Investment Principles

The launch of this website gives us the opportunity to set out the principles underlying our investment strategies and econometric models. These principles are based on the reading of numerous documents relating to the formation of stock prices and prices in general, as well as on the empirical verification of the various strategies suggested by these theories. The adoption of these principles and models has served us well in the past (performance well above the market) and should continue to do so in the future. This conviction is due to the depth (large number of bullish and bearish phases taken into account) and the stability of our mathematical models.

The most convincing financial theory, widely demonstrated from an empirical point of view, is, in our view, the theory of long-term mean reversion.

This theory was presented by De Bondt and Thaler in 1988, the idea is to classify stocks according to their performance over the last 3 years, we get two portfolios of stocks, the portfolio of losing stocks (price decline) and that of winning stocks (price increase). The study reveals that the losing stock portfolio (in the last three years) outperforms the winning stock portfolio by 25% over the next 3 years. This 25% rate is huge and is actually quite significant. (scan the sketch).

The authors also showed that the more depressed stock prices are, the more significant their stock market rebound. It also seems that these stocks are less volatile than average during the period of price recovery, which is another advantage.

In many cases, if not the majority, these abandoned shares belong to the category of low-priced shares, for example below €20 for French shares at the moment.

Richard L. Evans' excellent book "finding winners among depressed and low-priced stocks" published in the early 2000s convincingly illustrates the appeal of stocks with low and depreciated prices. (scan of actions)

The following table is a list of the best performing stocks year after year from 1987 to 1997. Stocks at the low price (price of $10.31 on average compared to a value of $35 for the market as a whole) recorded a gain of 253.5%, 18 times higher than the market 14.3% on average (click here). These gains are particularly significant during periods of market rebound. Thus, at the beginning of 1991, the class of shares whose low price, $5.35, i.e. 8 times lower than the average market price of $33.6, rose by 532.8%, i.e. more than 20 times the average market increase, 26.3% for the S&P 500 in 1991.

Click here to access the analysis

As the great professor of finance, Benjamin Graham, wrote, "a bull market is ordinarily most generous to low-priced issues." These are often stocks whose prices are at least 25% lower than their highest in the last 10 years (divided by more than four). Benjamin Graham is of the opinion that this type of action takes 1.5 to 2.5 years to turn around, De Bondt and Thaler highlighted a rebound that occurred between the 2nd and 3rd year. For our part, we agree with these remarks. Following our purchase of gold mines in December 2017, we had to be patient and wait 18 months before these shares really took off. It is essential to monitor the evolution of the net income and EBITDA of these shares with the greatest rigour over the quarters.

The combination of a low price and a strong increase in EBITDA generally results in a surge in prices. In addition, prudence suggests that only stocks with a market capitalisation of more than €100/200 million should be retained. We don't invest in micro caps, which are really too random.

The monitoring of these reversals is greatly facilitated by the stock selection queries that we have developed using the Sheetsfinance software

SheetsFinance | Stock Analysis in Google Sheets

SheetsFinance - YouTube

Example of follow-up (more than 1200 actions analyzed)