Lessons In Investment Warfare

Tyler Durden's picture

Submitted by Tim Price via Sovereign Man blog,

"Let us learn our lessons. Never, never, never believe any war will be smooth and easy, or that anyone who embarks on that strange voyage can measure the tides and hurricanes he will encounter. The statesman who yields to war fever must realise that once the signal is given, he is no longer the master of policy but the slave of unforeseeable and uncontrollable events.

“Antiquated War Offices, weak, incompetent or arrogant commanders, untrustworthy allies, hostile neutrals, malignant fortune, ugly surprises, awful miscalculations – all take their seats at the Council Board on the morrow of a declaration of war. Always remember, however sure you are that you can easily win, that there would not be a war if the other man did not think he also had a chance.”


- Winston Churchill, ‘My Early Life’, quoted by Charles Lucas in a letter to the FT, 23rd July 2014.

And there is a war being conducted out there in the financial markets, too, a war between debtors and creditors, between governments and taxpayers, between banks and depositors, between the errors of the past and the hopes of the future. How can investors end up on the winning side ? History would seem to have the answers.

For history, read in particular James O’Shaughnessy’s magisterial study of market data, ‘What Works on Wall Street’ (hat-tip to Abbington Investment Group’s Peter Van Dessel). O’Shaughnessy offers rigorous analysis of innumerable equity market strategies, but we are instinctively and philosophically drawn most strongly towards the value factors highlighted hereafter.

The chart below shows the results accruing to various strategies across the All Stocks universe – all companies in the Standard & Poor’s Compustat database with market capitalisations above $150 million, a dataset which comprises between 4,000 and 5,000 individual companies. The analysis takes in over half a century’s worth of data.

Making the (fairly reasonable) assumption that the data in this study is sufficiently broad to mitigate the effects of shorter term market “noise”, the results are unequivocal. Buying stocks with high price-to-sales (PSR) ratios; buying stocks with high price / cashflow ratios; buying stocks with highprice / book ratios; buying stocks with high price /earnings (PE) ratios; all of these are disastrous strategies relative to the performance of the broad index itself. Caution: these all happen to be ‘growth’ strategies.

Graph842014 Lessons in investment warfare


But the converse is also true – in spades. Buying stocks with low price-to-sales ratios; buying stocks with low price / book ratios; these are both outstandingly successful strategies over the longer term, converting that initial $10,000 into over $22 million in each case. Buying stocks on low price / cashflow ratios is also a winning strategy. The relatively simple ‘high yield’ and ‘low p/e’ strategies also comfortably outperform the broad market. Note that these are all ‘value’ strategies.

This leads O’Shaughnessy to question the legitimacy of the so-called Capital Asset Pricing Model, in which investors are compensated for taking more risk:

“..the higher risk of the high P/Es, price-to-book, price-to-cashflow, and PSRs went uncompensated. Indeed, each of the strategies significantly underperformed the All Stocks Universe.”

Perhaps the market is indeed less efficient than certain academics would have us believe. The world’s most successful investor, Warren Buffett, would seem to think so. As he was quoted in a 1995 issue of Fortune magazine,

“I’d be a bum on the street with a tin cup if the markets were always efficient.”

And note that careful addition of the word “always”. Buffett wasn’t even going so far as to suggest that the markets are never efficient, but rather that the patient investor can take advantage of Mr. Market’s occasional lapses into the realms of absurdity, whether in the form of bullishness or outright despair.

O’Shaughnessy frames the returns from these various ‘growth’ and ‘value’ strategies more explicitly in the chart below.

Graph2842014 Lessons in investment warfare

Special pleaders on the part of ‘growth at any cost’ might argue that the time series is insufficient. But if 52 recent years – easily an investor’s lifetime – taking in at least two grinding bear markets are not enough, how much would be.

Again, the conclusions are clear. Buying stocks on low price-to-sales ratios is a winner, tying with stocks on a low price-to-book ratio with an annualised return over the longer term of 15.95%. Low price-to-cashflow is also a stellar performer. Buying stocks with a high yield also beats the broad market, as does buying stocks with low price / earnings ratios. Again, these are all explicit ‘value’ strategies.

