Core QVM - The Strategy For The Rational Investor

26th Jun '23 by Edward Croft

21 comments 3975 reads

We now come to the last of eight articles in our series on “The Strategy Map”, to explore an approach that sits at the centre of it all. Before I get started, I want to say that I’m in awe of the private investor community. When everyone seems to know more than you about every stock out there, it’s easy to feel intimidated. There are brilliant minds on Twitter, brilliant minds in Stockopedia’s community, an industry of armchair and professional analysts poring over every company’s every move. How can you possibly find a stock picking edge?

You can, of course, outwork everyone, but it often seems like an exhausting endeavour. You could piggy-back on other’s ideas, but the shallowness of your own research can niggle and worry. The time-poor investor, with a desire to DIY, faces a conundrum. How can you run a successful portfolio without becoming a full-time analyst?

The answer lies in knowing the “base rates” of what pays off and why in the stock market. In this article we’ll be exploring how the stock market really works, why it rewards quality, value and momentum stocks (Q+V+M = QVM) and how you can construct a portfolio to harvest their rewards.

At the heart of this lie a few ideas that upend conventional thinking. Will you stay with the blue pill of ordinary reality, or take the red pill and follow me down the rabbit hole?

Is this right for you?

The kinds of stocks that qualify for a QVM approach are often rather dull, even if their returns can be anything but. As this strategy blends the best of quality, value and momentum, the kinds of stocks listed are varied. But as some lie at extremes, they can generate a range of psychological reactions:

Quality - good stocks are often rather dull. It’s controversial perhaps, but most novice stock pickers want exciting stories. You don’t always find excitement in steadily profitable companies. Can you really say no to the glamorous story stocks that all your friends are convinced will triple their money in bull markets?
Value - cheap stocks come with problems - they may be cheap for a reason. Stumbling profits, competitive issues, staff issues, sector obsolescence you name it. Can you really swallow a frog?
Momentum - strong stocks come with high prices - nobody likes buying stocks at highs. We’re programmed to do…

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Edward Croft

26th Jun '23

Actually the research is pretty clear that a portfolio composed of multi-factor ranked stocks tends to outperform one composed of single-factor ranked stocks.

Certainly this is intuitively true for "cheap" stocks. Cheap stocks are often cheap for a reason, so a second good characteristic (profitability or momentum) can swing the odds in its favour.

I did a study on this last year, but it's also well backed up by research by AQR, Novy Marx and others.

Epitychia

Thank you, very useful.

DWit199

Actually the research is pretty clear that a portfolio composed of multi-factor ranked stocks tends to outperform one composed of single-factor ranked stocks.

Looking at the data on just under 700 shares that I have collected, this was true last year. Although even the top quintile of QVM StockRank shares would have been beaten by the FT100, when compared to the average of all shares in my investment universe, the QVM StockRank substantially outperformed each factor individually.

Rusty2

Yet QM and VM, have outperformed QVM stocks, on stockopedia: https://www.stockopedia.com/sc...

This year QVM top stocks have been the worst performing: https://www.stockopedia.com/sc...

Ed switched NAPS from top QVM to top QM and VM stocks.

Saxonboy57

Thanks Ed. A very interesting article. I sometimes feel a bit inadequate, when I compare my efforts with other clearly more knowledgeable investors. Unfortunately, I just don't have the time to do huge in depth analysis of all stocks so I lean on Stockopedia to point me in the right direction and spend a few hours researching. To date, I haven't done too badly with some nice dividends and capital appreciation, but have also had a couple of bummers like Tullow Oil (although I live in hope). Anyway, please keep drip feeding your articles as they really are a godsend for time limited investors like myself.

"This year QVM top stocks have been the worst performing"

Worth bearing in mind that those "guru screen trackers" have no diversification constraints, so they just track the top 20 which can have pretty significant sector (and market cap) skews.

On a sector diversified basis the top 20 QVM have done much better - though obviously still been beaten by large cap value & market cap weighted FTSE 100 & All Share.

Thanks @Saxonboy57 - hopefully there are good benefits to the educational material we put out there!

steven cutts

I've really enjoyed these articles and learnt a lot. Will they be archived and easy to search for as I'm sure I will want to come back to them from time to time. Thank you and the other writers at Stockopedia for putting the time and effort into writing these articles.

The sample is different. I only include companies >£20m that are not REITS or collective investments. They also have to be members of the All Share, Fledgling or AIM All share Indices. Stockopedia include companies that are technically quoted on the LSE but are traded as 'Depository Receipts'

The sample date and date range are different.

I use Total Return data from another supplier. I don't know how Stocko calculate return for these collections.

Overall I am reasonably confident that my data reflects the returns available from the sort of companies that I would consider to be in my Investment Universe, but it is only a sample.

Steven - yes, we are working on an improvement to the CMS to make these kinds of articles, webinars and videos easier to find. We have the designs ready, but quite a big project.

KevinS1

27th Jun '23

Thanks Ed. Another great article.

Do you happen to have a summary of the NAPS performance on a year-to-year basis, just to get a feel for how things have been over the long-term.

I am quite tempted to liquidate some of my PF to start a NAPS type approach, but in the back of my mind I keep saying to myself "give things time, they will get better". I think a lot of us are having a painful couple of years and the temptation at this point is to feel things aren't working and look for something better, but I know that isn't the answer. The market is just having a poor couple of years and in the medium term things should come good.

However, if the NAPS helps with the diversification and allows a no-frills approach I am tempted to give it a go for a small % of my PF to test the theory.

Looking at your picks this year (I only had a quick glance at each chart) I am suspecting that it might be in a bit of pain as there seem to be quite a few suffering with big drops and no big wins YTD with the exception of 1 or 2. I am looking forward to your next update.

Good luck and please keep the articles coming. Thank you.

I'll be writing a half year NAPS update for publication next week. The year to year summaries are really the annual write ups in the blog page https://www.stockopedia.com/co... - what specifically would you be looking for?

It's been a painful 2 years. For the NAPS, and for almost everyone's portfolios.

The biggest factor driving stock returns isn't Q, V or M - it's "the market". When the market is going down, all portfolios struggle and vice versa. What's been pretty clear over the last 2 years is that small caps have been pretty indiscriminately sold off, and only a small corner of the market has seen any rewards.

It could get worse, but it's not all bad. I get a bit fed up with all the Britain bashing that goes on in our national press and general psyche. There are so many wonderful positives to doing business in Britain. I do hope Jeremy Hunt's pension reform goes far enough to incentivise local UK investment as it could do wonders for the stock market here. The government need to drive a step change in our savings & investment culture.

There was a great podcast at the weekend on "Merry talks Money" with Gervais Williams of Miton - he said he's more excited about the future for UK small caps than at any time in 30 years. Nice to hear a micro-cap fund manager being so positive in all the doom and gloom.

gmtrader

Once again, great article. Thank you Morpheus.

Ed66

Hi Ed,

Yet another fantastic read! Thanks.

As you’re looking at improvements to the system, I was wondering if it would be possible to bookmark an article midway, so that it is easier to return to later. Some of them can be quite lengthy (especially if you also read around the embedded links).

Thanks again.

Thanks ED - totally agree.

The annual result I was simply looking for a bar-graph across the full time of it being run showing the annual result against perhaps the FTSE All-share & maybe the S&P - very simple bar graphs per annum.

If that's too much trouble I will just have a look at each years annual report.

BnB

I get a bit fed up with all the Britain bashing that goes on in our national press and general psyche. There are so many wonderful positives to doing business in Britain.

I have to take issue with you there. We are being left behind by our traditional rivals in Europe like France and rapidly overtaken by European nations that were considered third world only a generation ago, like Poland, or didn't even exist, such as Slovakia. My favourite personal metric of economic outlook is the degree of availability of 4G signal, which I get the chance to test each year on long driving tours around Europe. You can get 4G literally everywhere in most European states today, and notably throughout all national parks and remote regions. Try living a distance from London and be shocked at how backward is the infrastructure. There is either no signal at all - true throughout the Lake District and Yorkshire Dales, away from tourist centres like Ambleside, or, in city centres like Manchester - widely regarded as England's second city of business, no data bandwidth to enable browsing/streaming. That's right - via o2, you can't open a web page in central Manchester on a normal business day.

Meanwhile, we have the opportunity to be energy-independent via wind power, yet the nimbyism ingrained in our planning systems leaves us with the most intractable inflation problem in the developed world.

Gervais Williams of Miton - he said he's more excited about the future for UK small caps than at any time in 30 years. Nice to hear a micro-cap fund manager talking his own book. And if investment possibilities are good, it is only because UK companies' prospects are so poorly regarded. Great for value investors, perhaps, but a poor sign for the nation,

I appreciate that, like Gervais, you are talking up your business. Damn it, that's your job and your mission. I can see the value proposition - stocks are cheap. But the UK is being hollowed out.

Yes, very much. thanks

yiannos1

And it’s only that small corner of the market that will survive , as small caps valuations will definitely get worse. Low to 0 interest rates are a thing of the past , growth is minimal , and there is nothing positive or wonderful in doing business in the UK.

There are many small caps that seem undervalued , but I struggle to find any growth in their revenues.

28th Jun '23

We are actually a world leader in % of power from wind. In Europe, only Denmark, Portugal, Falkland Islands, Ireland and Lithuania (all significantly smaller nations) have a higher percentage (our world in data). We lie 8th globally I believe.

Meanwhile, 99.90% of our population has a 4G signal. 22nd= out of 195 countries in the world. Ahead of Germany, France, Spain, Italy and the majority of Europe. It tends to be very small countries that have 100% coverage.

I agree could do better, or even be a world leader on these fronts, and things should be better, but it ain't all bad.

Sean Reilly

21st Jul '23

Hi, Not sure if you will get to see this comment Ed as the article is a month old almost but I feel compelled to post to let you and the team know that this series is by far the best blog material I have read on this site over the last couple of year of membership. The "morale of the story" of this research is factor investing works and its the absolute best rest to be around these parts. Its been mentioned above and I am sure by yourself but please get this content joined up in a place of its own on the site so we can come back and read this gold over and over again. Cheers

Core QVM - the strategy for the rational investor

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Edward Croft

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