Why we use rules-based strategies to invest in equities
Michael Chu talks about how our team uses rules-based strategies to invest in individual stocks
Why We Use Rules-Based Strategies to Invest in Equities
[Upbeat music]
[Michael Chu
Portfolio Manager & Senior Wealth Advisor
CIBC Private Wealth – Wood Gundy]
Investors who disengage their emotions when they make their investment decisions stand a much
better chance of building wealth with returns that outperform both inflation and the market
averages.
[Why We Use Rules-Based Strategies to
Invest in Equities]
Hello, I’m Michael Chu and I’d like to talk about why our team uses rules-based strategies to
invest directly in individual stocks.
Historically, the stock market has generated a better return than almost any other investment,
providing opportunities for individuals to participate in the profits of a wide range of businesses.
[Over the past 150 plus years, the market produced compound annual returns over 9 percent,
which works out to 7 percent above inflation.]
Over the past 150 plus years, the market produced compound annual returns over 9 percent,
which works out to 7 percent above inflation. But many investors have not achieved these returns.
One of the main reasons is that investors generally use a subjective approach to investing. As our
client you’re familiar with Stan’s monthly Perspectives articles on Behavior Finance where he
emphasizes research that behavioral finance has taught us about the drawbacks of using a
subjective approach. A subjective approach is susceptible to emotions and biases, which can
lead to traps like relying on “gut feelings”, “hot tips” and following the crowd. This results in lower
returns over the long term.
Stan has also created a video on this – if you haven’t seen it be sure to check it out.
[In contrast, many studies have found that simple objective factors, used with discipline, lead to
better than average returns.]
In contrast, many studies have found that simple objective factors, used with discipline, lead to
better than average returns.
[There are three main types of objective factors:
VALUE
MOMENTUM
QUALITY]
There are three main types of objective factors: value, momentum and quality.
[In the graphic, VALUE is highlighted with the bullet points:
x low price-to-earnings
x low price-to-cash flow
x low price-to-sales
x low price-to-book value, or
x low price-to-dividend]
Stocks with good value are generally those which have low prices compared to underlying
company fundamentals such as:
x low price-to-earnings
x low price-to-cash flow
x low price-to-sales
x low price-to-book value, or
x low price-to-dividend
[In the graphic, MOMENTUM is highlighted with the bullet points:
x analysts are raising their earnings estimates
x the company is reporting better than expected earnings, or
x the company’s stock price is moving up much faster than average, suggesting higher than
expected results.]
Stocks with good momentum are generally those that have surprised by doing better than
expected. For example,
x analysts are raising their earnings estimates
x the company is reporting better than expected earnings, or
x the company’s stock price is moving up much faster than average, suggesting higher than
expected results.
Stocks with good quality are generally those with strong profitability, growth and safety.
[In the graphic, QUALITY is highlighted, with the bullet points:
• High return on equity, high profit margins, strong cash flows
• Growing earnings, margins and cash flows
• Low price volatility, low earnings variability, low debt/equity.]
Examples of quality measures are:
• High return on equity, high profit margins, strong cash flows
• Growing earnings, margins and cash flows
• Low price volatility, low earnings variability, low debt/equity.
Research has shown that stocks with good value, momentum or quality tend to produce returns
averaging several percent above the market average. And if you combine various factors, the
results are even better.
[The Stan Clark Financial Team built and refined a collection of 18 proprietary rules-based
strategies, unique to our team, to help us identify and invest in stocks with good value,
momentum and quality.]
The Stan Clark Financial Team built and refined a collection of 18 proprietary rules-based
strategies, unique to our team, to help us identify and invest in stocks with good value,
momentum and quality.
[Canadian Strategies
- High Yield (HY)
- Income (In)
- Value (VL)
- Multi-Screens (MS)
- Predictable Growth (PG)
- Shareholder Yield (SY)
- Quality (QL)
- Momentum (Mo)
U.S. Strategies
- High Yield (HY)
- Asset Value (AV)
- Value (VL)
- Earnings Value (EV)
- Multi-Screens (MS)
- Shareholder Yield (SY)
- Quality (QL)
- Momentum (Mo)
International Strategies
- Developed Markets
- Emerging Markets]
We created eight separate strategies for Canadian stocks, eight specifically for US stocks and two
for international stocks.
Each strategy uses a different combination of factors.
[In the graphic, Income (In), Predictable Growth (GP) and Multi-Screens (MS) are highlighted]
For example, our Income Strategy focuses on dividend yield, our Predictable Growth Strategy
focuses on price-to- earnings ratios, while our Multi-Screen Strategy combines a wide range of
factors.
Using 18 strategies is like having 18 money managers to choose from, each having a good longterm track record, and each having a different approach for evaluating stocks. Diversifying by
strategy, helps produce more consistent results and reduces risk.
Each strategy provides us daily with its ranking of stocks and which ones it recommends to buy,
hold or sell. When we put together your portfolio, with 18 strategies to choose from, we are able to
create a well-diversified portfolio for you while choosing the top rated companies from any
strategy.
[Animation showing 3 folders in a line that have the titles, U.S. Strategies, Canadian Strategies
and International Strategies. A fourth folder below these is labelled “YOUR PORTFOLIO”]
For example, we could create a 40 stock Canadian portfolio by picking 5 top rated stocks from
each of our 8 Canadian strategies.
[Animation shows cursor selecting the ‘Canadian Strategy’ folder which duplicated into 8 other
folders, with the labels, HY, In, VL, MS, PG, SY, QL, Mo. The cursor selects the HY folder, pages
appear from the folder with the title “5 TOP-RATED STOCKS’. The pages then move across the
animation into the ‘YOUR PORTFOLIO’ folder]
[In the same animation, pages then appear out of the 7 remaining folders and are moved into the
‘YOUR PORTFOLIO” folder.]
[40 TOP-RANED WELL-DIVERSIFIED STOCKS IN YOUR PORTFOLIO]
If we had only one strategy, we’d need to go down to the 40th ranked stock to get the same
diversification. We would call that de-worsification. Stocks are also replaced according to
specific rules. When a stock is no longer well-rated, perhaps its price has risen or its
fundamentals have deteriorated, it’s replaced with a top-ranked stock from one of our strategies.
The important thing is to buy and sell according to the rules after verifying that the signals make
sense
[This aligns with our core principles of behavioral finance and not be swayed by our all-too-human
biases.]
Again, this aligns with our core principles of behavioral finance and not be swayed by our all-toohuman biases.
Our strategies back tested average compound growth over the past 30 years surpassed
comparable market indexes by over 3% per year. The strategies back tested returns have also
consistently beaten their benchmarks over most rolling three-, five- and ten-year periods. They
have also had considerably fewer losing periods – in keeping with our goal to deliver exceptional
growth to our investors during up markets, while softening the blows and easing the stresses of
down markets.
[In summary, rules-based strategies make it possible for you to outperform, through diversified,
lower risk portfolios.]
In summary, rules-based strategies make it possible for you to outperform, through diversified,
lower risk portfolios.
I invite you to learn more about these strategies and how we incorporate our unique pillars of
Financial Planning, Asset Allocation and Behavioral Finance to grow and protect your wealth. You
can find more on all of these, including summary videos on each by Sylvia, Tom and Stan on the
“Our Perspectives” section of our team’s website.
And please contact us by phone or email if you have would like to discuss how any of this applies
to your specific situation
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The contents of this video are for informational purposes only and are not being provided in the
context of an offering of a security, sector, or financial instrument, and is not an endorsement,
recommendation, or solicitation to buy, hold or sell any security.
Michael Chu is a Portfolio Manager and Senior Wealth Advisor with CIBC Wood Gundy in
Vancouver. The views of Michael Chu do not necessarily reflect those of CIBC World Markets
Inc.
If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.]