Since we appear to be living through something of a speculative bubble (a bubble inflated quite deliberately by explicit central bank action), it is worth recalling one prior instance of ‘growth’ outperforming. As O’Shaughnessy points out.

“Between January 1, 1997 and March 31, 2000, the 50 stocks from the All Stocks universe with the highest P/E ratios compounded at 46.69 percent per year, turning $10,000 into $34,735 in three years and three months. Other speculative names did equally as well, with the 50 stocks from All Stocks with the highest price-to-book ratios growing a $10,000 investment into $33,248, a compound return of 44.72 percent. All the highest valuation stocks trounced All Stocks over that brief period, leaving those focusing on the shorter term to think that maybe it really was different this time. But anyone familiar with past market bubbles knows that ultimately, the laws of economics reassert their grip on market activity. Investors back in 2000 would have done well to remember Horace’s Ars Poetica, in which he states: “Many shall be restored that are now fallen, and many shall fall that are now in honour.”


“For fall they did, and they fell hard. A near-sighted investor entering the market at its peak in March of 2000 would face true devastation. A $10,000 investment in the 50 stocks with the highest price-to-sales ratios from the All Stocks universe would have been worth a mere $526 at the end of March 2003…


“You must always consider risk before investing in strategies that buy stocks significantly different from the market. Remember that high risk does not always mean high reward. All the higher-risk strategies are eventually dashed on the rocks..”

This might seem to imply that there is safety simply in the avoidance of explicitly high-risk strategies, but we would go further. We would argue today that central bank bubble-blowing has made the entire market high-risk, with a broad consensus that with interest rates at 300-year lows and bonds hysterically overpriced and facing the prospect of interest rate rises to boot, stocks are now “the only game in town”. We concede that by a process of logic and elimination, selective stocks look way more attractive than most other traditional assets, but the emphasis has to be on that word “selective”. We see almost no attraction in stock markets per se, and we are interested solely in what might be called ‘special situations’ (notably, in ‘value’ and ‘deep value’ strategies) wherever they can be identified throughout the world. We note, in passing, that markets such as those of the US appear to be virtually bereft of such ‘value’ opportunities, whereas those in Asia and Japan seem to offer them in relative abundance. In this financial war, we would prefer to be on the side of the victors. If history is any guide, the identity of the losers seems to be self-evident.


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Duffy's picture

churchill was a cunt.

falak pema's picture

they say he liked them as much as cigars. 

But he liked power even more. And had nostaligia for Rule Britannia which was incongruous after 1945 and British Empire debacle. 

Can't make a leopard change his spots.

ZerOhead's picture

Just buy whatever Goldman tells you to sell....

JustObserving's picture

How Sir Winston Churchill Starved 4 Million Indians

Churchill’s six-volume History of the Second World War fails to mention the cataclysm that was responsible for about 90% of total British Empire casualties in that conflict, but makes the extraordinary obverse claim: ‘No great portion of the world population was so effectively protected from the horrors and perils of the World War as were the people of Hindustan. They were carried through the struggle on the shoulders of our small island.’”


Mukerjee, a Bengali herself, has conducted extensive research to document what she writes, and also interacted with those who survived the holocaust and lost their parents, children, and other relatives. In Bengal, millions were dying because of food shortages caused by British looting to feed the troops engaged in World War II, and partly due to nature’s fury in the midst of a well-developed independence movement, which led to the end of the British rule in 1947. She documents the British War Cabinet’s role, Churchill’s, in particular, in exacerbating the food shortages, stonewalling attempts to send food from other countries to alleviate the crisis, and, in fact, justifying the necessity to cull those who are not only ‘inferior,’ but who breed like rabbits.


I do not understand the squeamishness about the use of gas. I am strongly in favour of using poisonous gas against uncivilised tribes.

Writing as president of the Air Council, 1919


ZerOhead's picture

And it wasn't the first time either... think back to 1876...


