Never pay up (for stocks)

As quantitative driven investors, we spend the majority of our time searching out how to add risk-adjusted return to our portfolios. Often this involves combing through a myriad of indicators whether they be fundamentally based like P/E, P/B, or P/S to more econometric based such as Wage Growth or GDP. Though, what  is equally as important is knowing what NOT to do. Knowing what not to do provides a basis for exclusion which helps us as investors filter through millions of data points which are largely just noise. One such tidbit highlighted by Patrick O'Shaughnessy, portfolio manager at O’ Shaughnessy Capital Management, is to never buy expensive (or sometimes aptly called “Fad stocks”) stocks. Patrick succinctly sums his research up with :

“Some stocks priced at huge multiples (think $TWTR) will deliver outstanding returns. But as a group, expensive stocks have always delivered terrible returns relative to the market, and you would be smart to avoid them entirely rather than trying to pick the few diamonds in the market rough. You’ll miss out on the most fun stories, but your portfolio will be healthier for it.”

 He adds this chart showing the research:



What this chart is showing is that buying the cheapest stocks on average yields 5% additional return over the market and buying the most expensive stocks reduces an investor’s return by 7% vs the market. These stocks may be cool companies, but most people would rather own higher returning, “boring stocks” vs being able to state they own the latest and greatest tech stock. So remember the next time you get the urge to buy the latest IPO trading at an eye-popping valuation that the odds are greatly stacked against you. This sits well Pilotage’s investment philosophy as we allocate heavily to the Value sectors of the market (as denoted by a firms Price/Book Value ratio) and typically steer clear of expensive Growth sectors.

We welcome you to review the entire article which can be found here .

As always, should you have any comments or questions please email