Winning Percentage Isn't Everything

11/16/2015


All else equal, a strategy that outperforms consistently is preferable to one that wins less regularly. But all else is seldom equal, and a higher winning percentage often comes at the price of lower long-term returns.

Depending on your risk tolerance and psychological makeup, accepting a lower return for a higher winning percentage may make sense. But you should know how much you're paying in the tradeoff, and you should never forget that achieving a high winning percentage is not your goal as an investor. Your goal is to grow your wealth over the time frame you've selected.

Bonds have had fewer losing years than stocks, but that does not make them a better choice for your portfolio. The same holds true when comparing stock-selection strategies.


Back-tested Quadrix results since 1992

12-Month % REturns Relative to Average Stock
----------- For Top One-Fifth Of Stocks Based On Quadrix -----------
Earns.
Ests. *
Fin'l
Str.
Momen-
tum
Perfor-
mance
Quality
Value
Overall
Average outperformance
0.6
(0.5)
0.6
1.5
(0.2)
3.5
2.6
Stand. dev. of
outperformance
6.5
6.5
6.4
13.4
6.0
11.9
6.6
Average/standard
deviation
0.1
(0.1)
0.1
0.1
0.0
0.3
0.4
Geometric mean
outperformance
0.2
(0.7)
0.4
0.4
(0.4)
2.8
2.4
Winning %
67
43
57
58
50
59
63

Selected value factors

Average
Outperformance
Of Top Fifth
(%)
Standard
Deviation Of
Outperformance
(%)
Average/
Standard
Deviation
Geometric
Mean
Outperform.
(%)
Winning
%
Price/sales
4.2
14.8
0.28
3.2
64
Price/free cash flow
4.1
10.7
0.39
3.6
74
Enterprise value/EBITDA
4.2
9.3
0.45
3.8
69
Price/sales to
5-year median
3.4
17.3
0.19
2.3
47
Price/earnings
3.3
9.6
0.34
2.9
61
Price/book value
3.1
13.7
0.22
2.3
58
Price/cash flow
3.0
10.7
0.28
2.4
61
Price/sales to
3-year median
2.0
17.4
0.12
0.9
36
P/E to 5-year median
2.0
8.6
0.23
1.7
54
P/E on current-year
estimate *
1.7
10.7
0.16
0.6
44
P/E to expected
growth (PEG) *
1.6
10.4
0.15
0.5
45
Price/cash flow to
5-year median
1.5
9.4
0.16
1.1
42
P/E on next-year
estimate
1.4
10.6
0.13
0.5
44
Price/book to
5-year median
1.3
14.7
0.09
0.4
35
Dividend yield
0.1
11.4
0.01
(0.6)
49
Quadrix Value score
3.5
11.9
0.29
2.8
59
* Data based on 12-month holding periods for broad Dow Jones U.S. Index since 1992, except date for Earnings Estimates and valuation ratios that use estimates begin in 2004.

For example, as shown above, the top one-fifth of stocks in the broad Dow Jones U.S. Index as measured by Quadrix® Value has outperformed the average stock in 59% of 12-month holding periods since 1992, only slightly better than the 58% winning percentage of Performance and the 57% of Momentum. But Value has been far more effective, and it continues to receive the biggest weighting in the calculation of Overall scores — despite its recent struggles.

Among Value variables, the price/free-cash-flow (P/FCF) ratio has been among the few effective metrics in recent periods. And P/FCF has an unusually high winning percentage. Apple ($116; AAPL), Centene ($59; CNC), F5 Networks ($108; FFIV), and Goodyear Tire ($33; GT) are Forecasts recommendations that rank among the cheapest 25% of U.S. stocks based on P/FCF.


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