedia.

But imagine if it were the Stone Age and the class was given 1 yr to walk Thailand and Singapore and come up with an estimate, how likely is it for the class to get it right? Probably as likely as the analysts to get next yr's EPS right, right? Which implies that estimates based on some info but INCOMPLETE info is not much help and that's the way it should be.

So consensus thinking and crowd thinking, by logically extending the argument, can actually be usually wrong. This can be quite scary bcos most of us (well some of us) usually follow others' action thinking that they did their homework so we are safe. E.g. I will go for a stall with a respectable queue in front of the shop at an unfamiliar hawker centre. As for financial markets, there is this thinking that even if we are wrong, so would most others and so it shouldn't be that bad.

Now based on the recent poll, I guess most pple would agree that Singtel is a bad investment since most pple thought that Singtel gave back 0% return since IPO. But guess what, the actual answer is more than 44% return since IPO, which is at least 3%pa based on the price of Singtel when the poll started (around S$3.60). Bcos Singtel gave back lots of dividend and capital back to shareholders during the 15 years it was listed. Since then, Singtel reached a new high of S$4.00 or so. That's another 10%. So again, most people are wrong. Ok you may argue 3%pa is not very attractive, esp after putting your money there for 15 yrs. Well its better than fixed D, and the point here is actually estimates are usually wrong, just a reminder.

Also it's a mere 15 years since Singtel IPOed. Statistically, it's not really that significant yet. Yes in order to be of statistically significant, the track record has to be 18 yrs or more! If you hold on to Singtel for the next 3 yrs or more, maybe the annual return will converge 8%pa or something.

So I guess the moral of the story here is this: Don't trust what most people do, they are usually wrong. Do your own homework and come up with the logical conclusion. Or you can visit this blog (which tries to post accurate logical conclusion on most stuff) more often.

The Efficient Market Revisited

There has been a lot of debate since the 1950s whether markets are efficient or not. Btw, if you are asking what the heck is an Efficient Market, you can read this posts first.

Label: Modern Portfolio Theory

Ok Efficient Market. Essentially, some academics came out with this theory that nobody can earn a superior return than the market return (ie average investment return) over an extended period of time bcos markets are damn bloody efficient. ie if there is an inefficiency (or a discrepancy between price and value), eg a stock is worth $5 but is only trading at $3, people will simply keep buying the stock until it is fairly valued. So no matter how hard you try, you can only earn the average index/market return if you invest in stocks/bonds whatever, which is about 8%pa.

As with academics, they made it complicated. So they came up with three forms of Efficient Market which I have forgotten what they are. But the message is nobody can beat the market whether you use fundamental analysis, or technicals or whatever intelligent tools you can come up with. So even if you managed to spot one inefficiency, you are just lucky and you won't be able to do it over and over again. The academics dare you to prove them wrong man! They really do! And sadly I think they are winning. Not 100% but quite close.

Having said that, actually there is a flaw in the EMH, or Efficient Market Hypothesis. The flaw is that the markets are not efficient to begin with. It becomes efficient bcos the market participants are constantly taking out the inefficiencies. Imagine 1 million investors/speculators in the market and everyone just managed to spot 1 price/value discrepancy, then the market will be quite efficient already right?

So the markets become efficient bcos there are lots of participants taking out the inefficiencies all the time. The thing is that most participants can probably pick out 1 or 2 inefficiencies during a certain time frame but not a hell lot over long periods. Hence in general, markets are quite efficient to any one person.

But what if they are those who can consistently spot inefficiencies and earn the difference between price and value? Does that mean that the market is not efficient? In my opinion, the markets are still efficient it's just that this group of people have superior tools to enable them to pick out more inefficiencies than others. Of course for those still blur blur one, we are talking about value investors.

One reason why value investors can do this is bcos of their investment philosophy and investment horizon. Most pple nowadays go for instant reward, taking quick profits. They are not interested in owning businesses, waiting for its value to grow over time. They want profits NOW. Hence although a lot of people may know about value investing, they either

1) don't believe it works; they just don't believe in the owning business thingy
2) may not want to practise it bcos it takes too long to see the fruits
3) they think they are practicing value investing but they still buy and sell stocks like oranges or mobile phones or cars

So those Superinvestors for Graham and Doddsville patiently buy businesses while the world revolves around trading stocks like oranges or mobile phones or cars and Voila! They beat the major indices flat with their 30 yr track record of 25-40%pa. But sad to say, there are probably only a handful of these people and they don't really have a strong statistical argument against the Almightly Efficient Market.

Conclusion: The markets are not 100% efficient but they are efficient enough such that you don't get a free lunch if you don't work hard enough for it. Work hard = read books / annual reports, do a lot of macro, industry, company analysis etc.

Barriers to Entry

To determine whether a company has a business moat ie whether it can defend its turf when competitors come in, we look at what is called Barriers to Entry, one of Porter's 5 Forces. I have identified a few common barriers but I must point out that the list is not exhaustive. Other barriers exist and it takes experience and knowledge to identify them. Again, investing is about life-long learning and hard-work. It is not about get-rich-quick.

Market share
This is the most basic edge a company can have over its competitors. When a company is the No.1 or No.2 in its field, it is simply much more difficult for the laggards or any newcomers to try enter their market. Esp if there are only 2 or 3 big players in the market. This is bcos standards are set and relationships have already been established, and the laggards and newcomers don't have the resources or time to beat the leaders.

Technological edge
This edge can be manifested in several ways. It can be simply authentic technological capabilities, like Toyota with its hybrid technology which it was the first to developed and remain the leader today. Or it can be superior manufacturing technology which allows the company to make stuff cheaper yet have similar or better quality. Like Samsung's LCD TVs.

High initial investment cost
Some businesses require very high start-up cost and this naturally deters competition. Oil/mineral exploration, wafer fabs, a telco network etc. It is simply not business that any Tom, Dick, Harry can start. Sometimes, it can only be started by the government. So when a business can earn a good return and its in one of these high start-up cost sectors, hmm, maybe it can be interesting.

Brand
This is one of the best barriers a company can ever build. Buffett prides his See's Candy, commenting how people will always buy See's Candy even when it keep raising prices. Great brands like Coca Cola, Louis Vuitton, Rolex and our beloved Ipod are simply immune to competition. No matter what the competitors do, people will still buy Coke to drink, LV bags, Rolex watches and the Ipod over Creative Mp3 players.

Regulations
This is the most tricky barrier. Sometimes it works very well for the company in question, but sometimes it simply screw things up. The investor has to become a political analyst to get this one right. Eg. oil fields in Indonesia and Russia. Although major co.s like Shell etc negotiated for rights to sell the oil in these fields some years ago with the respective govts, the contracts were void since oil prices shot through the roof. In the case of Russia, the rights were forced to be sold back to Russian co.s. Suck thumb right? Some value investors stay away from highly regulated sectors altogether.

So, as mentioned, there are other barriers and it takes time and experience to identify them. But when you know the company has got a good business moat, earns a good return, and reward shareholders, then go for it. In Singapore, some co.s that comes to mind would be your mass transport stocks, newspaper, telcos etc.

Index Investing vs Stock Picking

Our guru, Warren Buffett doesn't really like the idea of buying indices bcos it is not really investing per se. He thinks most pple stand a better chance if they follow simple investment rules like those governing Value Investing. But not everyone can be like him.

Another reason why some prefer stock picking is: index fund investing simply takes all the fun out of investing. It is like skipping the appetizer, the soup, the main course and going straight to the dessert. Investment is about pitting your wits against the market right? What's the point of just parking some money in some indices that move only 1% each day?

Well for most folks who really have no time to read up and study but yet want to say they are doing investments, it would be better for them to go buy index funds rather than spend the money on some structured pdts or unit trusts recommended by ignorant / totally unethical bankers that will probably give them poorer or even negative returns.

But for those reading this blog, well, we are different right? We are here to learn to pick stocks and beat the index. Sad to tell you the truth, chances of that happening is roughly 10%. This is a very well documented result and there is even a book that argues if you give darts to some monkeys and they simply throw the darts on some newspaper with all the stock quotes to "pick stocks", the resulting portfolio will do as well as the average fund manager's portfolio.

Nevertheless, the valiant shall not be discouraged. There is Value Investing and there are those Superinvestors fr Graham and Doddsville that made it right? Why not me? Well there are probably tens of millions of golfers around the world, why are we not like Tiger, Vijay or Phil? It takes years of hardwork to be good at anything. Value investing and/or stock picking is no exception.

But having said all that, stock picking is simply too fun to give up for many, including this blogger. Bcos even when you get just one stock right, it's more than enough satisfaction even though you may get another 10 stocks wrong hehe! It is like having kids, I guess. You lose sleep for 10 nights, there are the wailings, the worries when the baby is sick, worries when the baby is too fat, too thin etc. But in the end, that one smile is all it takes to make those sleepless nights and worries worthwhile. Emotional dividend yield 1000%, hehe!

