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

Oct 22
The top 50 best Peter Lynch quotes:

1. “All the math you need in the stock market you get in the fourth grade.” Image
2. “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

3. “Know what you own, and know why you own it.”

4. “Invest in what you know.”
5. “An important key to investing is to remember that stocks are not lottery tickets.”
Read 27 tweets
Oct 17
Charlie Munger said success demands worldly wisdom, not memorized facts

Build a latticework of mental models from many fields

Here are his core models: Image
1. Multiple Models

Relying on one discipline warps reality.

Munger urges you to gather models from math, physics, engineering, biology, psychology, and economics. Image
2. Elementary Math (Probability & Combinations)

You must master basic probability.

It’s not natural thinking.

Without it, you're like “a one-legged man in an ass-kicking contest.” Image
Read 12 tweets
Oct 15
The best one-liners in investing come from Charlie Munger

His lesser-known insights are just as powerful

Here are the 15 best Munger quotes you’ve never heard: Image
1. Wisdom

“Acknowledging what you don’t know is the dawning of wisdom.” Image
2. Every choice has a hidden cost

"Intelligent people make decisions based on opportunity costs." Image
Read 17 tweets
Oct 15
Think profits tell the full story? Think again.

Free Cash Flow to Firm shows the real cash a business has to grow, invest, and reward investors.

It’s the heartbeat of a company’s true financial power: Image
Introduction Image
1) What is FCFF? Image
Read 10 tweets
Oct 15
Howard Marks is one of my favorite investors

I read all his memos (1,600 pages).

You can steal my 10 key lessons for free: Image
1. Look at the valuation

A good company can be a bad investment if you overpay.

And also: a less attractive company can be a great investment if you buy it at a low price.
2. Don't be a sheep

If you do the same as everyone else, you'll get the same results as everyone else.

Do your own homework and think as an owner.
Read 12 tweets
Oct 13
Here are the 30 best investors of all time.

And one quote from each investor:

1. Stan Druckenmiller

“I like putting all my eggs in one basket and then watching the basket very carefully.” Image
2. Jim Rogers

“Those who can not adjust to change will be swept aside by it. Those who recognize change and react accordingly will benefit.” Image
3. Peter Lynch

“Know what you own, and know why you own it.” Image
Read 31 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!

:(