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The Conservative Formula: Quantitative Investing Made Easy

Last Updated on 10 February, 2024 by Rejaul Karim

In “The Conservative Formula: Quantitative Investing Made Easy,” authors Pim van Vliet and David Blitz introduce a groundbreaking conservative investment formula. This innovative approach narrows down 100 stocks based on low return volatility, high net payout yield, and forceful price momentum.

The simplicity of this formula offers investors full and efficient exposure to the most significant factor premiums while encapsulating half a century of empirical asset pricing research. Boasting a compounded annual return of 15.1% since 1929, the conservative formula significantly outperforms the market, curtails downside risk, and provides positive returns across several decades.

Its prowess extends to European, Japanese, and Emerging stock markets where it outdoes various strategies centered on size, value, quality, and momentum combinations. Crafted to be a practical tool for numerous investors, this formula addresses academic concerns about ‘p-hacking’ by utilizing three straightforward criteria, eliminating the need for accounting data.

Abstract Of Paper

We propose a conservative investment formula which selects 100 stocks based on three criteria: low return volatility, high net payout yield, and strong price momentum. We show that this simple formula gives investors full and efficient exposure to the most important factor premiums, and thus effectively summarizes half a century of empirical asset pricing research into one easy to implement investment strategy. With a compounded annual return of 15.1 percent since 1929, the conservative formula outperforms the market by a wide margin. It reduces downside risk and shows a positive return over every decade. The formula is also strong in European, Japanese and Emerging stock markets, and beats a wide range of other strategies based on size, value, quality, and momentum combinations. The formula is designed to be a practically useful tool for a broad range of investors and addresses academic concerns about ‘p-hacking’ by using three simple criteria, which do not even require accounting data.

Original paper – Download PDF

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Author

Pim van Vliet
Robeco Quantitative Investments

David Blitz
Robeco Quantitative Investments

Conclusion

In conclusion, “The Conservative Formula: Quantitative Investing Made Easy” offers a compelling approach to investment, simplifying quantitative investing through a conservative formula. This formula, which selects 100 stocks based on low return volatility, high net payout yield, and strong price momentum, provides investors with efficient exposure to essential factor premiums and condenses decades of empirical asset pricing research.

The conservative formula’s stellar performance, with a compounded annual return of 15.1 percent since 1929, significantly outperforms the market and mitigates downside risk. Additionally, it demonstrates impressive returns across diverse global stock markets and supersedes alternative investment strategies.

By incorporating three straightforward criteria without necessitating accounting data, this formula addresses ‘p-hacking’ concerns within academia and positions itself as a practical tool designed for a broad range of investors, ultimately revolutionizing the landscape of quantitative investing.

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The Excess Returns of ‘Quality’ Stocks: A Behavioral Anomaly

FAQ

What is the key proposition of “The Conservative Formula: Quantitative Investing Made Easy”?

The paper introduces a conservative investment formula that selects 100 stocks based on three criteria: low return volatility, high net payout yield, and strong price momentum. This formula aims to provide investors with full and efficient exposure to significant factor premiums, simplifying quantitative investing and summarizing empirical asset pricing research spanning half a century.

How does the conservative formula perform compared to the market and other investment strategies?

The conservative formula boasts a compounded annual return of 15.1% since 1929, significantly outperforming the market. It not only curtails downside risk but also exhibits positive returns over every decade. The formula’s efficacy extends beyond the U.S. market, demonstrating strength in European, Japanese, and Emerging stock markets while surpassing various strategies centered on size, value, quality, and momentum combinations.

How does the conservative formula address academic concerns about ‘p-hacking,’ and what makes it a practical tool for investors?

The formula addresses ‘p-hacking’ concerns by employing three straightforward criteria—low return volatility, high net payout yield, and strong price momentum—eliminating the need for accounting data. This simplicity makes it a practical tool for a broad range of investors. The paper emphasizes the formula’s potential to revolutionize quantitative investing by providing a comprehensive and efficient approach to factor premiums.

You can find many more Research Papers here

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