For the past 14 years, our Have It All stock screen has sought to dispense with the idea that investors need to stick to a certain style (or ‘factor’ in the academic jargon). If its nine tests can be reduced to a single instruction, it would be this: buy quality stocks, but don’t pay much for them.
As its name implies, the exercise is somewhat tongue in cheek. While our screens place a lot of emphasis on rigid investing rules, the stock market is supposed to be a rational place. Prices are meant to be reasonable proxies for the expected sum of all future cash flows, discounted to their net present value. A stock’s cheapness should, on balance, reflect the chances of justifying that value and realising that cash.
There are two problems with this assumption. First, the future is hard (and sometimes impossible) to predict, meaning expectations are often wide of the mark. And second, investors rarely approach a stock from a clean slate: memory, bias and other psychological quirks about historic prices all hold sway.