So back to stock picking, although the chances of picking the 10 bagger is pretty slim, we can enhance our chances by sticking to the right investment philosophy. Well the tried and tested method that worked is of course *drumrolls* value investing lah. But it doesn't mean you studied all the literature about value investing then you will make money. Ah Beng knows the golf strokes and theory, but can he beat Tiger? Value investing just increase your chances. Of course, other investment philosophy may work too. After all it's a free market and there are pple who made millions out of day trading.

Maybe the trick is to have a certain % of your portfolio in indices and the rest in stock picking. That way you get to enjoy the best of both worlds. The index part of the portfolio will ensure you earn a good average return of 8-10% and the stock picking gives you the kick you want. So work hard, Tiger is not as high up as you think!

And how to tackle private bankers?

The private banking industry is booming in Asia and more so in Singapore. Hence we see banks like Citi, UBS, HSBC hiring bankers by the truckloads. They hope that their legions of private bankers will be able to capture AUM (Asset Under Management) and then they can churn their clients to collect lots of fees. Btw, that won't be the official stance, the official stance would be to help HNWIs (high net worth individuals), manage their wealth, do tax planning, investments etc. Sadly, 99% of them (my own guess) will fail to do their jobs.

Traditionally the private banking industry has done good segmentation and actually the name, "private banker" is only reserved for those in the highest hierachy, ie bankers that serve the richest clients, the UNHWI (ultra high net worth individuals, whoa, that's a cool acronym right? Go tell your wife/gf that you will become a UNHWI someday, hehe).

But now, everyone wants to call themselves private bankers, so even those behind the counters whose jobs are to con aunties and uncles into buying some crazy pdts by offering them free umbrellas call themselves private bankers.

Anyways, the job of the private banker is to help clients manage their wealth. But their commission is based on two criteria. 1. How much money they can con their clients to put with the bank. 2. How many pdts they can con their clients to buy.

The second criteria is what makes it most unethical bcos they must continuously sell clients new pdts in order to hit their tgts. ie like maybe 10 pdts per mth or something. And next mth, it's another 10 pdts. So they have to ask the client to buy pdt A today, sell pdt A next mth, then buy pdt B and sell B next mth and buy back pdt A etc. But we know that investments can only generate good return over the long run right? Btw long run means 10 to 20 yrs hor. If you buy and sell stuff mth in mth out, you are just generating comission for the banker, which is what they want and will not help you build your retirement nest egg.

So what is the best way to tackle the private bankers and the best way to do investment? The short answer is you don't have to talk to private bankers.

For most people, the best way to invest would be to buy index funds that have the lowest fees. Index funds are funds that try to mimick the performance of an index, like the STI, Hang Seng, Nikkei, S&P500 etc. They don't employ fund managers who claim that they can beat the benchmark, they just buy whatever is inside the index and hence most of these funds have no sales charges and minimal mgmt fees.

In Singapore, MAS has made some regulations on unit trusts/funds that cap the sales charge at 3% or something. That's actually still too high bcos investment on average only give you 8% per annum. So you pay on 3% on your first year of performance, you are left with 5%, that's a mere 2% better than fixed D! Imagine buying a PC and you need to pay the salesman 20-30% ie $200-300 of commission! On top of them, you pay 1% mgmt fee every year, usually for fund managers that will underperform the benchmark. So my own personal policy is to refrain from buying unit trusts whenever possible. But sometimes, unit trust can help you gain access to some sub-sectors that are not easily investable, eg. environment/green stocks or energy stocks etc.

Look for index funds that have 0% sales charge and probably 0.5-0.8% mgmt fee per year. Lower fees mean higher return back to you. One of the biggest index fund seller in the world is the Vanguard Group. It may be hard to get their pdts in Singapore though. That's when you get the help of the private banker, ask them to source all the index funds available. If they are any good in the first place, they can help you. My guess is: it's more difficult than striking lottery.

After you buy the fund, just leave it there. Don't be bothered by the daily or weekly or even monthly fluctuations, over the long run, all indices will go up, if history is any accurate, you will earn 8-10% per annum, ie you double your money every 6 to 8 yrs. When you have more money to spare, you should just buy more of the same. Of course, you can exercise some judgement and buy indices of growing economies, like China, India etc. Or diversify globally, ie. have some of these hot economies, but also of US and Europe and Singapore.

That is the simple truth about investment, just buy index funds, and you will do ok. Disappointed huh, why so much hype around financial advisers and private bankers right?

But what about stock picking? Next post!

So how to tackle the insurance agents?

I thought maybe I should provide some (even though still imperfect) answers to my questions in the last post.