In part, the Great Famine may have been caused by an intense drought resulting in crop failure in the Deccan Plateau.[2] However, the commodification of grain, and the cultivation of alternate cash crops also may have played a role,[3] as could have the export of grain by the colonial government; during the famine the viceroy, Lord Lytton, oversaw the export to England of a record 6.4 million hundredweight of wheat.[4]

"The mortality in the famine was in the range of 5.5 million people.[14]" 


So let's see... the EXPORT of 6.4 million 100lb bags of wheat COULD HAVE worsened the famine where 5.5 million died?

Talk about British understatement. Makes Bibi look like an absolute humanitarian by comparison...

gmak's picture

If it weren't for his leadership, though, we would be writing this in German.

logicalman's picture

If it weren't for his alleged 'leadership' WW2 would have been VERY different.

WW2 was a result of the conditions imposed on Germany after WW!.

Interestingly, BIS came into existence to be the administrator for the aforementioned conditions, aka reparations.

All wars are banksters wars - the politicians are just actors on a stage.



Ben Ghazi's picture

Sir Montgomery, Gen Eisenhower, Gen Patton, Gen McArthur, Gen Bradley, Adm Nimitz .........


True Leadership!

Ben Ghazi's picture

Who is the Fag that downvoted this list?



Anal Jouster!

jez's picture

Not me.


But you forgot Lt. Calley.

Sandmann's picture

Operation Market Garden ?

TheReplacement's picture

War is hell.  The most unethical thing you can do in war is lose.  Everything else is just details. 

It is easy to sit and look back on history and pick people, who won their wars, apart for actions in the past while you sit there losing your personal war today.  History may well look back at you as a victim but that won't save you or your kind.

Good luck.

zorba THE GREEK's picture

Buy low and sell high. Sell the stock market here at the high and buy

physical silver and gold ( in that order ) at the low and only sell the

PMs for cash as you need the $ and avoid the taxman. That is the

formula for successful financial planning for the present state of the


zorba THE GREEK's picture

Avoid corupt governments looting your hard earned money.

Juno Rock's picture

Spoken like a true Scot's with a delusion of granduer. 


We shall see after the referendum, wether or not she sinks or floats.  

logicalman's picture

Churchill was a self-interested, self agrandizing, warmongering, drunken cunt.


He was also largely responsible for what's happening in Gaza right now, because he needed money and Zionist suppleid it.

He was good with words, though.

Harbanger's picture

Not just good with words, but spot on.

"Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery." - Winston Churchill

Sandmann's picture

He was actually sponsored by a group of Jewish businessmen including Mond and Waley Cohen and Strakosch.

He put together the catastrophic Narvik expedition which undermined Chamberlain in 1940.....he had been in secret cipher contact with FDR throughout whilst Chamberlain was close to the US Ambassador Joseph Kennedy

Escrava Isaura's picture

The West has ganged up on Russia, because the West is totally corrupt. The wealth of the elites is based not only on looting weaker countries whose leaders can be purchased (read John Perkins’ Confessions of an Economic Hit Man for instruction on how the looting works), but also on looting their own citizens. The American elites excel at looting their fellow citizens and have wiped out most of the US middle class in the new 21st century.

Paul Craig Roberts
power steering's picture

Located in the fiction section of your local public library

Escrava Isaura's picture

new power steering,

Thanks for the suggestion:


sylviasays's picture

"the West is totally corrupt."

Where does hypocrite Escrava Isaura live? In Washington, D.C. according to her previous posts. 

No doubt Escrava has a cushy, well-paid government job that allows her to sit on her fat, lazy socialist ass and post to ZH all day?

jez's picture

No doubt. No evidence, but no doubt.

Escrava Isaura's picture


new sylviasays has a reading comprehension. That was a quote by Paul Craig Roberts and I don't know where he lives, not that it matters.

JohnG's picture

You're a special kind of stupid aren't you.

