Compounding Quality Profile picture
Oct 2, 2022 18 tweets 6 min read Read on X
🧵 How to outperform the market

Do you consistently want to perform better than the S&P500 and MSCI World? Use these golden investment rules and you'll do great ⬇️⬇️⬇️⬇️
1. Size matters

In general, small cap stocks perform better than large cap stocks due to the law of large numbers.

Small cap stocks outperformed large cap stocks on average by 3.6% (!) per year between 1927 and 2009.
2. Valuation matters too

The cheaper you can buy a stock, the better.

Buying the cheapest stocks based on a simple price-to-sales ratio managed to outperform the market with 3% per year, achieving an annual return of 14.2% (!).
Price-to-earnings ratio

Investors who bought the cheapest stocks based on a PE outperformed the market by more than 5% per year, achieving an annual return of 16.3%.

This strategy outperformed the market in 99% (!) of all 10-year periods.
The best valuation factors

In the picture below, you can find which valuation factors performed well between 1964 and 2019.

A low EV/EBITDA seemed to have worked the best as your $10.000 would have turned into more than $11.6 million.
Combination of value factors

A combination of value factors allows you to further improve your performance.

When you bought the cheapest stocks based on a combination of the P/E, P/B, EBITDA/EV, P/S and P/CF, you would have achieved a yearly return of 17.2% (!) per year!
3. High dividend stocks do NOT outperform

When you want to invest in dividends stocks, don’t focus on dividend yield.

Focus on dividend aristocrats (stocks with more than 25 years of consecutive dividend increases) with a durable payout ratio.
4. Free cash flow is king

Companies with the lowest accruals-to-price (where most earnings are translated into free cash flow) outperformed companies with the highest accruals-to-price with 5.3% per year.

Earnings are an opinion. Cash is a fact. Focus on free cash flow.
5. The healthier balance sheet, the better

Quality investors invest in companies with a healthy balance sheet.

Companies with the highest cash flow to debt (healthiest balance sheet) outperformed companies with the least healthy balance sheet with 8.0% (!) per year.
6. Don’t look at profit margins alone

Investing in companies with high profit margins does not work if the company doesn't have a competitive advantage.

When a company has a high profit margin but no moat, rivals will enter the market and reversion to the mean takes place.
7. Return On Equity (ROE)

When you would have bought the stocks with the highest ROE, you only would have slightly outperformed the market.

However, in general it is a very good idea to combine good capital allocation metrics with a high profitability.
8. Momentum works great

In the short term, what goes up tends to keep going up and what goes down tends to keep going down.

A momentum-based strategy would have generated a return of 14.1% (!) per year over the studied period. This is an annual performance of 3.6% per year.
9. Golden egg: momentum + value

Combining momentum and value (Trending Value) achieved an annual return of 21.2% (!) per year between 1964 and 2009.

This is an annual outperformance of 10% (!) per year.
10. Consistency is key

There are a lot of strategies that outperform the market. In general, it is important to note that you should stick to the strategy that suits you as an investor...
... by definition, every active strategy will underperform the market from time to time. Discipline and consistency are key.

Keep faith to your strategy and you’ll end up fine.

Investing is a marathon, not a sprint.
If you liked this thread, you will love our website:
qualitycompounding.substack.com
This thread was based on the great book What Works on Wall Street from @jposhaughnessy.

James is one of the highest quality people on FinTwit I know of.
@jposhaughnessy If you liked this, you will love our website: qualitycompounding.substack.com

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Compounding Quality

Compounding Quality Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @QCompounding

Mar 30
A visual is worth a thousand trades.

These 15 visuals make investing crystal clear:

1. Asset Types: Image
2. Investing MBA Image
3. Atomic Habits summary Image
Read 16 tweets
Mar 29
Novo Nordisk is down 40% in the past year.

Is this a major red flag or the opportunity of a lifetime?

Let’s break it down Image
Here’s a onepager with the essentials of Novo Nordisk: Image
1. Business model

Novo Nordisk is a global pharma giant, mainly focused on diabetes and obesity care.

Its key products:
✅ Ozempic (diabetes)
✅ Wegovy (obesity)

Both are based on semaglutide, a drug that mimics a natural hormone to control blood sugar and hunger. Image
Read 12 tweets
Mar 28
10 funny quotes on investing with meaningful lessons:

1. Price vs value:

“The stock market is filled with individuals who know the price of everything, but the value of nothing.” – Philip Fisher Image
2. Dangerous Months

“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September...” – Mark Twain Image
3. Balance Sheet = a bikini

"You know, a balance-sheet is like a bikini, it shows more but it hides what is vital. I learned to read a balance sheet and then I got fascinated by stocks." – Rakesh Jhunjhunwala Image
Read 11 tweets
Mar 27
How does Warren Buffett calculate the intrinsic value of a stock?

He looks at the Owner’s Earnings.

Today, I'll teach you everything you should know 👇 Image
1. Formula
Owner’s Earnings = Earnings Per Share (EPS) + Dividend Per Share

It reflects the real cash flow available to investors after all expenses are covered. Image
2. Importance

In the long run, stock prices always follow a company’s Owner’s Earnings. 📈

By focusing on this metric, you can:
- Avoid market noise
- See a company’s true performance
Read 7 tweets
Mar 26
Charlie Munger always used 4 criteria to buy stocks.

It allowed him to make good and rational investment decisions.

Let's dig into them: Image
Here are the 4 criteria of Charlie Munger:

1️⃣ The business must have a moat
2️⃣ You need to be able to understand the business model
3️⃣ Management must have talent and high integrity
4️⃣ There should be a margin of safety
1️⃣ The business must have a moat

A sustainable competitive advantage is crucial.

Seek for companies with a high and consistent gross margin as well as ROIC.
Read 7 tweets
Mar 25
Joel Greenblatt averaged 40% annual returns.

Not once. Not twice.

But for over 20 years!

He shared his exact method in The Little Book That Still Beats the Market.

Here are the 10 biggest lessons: Image
1. Stocks aren’t lottery tickets

They’re pieces of real businesses.

Owning shares means owning a slice of future profits.

That changes how you think about investing. Image
2. The market is moody

One day a stock is “hot.” Next week, it’s trash.

But businesses don’t change that fast. Prices do.

And that’s your edge. Image
Read 13 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Don't want to be a Premium member but still want to support us?

Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal

Or Donate anonymously using crypto!

Ethereum

0xfe58350B80634f60Fa6Dc149a72b4DFbc17D341E copy

Bitcoin

3ATGMxNzCUFzxpMCHL5sWSt4DVtS8UqXpi copy

Thank you for your support!

Follow Us!

:(