Adaptive investing

What is the best metric in evaluating stocks? Most will tell you P/E. I use estimate earnings and P/E becomes Forward P/E. Switch it over to E/P for easier to understand and it is termed Earnings Yield (EY = Price/Forward Earnings).

Some may tell you ROI and there is a successful book on ROI.

Both are wrong metric as there is no single evergreen metric and there is why most have poor performances by following them blindly It is the herd theory: The performance is usually decreased in longer term when too many folks follow it.

Here is my test on S&P 500 stocks from April 1, 2019 to July 1, 2019.

I used the top 10 stocks from each sort. Commissions, dividends and spreads are omitted for simplicity. SPY’s return is annualized to 13.8%.

Value parameters

Top 10 stocks sorted by	Best SPY1
EY in descending order	-251%
Dividend Yield in descending order	-291%2

Opposite to above

Top 10 stocks sorted by	Best SPY1
EY in ascending order	6%
Dividend Yield = 0	138%3

¹   Beat by % = (Avg. return of 10 stocks – SPY) / SPY

²   Including dividend yields for the average 10 stocks and SPY, “Beat SPY’ is reduced to -241%.

³   Just randomly picked the 10 stocks that do not pay dividends as there are more stocks with no dividends.

EY, the forward Earnings Yield (i.e. EY = Forward Earnings / Price) is a long-term metric. It may still work after a year. Why do the stocks with the worst EYs perform well? It could be they are momentum stocks or could be investors looking for potential.

It is similar to choose screens to select winners. Some screens work better in the current market conditions.