Here’s a great interview with Dan Rasmussen on the Invest Like The Best podcast with Patrick O’Shaughnessy in which Dan discusses how to maximize returns during market panics, including the out-performance of value investing in times of crisis. Also included here is Verdad’s paper on Crisis Investing – How To Maximize Returns During Market Panics. Here’s an excerpt from the interview:
One of the ways we can look at it is looking at the classic Fama French factors, and there’s a recent study that found those factors are about 8x as predictive during these times of economic crisis. The way we look at it is to say ok let’s divide the market into times of high yield spread. Months when the high yield spread is over 650 versus months when the high yield spread is below 650.
In what percentage of months do the Fama French factors outperform the market depending on that? So if you look at high minus low, which is value, value wins in 66% of the markets where at normal levels, and 91% where we’re at, crisis levels. If you look at CMA, conservative minus aggressive, it wins in 46% of non-crisis months and 74% of crisis months.
Small minus big wins in 51% of non-crisis months and 71% of crisis months. So, what you see is that the predictability of quantitative tools, and even very simple ones, like buying companies with positive net income and positive operating cash flow doesn’t actually matter all that much during times of easy money. But during a economic crisis the returns for simply buying companies with positive net income, positive operating cash flow is essentially double.
So you just benefit much more from the quantitative rules, and I think part of that is because investor psychology and what happens in a crisis tends to follow a very predictable pattern.
You can find a copy of Verdad’s paper here – Crisis Investing – How To Maximize Returns During Market Panics.
You can listen to the entire interview here:
For more articles like this, check out our recent articles here.
Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple: