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Conservative Formula Investing

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This is an old revision of this page, as edited by InvestorQuant (talk | contribs) at 15:33, 7 February 2022 (The page has been edited in several ways. First, the results are now also presented in a graphical way. Second, reference to SSRN top downloads is included. Third, the section 'analysis' has been rewritten and now also includes a reference towards an Indian application. Fourth, the related Piotroski F-score is added. Fifth, the three categories have been included to list with similar articles.). The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.

Conservative formula investing is a low-volatility investing approach enhanced with shareholder yield and momentum.

Background

The Conservative Formula is first mentioned in the investment book 'High Returns from Low Risk' written by Pim van Vliet and Jan de Koning.[1] The book explains low-volatility investing in a non-technical way and is translated into Chinese, German, French, Spanish and Dutch.[2][3][4][5][6] The formula is designed to make factor investing easy for investors. The Conservative Formula has been scientifically tested in a Journal of Portfolio Management study in 2018.[7] The article is in the top 2,000 most downloaded papers on SSRN, as of February 2022.[8]

Methodology

The formula is based on 3 investment criteria: Low risk, cheap, and strong. This is how the 100 stocks are selected

  1. The 1,000 largest stocks are divided into two groups based on their historical 36-month stock return volatility.
  2. Each stock in the low volatility group is ranked on its 12-1 month price momentum and total shareholder yield.
  3. The momentum and yield ranks (1-500) are simply averaged and the 100 best stocks are equally weighted.

The Conservative formula is tested going back to 1929 for the US and is also tested for Europe, Japan and Emerging Markets and also China.[9] Code to replicate this conservative investment formula is shared on Reddit and Medium.[10][11]

Results

The average annualized return is 15.1% per annum, outperforming the broad market index by a wide margin and achieved with lower risk (US 1929–2016).[12] Deep historical return series can be downloaded going back to 1929.[13] The image shows the cumulative dollar performance the Conservative Formula over time.

Analysis

This investment approach is able to beat more complex factor models utilizing easy to obtain data, that is in a segment of the market that is liquid and investable. Alpha architect writes: "While achieving the goals of simplicity and liquidity the conservative formula gives positive factor tilts towards low-beta, value, quality, and momentum." [14] The Conservative Formula has been discussed on GuruFocus.com [15] La Vanguardia[16] had many reviews on JD.com [17] discussed on Financial Investigator,[18] ETF guru.[19] It is included as a stock screener on Valdiea and ValueSignals.[20][21] An enhanced low-volatility strategy, which also includes momentum, is also tested in the Indian stock market.[22]

See also

References

  1. ^ "High Returns from Low Risk: A Remarkable Stock Market Paradox | Wiley". Wiley.com. Retrieved 2022-01-08.
  2. ^ "《低风险，高回报 一个引人注目的投资悖论 中信出版社》([荷]平·范·弗利特（Pim van Vliet） [荷]杨·德·科宁（Jan de Konin）)【摘要 书评 试读】- 京东图书". item.jd.com. Retrieved 2022-01-08.
  3. ^ Finanz Buch Verlag - Der Weg zum eigenen stabilen Aktien-Portfolio (in German). 2017-01-23. ISBN 978-3-95972-020-5.
  4. ^ "Livre Un paradoxe financier étonnant - Economica - Finance". www.economica.fr. Retrieved 2022-01-08.
  5. ^ El pequeño libro de los altos rendimientos con bajo riesgo - Pim Van Vliet,Jan de Koning | PlanetadeLibros (in European Spanish).
  6. ^ "Atlas Contact De conservatieve belegger - Pim van Vliet, Jan de Koning : Atlas Contact". www.atlascontact.nl. Retrieved 2022-01-08.
  7. ^ Blitz, David; Vliet, Pim van (2018-07-31). "The Conservative Formula: Quantitative Investing Made Easy". The Journal of Portfolio Management. 44 (7): 24–38. doi:10.3905/jpm.2018.44.7.024. ISSN 0095-4918.
  8. ^ "Social Science Research Network - SSRN".
  9. ^ Pong, Eddie (2019-02-18). "Conservative Equity Investing". Rivermap. Retrieved 2022-01-08.
  10. ^ mementix (2018-04-26). "The Conservative Formula in Python: Quantitative Investing made Easy". r/algotrading. Retrieved 2022-01-08.
  11. ^ Rodriguez, Daniel (2019-08-29). "Rebalancing with the Conservative Formula". Medium. Retrieved 2022-01-08.
  12. ^ Blitz, David; Vliet, Pim van (2018-07-31). "The Conservative Formula: Quantitative Investing Made Easy". The Journal of Portfolio Management. 44 (7): 24–38. doi:10.3905/jpm.2018.44.7.024. ISSN 0095-4918.
  13. ^ "Low-volatility data free available for download". Low-volatility and Conservative Formula return series. Retrieved 2022-01-08.{{cite web}}: CS1 maint: url-status (link)
  14. ^ "Alpha Architect Review: The Conservative Formula: Quantitative Investing made Easy". Alpha Architect. 2018-09-11. Retrieved 2022-01-08.{{cite web}}: CS1 maint: url-status (link)
  15. ^ "High Returns From Low Risk: Th - GuruFocus.com". www.gurufocus.com. Retrieved 2022-01-08.
  16. ^ "Aprender a invertir: máxima rentabiliad y mínimo riesgo". La Vanguardia (in Spanish). 2019-09-19. Retrieved 2022-01-08.
  17. ^ "《低风险，高回报 一个引人注目的投资悖论 中信出版社》([荷]平·范·弗利特（Pim van Vliet） [荷]杨·德·科宁（Jan de Konin）)【摘要 书评 试读】- 京东图书". item.jd.com. Retrieved 2022-01-08.
  18. ^ "Conservatieve Belegger". www.financialinvestigator.nl (in Dutch). 2018-12-17. Retrieved 2022-01-08.{{cite web}}: CS1 maint: url-status (link)
  19. ^ "ETF guru | Swedroe explaining low-volatility".{{cite web}}: CS1 maint: url-status (link)
  20. ^ "Multi Factor Investing Strategy and Portfolio - Validea.com". www.validea.com. Retrieved 2022-01-08.{{cite web}}: CS1 maint: url-status (link)
  21. ^ "Stock Screener". www.valuesignals.com. Retrieved 2022-01-08.
  22. ^ Joshipura, Nehal (February 2022). "The volatility effect: evidence from India". Investment Management and Financial Innovations.
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