Quantitave Value Investing in Europe: What Works for Achieving Alpha
There is a growing literature on statistical methods to beat the market inspired by the original classics, Dremen's Contrarian Investment Strategies and Greenblatt's Little Book, but a new report uniquely focuses on Europe and adds momentum to the mix of factors tested. Like other studies, it shows simple value measures beat the market, but with a surprising twist.
Too good to be true? The loose end that bothers me most about last week’s magic formula testing is the incredible success of the formula in the first three years of the test. It’s visible to the naked eye:
After a day (and part of a night) exporting data from Sharelockholmes, ranking it, and creating portfolios from the top 30 companies using two variants of Joel Greenblatt's magic formula, I’d built a monster: 133 individual worksheets, 80 portfolios (40 for each variant of the magic formula), one chart, and a serious case of number blindness.
Monstered by data Joel Greenblatt's magic formula, which ranks companies by quality and value has an outstanding performance record in the US. I'm about to see how it would have done in the UK over the last ten years using data available to private investors. First a bit of revision, these are the two magic formula variables: