#93 - John Reese - “There Is No Strategy That Outperformed the Stock Market Every Single Year"

54 minutes

In Episode 93, we welcome entrepreneur, author, and quant investor, John Reese.

We start with John’s background. When John was a child, his father was a subscriber to Value Line, and John related to the charts and numbers. Later, this love of numbers took him to MIT, where he researched how to take the wisdom from books and turn it into computer programs. Years later, when he sold his company to GE Capital, John needed to learn how to invest the proceeds. Yet, he wasn’t sure which investment guru to follow in doing this. He decided to study a handful of gurus, and was disappointed to find that there was no repeatability and sustainability of outperformance over multiple time periods.

However, John then came across Peter Lynch’s One Up On Wall Street. In the book, Lynch had provided enough detail about his strategy that John was able to translate it into a computer program designed to pick the stocks that Lynch might have chosen. The results were solid. John then moved on to Ben Graham, eventually codifying 12 different guru strategies. He then put his research up on a website, which eventually morphed into Validea.

Meb asks about the challenges of this – namely, many managers have a qualitative component to their stock selection as well quantitative. How did John account for this?

John tells us this was very challenging. He had to re-read the various books multiple times, determining whether the printed word actually matched what the guru did in the market, versus his actions revealing more information or biases. Meb asks about filtering the incredibly long list of potential gurus to follow, and John tells us the list actually wasn’t too long. Most gurus didn’t have a sufficiently-long track record of performance, or they didn’t describe their strategies in sufficient details as to be able to be codified.

Meb then asks how John determines when a period of underperformance reveals a manager has lost his touch, versus the manager’s style is simply out of favor.

John tells us that he first looks at the length of time in which the strategy worked. If it was long enough, he tends to believe that, at some point, the strategy will come back into favor. He goes on to tell us that in all of his research, he found that there was not one strategy that outperformed the market every single year. They were these periods of going-out-of-favor that paved the way for the outperformance that occurred when the style came back into favor.

The guys then jump into an actual example of how John’s guru quant strategies work, using Buffett. Be sure to listen to this part for all the details.

Moving on from Buffett, Meb asks if there are any common attributes to the models that tend to do the best – any broad takeaways.

John tells us that, over time, the more successful strategies tend to have a value orientation, some kind of debt criteria, and they’re all profitable.

Meb asks – “Okay, gun to your head, which strategy has outperformed?” I’m going to make you listen to find out John’s answer, but odds are you’ll be surprised.

Next, the guys turn to factors, with Meb asking if there are any combination of factors that John tends to prefer. John says he likes momentum and mean reversion. This leads into a conversation on timing factors.

As usual, there’s far more in this episode: practical guidelines for listeners looking to follow along… portfolio construction in today’s challenging environment… what John would have done differently if he could start over again on Day 1… a roboadvisor for income investors… and of course, John’s most memorable trade.

This one happened the day after Black Monday. What are the details? Find out in Episode 93.

More episodes from The Meb Faber Show

#290 – Bill Smead, Smead Capital Management - There’s Less Respect For Stock Picking Experts Right At This Moment Than There Has Been Since The Peak Of The Dot-Com Bubble

In episode 290, we welcome our guest, Bill Smead, the Chief Investment Officer for Smead Capital Management.  In today’s episode, Bill explains why he believes the market is undergoing a …

#289: Stocks Are Allowed To Be Expensive Since Bonds Yields Are Low…Right?

Episode 289 is a Mebisode. In this episode, you’ll hear Meb put today's stock valuations into historical perspective. He addresses the claim that …

#288 - Best Idea Show - Doug Pugliese, Alpha Architect - Why Not Elect A 1042 Sale And Control When You Pay Those Taxes?

In episode 288, we welcome our guest, Doug Pugliese, the Head of 1042 QRP Solutions at Alpha Architect, where he manages the firm’s qualified …

#287 – Jonathan Hsu, Tribe Capital - Our Specific Areas Of Expertise Are Around Being Able To Tell A Story Utilizing Your Own Data

In episode 287, we welcome our guest, Jonathan Hsu, the co-founder and General Partner at Tribe Capital, a venture capital firm focused on using product and data science to engineer N-of-1 …

#286 – Jeremy Grantham, GMO - What Day Is The Highest Level Of Optimism? It’s The Day The Market Hits The Peak

In episode 286, we welcome our guest, Jeremy Grantham, co-founder and Chief Investment Strategist of GMO. 

In today’s episode, Jeremy begins by talking about the current market, which he …

#285 – Best Idea Show - David Marcus, Evermore Global Advisors - Do You Sell Things That You Like To Buy Things That You Now Love?

In episode 285, we welcome our guest David Marcus, the co-founder and Chief Investment Officer of Evermore Global Advisors, where he manages the Evermore Global Value Fund. In today’s …

How you can listen to this podcast

You can listen to episodes right here on the website, or if you prefer, in a podcast app. Listening in an app makes it easier to keep track of what you’ve already heard, listen without using your data plan and many other conveniences.

Recommended apps
Start listening to #125 - Tom Barton - The Biggest Problem Investors Have is Things Change...and They Don't Change
1:24:56
Start listening to #125 - Tom Barton - The Biggest Problem Investors Have is Things Change...and They Don't Change
1:24:56