Value Investing Model

The Model uses value-investing methods and techniques to buy and sell stocks based on the stock picks over time of a powerful computer algorithm or set of mathematical formulas.  

By applying this algorithm to historical earnings and price data, each quarter the Model selects a portfolio of stocks, called the Stock Picks List.  The Model determines a buy, hold or sell recommendation for each stock on the Stock Picks List.  The trading strategy of the Model is simple: buy when the stock is undervalued and sell when the underlying value of the stock is reflected in the market.

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How Does the Model Work?

The Model evaluates over 2,000 NYSE common stocks on a continuous basis, by applying the Model's algorithm to each company's earnings, stock price, and earnings/price volatility while normalizing these data for the effect of price inflation.  The purpose and result of the Model is to put together and maintain a portfolio of undervalued stocks, called the Stock Picks List.

The Stock Picks List changes as the Model takes new information into account and as individual stock prices and general market conditions change.  For quantitative purposes dictated in part by the need to accurately measure the Model's performance, the selection of stocks and stock trades are normally timed to occur near the beginning of each calendar quarter, i.e., about three to six weeks after most companies have announced their earnings during the preceding quarter and after the market's initial reaction to these announcements.

The Model is programmed to alter the criteria for stock purchases when the stock market is not fully validating the Model's current stock selections, by limiting the selection of new stocks on the Stock Picks List to extremely undervalued stocks.  At such times the Model accumulates cash as the purchase of other stocks is deferred.

Otherwise, proceeds from stock sales are continuously reinvested in stocks of the companies with buy recommendations on the current Stock Picks List.  Although the selection of companies on the Stock Picks List has turned over several times since 1994, the Model's original algorithm has remained unchanged.  The results of the Model have likewise remained consistent and positive.  In summary, the Model functions strictly and robustly by buying, holding and selling selected stocks according to the buy, hold and sell recommendations of the Stock Picks List as published quarterly.

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Why Does the Model Work?

The Model's algorithm is dynamic and recommendations adapt to changing market conditions.  Stocks on the Stock Picks List typically move through a cycle from being undervalued to being fully valued in a year or two.  The dynamics of the Model and of the stock market might extend the holding period for several more years in the case of a bullish stock, or it can signal a needed sale if the company or the market demonstrates certain adverse results.

The stock market is generally efficient in valuing stocks; but sometimes the stock market overreacts to earnings announcements and other news or forecasts.  The Model exploits the temporary inefficiencies in the stock market's reaction to new information and its reconciliation of new data with the past performance of the company.  The interaction between the Model and the stock market leads to a consistent pattern of purchases of stocks with low price-earnings ratios and sale of these stocks later at higher ratios.

The correctness of the Model's algorithm is confirmed by the exceptional and consistent growth in value of stocks on the Stock Picks List as compared to the recognized market indexes, such as the S&P 500 Index.  The underlying principle of the Value Investing Model, as reflected in the Stock Picks List, is always to buy and hold a stock based on the company's record and its demonstrated ability to sustain earnings.

Historically, a significant stock market downturn has always followed any period when value investing has gone out of favor.  By adjusting stock selections and buy recommendations to limit purchases at such times, the Stock Picks List steers clear of severe market downturns and the Model's performance is enhanced over the long run.

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How Is the Model's Performance Measured?

The Model and the Stock Picks List includes only the common stock of companies listed on the New York Stock Exchange (NYSE).  Preferred stocks, mutual funds, stocks of companies with dividends or financials stated in foreign currencies, and ADR/ADS listings are excluded.  All dividends, brokerage commissions and other transaction costs are included and accounted for.  Cash balances of the Model accrue a nominal rate of interest.  Performance results were prepared and are presented in compliance with the Performance and Presentation Standards of the Association of Investment Management and Research; but AIMR has not been involved in the preparation or review of the Model's results.

All company financial data is collected from reported SEC filings and not downloaded from or filtered by any financial-data provider.  Stock price data is entered on a daily basis.  There are over 31,000 records in the Model's current database.

The number of shares of each company on the Stock Picks List included in the Model portfolio is equal.  The relative value of each company's stock in the Model portfolio is weighted according to its market price on the date of purchase and adjusted for any post-purchase stock splits.  The aggregate value of the stocks on Stock Picks List included in the Model portfolio therefore functions as an index for purposes of comparing performance of the Stock Picks List to the recognized market averages.

Valuations are performed on a quarterly basis at the end of each calendar quarter.  Based on each company's most recent earnings announcement during the preceding quarter, at the beginning of each calendar quarter the Model's algorithm determines whether a buy, hold or sell recommendation is appropriate for each common stock listed on the NYSE.  Depending on stock price movement during the quarter, the Model's buy or hold recommendation for a stock can change to a sell recommendation, in which case the stock is sold and the sale proceeds are accounted for conservatively as end-of-quarter cash that is available for reinvestment at the beginning of the next quarter according to the current Reinvestment Strategy of the Model.  Otherwise, stock trades are executed once per quarter at the beginning of each calendar quarter, according to the buy or sell recommendations of the Model's algorithm.

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