Investing in undervalued securities worldwide
The CAPE ratio (Cyclically Adjusted Price-to-Earnings ratio), also known as the Shiller P/E, is a valuation measure for equity markets. It is calculated as:
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2009-2020 performance figures are from Pietari’s personal Interactive Brokers account. They are time-weighted returns calculated in accordance with the Global Investment Performance Standards (GIPS). From 2021, performance is calculated by eToro.
Past performance is not indicative of future results. All investments carry risk, including the risk of total loss.
It is often said that past performance is not a guarantee of future performance.
That is true. But there is also some evidence indicating that portfolios that performed better in the past, do perform better in the future.
“[…] top-decile prior-alpha funds produce annual future alphas of about 150 bps, net of fees” Source
Risk warning: That is only one study. In general, past performance is not indicative of future results.
Pietari invests the majority of his net worth in the strategy. This ensures that his interests are aligned with investors who copy the strategy.
“Funds with high-incentive contracts deliver higher risk-adjusted return, and the superior performance remains persistent. The top incentive quintile of funds outperforms the bottom quintile by 2.70% per year” Source
Risk warning: Pietari holds accounts with multiple brokers and may therefore have a conflict of interest when deciding which accounts he should trade in first.
The strategy has fewer constraints on its investments than traditional mutual funds.
The strategy portfolio can be invested in stocks, bonds or cash and these allocations can vary over time.
Compared to traditional mutual funds, the strategy also:
Each of these points has been shown to be an important predictor of portfolio performance.
“We […] find that portfolio concentration is directly related to risk-adjusted returns for institutional investors worldwide” Source
“A one-standard-deviation increase in turnover is associated with a 0.65% per year increase in performance for the typical fund” Source
“We find that truly active funds significantly outperform closet indexers. Further, we find that the truly active funds are able to outperform their benchmarks on average by 1.04% per year” Source
Risk warning: Concentrated portfolios with few positions can suffer large losses if bad news arrives about any of the companies in the portfolio.
The strategy invests in geographies and sectors where values have collapsed due to macroeconomic problems.
Within these geographies and sectors, the strategy overweights stocks that trade at low valuations on measures such as price-to-earnings or price-to-net asset value.
Every stock in the strategy portfolio must also be a good company, with no obvious red flags or long-term threats to its business model.
The aim of the strategy is to maximize returns, even if this means taking more risks than usual.
Risk warning: The strategy portfolio tends to be concentrated in risky stocks, which means that its losses in any market downturn will likely exceed those of the market index.