On insurance, if the agent cannot help you then who can? For my own journey, I talked to other agents, then I talked to friends, and find out more from the net and newspaper and talked to experienced folks to try to get to the truth.

At first I thought surely there would be some good agents out there. After all, some agents do earn big bucks by selling insurance right? Sooo, I called up pple, asked for appointments, but soon realized that they were all the same. They are TRAINED to sell you the useless stuff, and TRAINED to "taiji away" the difficult questions.

Whenever I asked about term insurance, they would say,

"Oh, but they only cover you until 60 you know?"
"But after 60, my kids are grown up, I don't need too much insurance." I say.
Then they change topic, "But if you buy this life plan, it's like a savings plan, you still get your money back, plus 3-4% per year."
"But meanwhile I pay $2,000 per yr for the next 20 yrs to earn 3-4%? And get covered for $50,000?"
"$50,000 coverage will grow to $50,512 over time! Ok what about this investment link product, it is very good blah blah blah"
What the heck...

I even got one agent who claimed to have advised millionaires on how to buy insurance and still give me stupid recommendations. So in the end, I gave up. I started talking to friends and read up. And here are some conclusions that I gathered.

Use less than 10% of your annual salary on insurance, I recommend 5%. But agents will quote you 20%, saying its MAS regulation. I find it hard to believe. I don't spend 20% of my annual salary on ANYTHING, not even mortgage! 20% on insurance? WTF!

But for 5% you have to try to maximize coverage, it has to be at least 5 times your annual salary to be meaningful. So this is tough job for 99.999% of all insurance agents. Try to find one who can do that, someone young, willing to work hard and help you. My experience: no agent can, so you gotta do it yourself. And that is to buy SAFRA insurance, one of the cheapest around.

Don't get swayed by the agents. They try to bend your rules, like 5% is not enough! Or you cannot see it that way, bcos this 20% will go to your savings blah blah. They should follow your rules, not the other way.

Don't buy investment linked products, usually you overpay for commission and stuff. If you want to do investment, do it separately.

Agents like to blackmail emotionally. Like if you die, your family how? Your kids so young how? And they will say, "I know one friend, cancer, no insurance, pay $200,000 etc". Stop them. I KNOW it's a disaster to die without insurance. But tell me the facts. The premium, the coverage etc. And Get me the cheap value-for-money policy, damn it!

So the ideal scenario, if your annual household income is say $60,000, spend $3,000 on insurance, buy minimal life (you need life policy to get term), say $20,000 and get lots of term, say $250,000. So you spend $3,000 to get insured for $270,000. That's probably an ok deal.

Not sure if most rational people are doing this. Pls comment ok!

Asking a Best Denki salesman whether you need a LCD TV

If you walk into Best Denki or Harvey Norman and ask the salesman whether you need a $3,000 LCD TV, what do you think he will say? He will immediately recommend you the $8,000 50 inch Samsung High Definition LCD TV, and give you 1,001 reasons why you NEED that TV. Right?

I guess the message here is that the salesman cannot tell you whether you NEED a LCD TV. His job is to sell you the TV NOT to determine if you need one.

But our world is a strange place. In so many areas of our lives, esp those related to finance, we ask the salesman whether we NEED something and we expect them to have our interest at heart and tell us the answers. Think about the following questions.

Is it logical to ask the insurance agent what kind of insurance is suitable for you?
Is it logical to ask your broker or his analysts which stock to buy?
Is it logical to ask your private banker how you should manage your wealth?
Is it logical to ask an investment banker whether your co. should do M&A?

In most to these cases, the salesperson, middleman thrives on activity. This is bcos he takes a cut or commission on the transactions that take place. So it is NOT in his interest that he recommend you the best thing. Bcos it will not generate future activity. He needs activity to earn his keep.

The insurance agent wants to revisit you every yr so that he can sell you another policy even though he sold you one last year that would have taken care of your lifetime need. And he will only sell you a life policy or an investment link one even though a term policy makes more sense for you. Bcos the commission on those pdts are much higher.

The analysts change their ratings every 3 mths bcos that's their job. Their job is not to identify the long term winner. Their job is to churn and create lots of buy and sell orders. So it is not in their interest to help investors identify the real 10 baggers (stocks that will rise 10 folds). Even if there are genuine analysts out there who believe they should help investors, the system is in place to discourage them. That's life dear.

Similarly the private bankers cannot help you grow your wealth. Their job is to sell you investment products and earn their keeps. They need to sell new products every yr to hit their annual targets. So naturally they will recommend you to buy this, sell that and buy back what you sold etc year in year out. Even though investments can only generate good return by investing for the LONG TERM.

As for companies, when they reach a stage where organic growth becomes difficult, they seek to do M&As. But the investment bankers they consult to do M&A are at best, well, not much better than the Best Denki salesman. They cannot help to identify which good co.s to buy. Their job is to make deal, not to help the CEOs find bargain M&A. That's why most M&A fails (though they look good on paper).

So how? I am still searching for an answer, but by talking to people who have gone down the same path sometimes help, esp those that have more experience in life and have succeeded (ie. not a bloke lah, but getting advice fr a bloke may still be better than getting advice fr private bankers). People who have bought so many insurance policies and finally know what is really good. People who have talked to so many private bankers and finally know not talking may be the best. And of course, when you have the answers, contributing your answers to this blog will help too!

More Margin of Safety

A frequently asked question on value investing and how to calculate intrinsic value is this: how can you be so sure that the co's intrinsic value is this and at this price it is a good investment?

For those not so sure what the hell is going on, read these first
Value Investing
Intrinsic Value
Good Investment

Well, the truth is, you are never sure, you can spend 20 days calculating the intrinsic value of the company and become so sure that the stock is undervalued. So you buy and the stock tank 20%. Shiok huh?

Intrinsic value goes hand in hand with margin of safety. Bcos you can never be sure whether you really got the intrinsic value right, you need to have a margin of safety. ie you will only buy the stock if the current price is way, way, WAY below your calculated intrinsic value. As a rule of thumb, I recommend 40-50% below your calculated intrinsic value.

Buffett used the example of building a bridge. If you know that the maximum weight of vehicles that will cross the bridge is 10 tons (based on historical statistics), will you build a bridge that will support 10 tons or a bridge that will support 30 tons?

That is margin of safety.

Ben Graham, the grandfather of value investing once said this: if you need to surmise value investing into only 3 words, it would be "margin of safety". It is THAT important.

Unfortunately, most investors don't really have this concept in mind. Even those who are very experienced. I guess it's not easy partly bcos have a strict margin of safety rule forces you to pass on many investment ideas even if they are quite good. And when you see them rally 100% after you decided NOT to buy them, wah shiok right? Now every wall you see has a purpose. For you to bang your head hard on it! Haha!

But having a margin of safety will make very sure that you will not lose your shirt. Even if you are damn wrong on your intrinsic value, you may lose a bit of money, the stock may tank 20%, but it won't tank like 80% and chances are after it tank 20% it will creep back up again, it will not bankrupt you. That's the strength if you have a huge margin of safety.

Why Quant may work?

In the previous post, we discussed how to construct a quant portfolio. Now let's try to understand why some thinks that it can work (ie it can outperform the market).

Well first, we must get the right factors though. If you screen for something like stocks that has hit 52 weeks high, or stocks with highest volume, or other funny factors, good luck. You have got the GIGO (Garbage in Garbage out) model. The model is only as good as the inputs.

What people usually believes as good inputs are like Low PER, Low PBR, High ROE, High cashflow, High OP margin, High EPS growth etc.

So there are roughly 400 stocks traded in Singapore and you only buy the top 50 with the lowest PER and highest ROE. What this means is that you are buying stocks that are cheap relative to all others and have the highest return potential relative to all others. And you do this every 6 mths, weeding out those that falls off the top 50 and adding new winners in. Theoretically, you SHOULD outperform the market.

But you don't. Murphy Law's works huh.

Well a few reasons. First of all, the data used are either historical or poor estimates. For PER, usually we get the 1-yr forward PER, which is basically the sum of estimates of all the analysts out there. And we know analysts are, well, like private bankers, GFN right? (GFN: Good-for-nothing). As for ROE, usually that's a historical no. so ROE may have changed, or dropped to below those of other stocks.

Second, to beat the market is a zero-sum game. You need to beat most of the other participants in the markets. This means you need to move faster than most other participants. Now when do you think these quant models were first used? Do you think you are one of the early birds using these models? The answer is NO btw. So investors have used this model since the last Ice Age, and here we are re-inventing the wheel and expecting to beat the market. That's not quite possible right?

But there is still hope.

The markets today, as with our world, has gotten very short-sighted. Thanks to MTV and instant noodles. Most people seek instant gratification. They are not interested in growing apple trees and waiting to eat apples years later. They are not interested in stocks that will only payback after 10 yrs.

So as we all know, the markets are unpredictable in the short term but follows earnings growth in the long run. The quant models, if used over long periods of time, should beat the market (esp if the rebalancing period is also stretched, so you don't get killed by transaction costs) bcos most other participants won't wait that long.