Renfield's picture

Thank you, Tim, you get it. World War III is IN PROGRESS. And it will be unlike any ever seen (again)... I think people who are expecting a mass rallying of boots-on-ground, half the world one way and half another, are in for a big disappointment. The enemy is not as visible in this war. Many combatants won't even realise that's what they were and why they were killed - many won't even know they WERE killed - but this is the deadliest war of all. This one includes famine, disease, and debt as weapons, not just at the highest levels but right to the bottom ranks.

falak pema's picture

WW3 will not happen except by accident. 

These Oligarchs love their wealth too much.

Asymmetric wars like in Syria, Iraq and Ukraine will be very much on the cards to avoid frontal WW3.

That's the lesson of Cuba and it still prevails.

disabledvet's picture

See below and "the Government" (all Governments) "love that they love their money so much."

Gold standards are for "greed containment." There just isn't that much money to sluice around....and the few who have really are rich.

Fiat money is a Wild West show...backed up by those same guns and showmanship. It's amazing banking even exists actually.

ZerOhead's picture

This is the lesson of Cuba...



You never know if those new Ukrainian NATO ABM bases may cause the same kind of standoff which of course had a little something to do with Turkey...

what's that smell's picture

warren buffet?

warren buffet is the ultimate inside-trading plutocratic oligarch.

warren buffet is a cunt.

Cheduba's picture

“I’d be a bum on the street with a tin cup if the markets were always efficient.”

What Buffet is saying is that he wouldn't have become filthy rich without sucking on the government teat.

deflator's picture

 Yeah, but he is a folksy cunt nub isn't he? Corn based ethanol and high fructose corn syrup hardly qualify as efficient yet he has managed to profit from both in myriad ways.

ebworthen's picture

1951-1996 would be a better time frame, or even 1951-1971.

But that was when we still made stuff, Glass Steagall hadn't been repealed, and the currency had some relation to Gold.

Low price/sales and low price/book ratios, got it, thanks.  No Facebook, Chipotle, Amazon, Tesla.

Plus $10,000 or more, and 40 years.  I needed this article in 1987.

MH17FLIGHT's picture

My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do... http://goo.gl/bhiamE

potato's picture

Sounds like you work for the SEC

Super Hans's picture

You are what I call a human "douche bag" so why not FUCK OFF!

Salsipuedes's picture

My cousin's husband Darlene makes 10 grand a week doing fuck all for the City of Los Angeles and gets free dental so FUCK OFF pond scum and don't miss your flight!

logicalman's picture

Best to just totally ignore.

trader1's picture



from the latest adam curtis piece:


ALADDIN is the name of an incredibly powerful computer network that is based in a tiny town called East Wenatchee - it's in the middle of nowhere in Washington State in North America.

This makes it incredibly powerful. Aladdin is owned by a company called Blackrock that is the biggest investor in the world. It manages as much money as all the hedge-funds and the private equity firms in the world put together. And its computer watches over 7% of all the investments in the world.

This is unprecedented - it's a kind of power never seen before. But Blackrock is not run by a greedy, rapacious financier - the traditional figure of recent journalism. Blackrock is run by the very opposite - a very cautious man called Mr Fink

Here he is. He's called Larry Fink

Back in 1986 Mr Fink was working his way up the First National Bank of Boston when an unpredicted fall in interest rates caused a disaster for the bank. He swore that it would never happen again - and for 20 years he built Aladdin.

It has within its memory a vast history of the past 50 years - not just financial - but all kinds of events. What it does is constantly take things that happen in the present day and compares them to events in the past. Out of the millions and millions of correlations - Aladdin then spots possible disasters - possible futures - and moves the investments to avoid that future happening.

I can't over-emphasise how powerful Blackrock's system is in shaping the world - it's more powerful in some respects than traditional politics.

And it raises really important questions. Because its aim is to not change the world - but to keep it stable. Preventing any development thats too risky. And when you are moving $11 trillion around to do that -it is a really important new force.

But it's boring. And there is no story. Just patterns.

Here is some video of Aladdin. A few weeks ago I was filming in Idaho - and decided to go and have a look at the buildings that house Aladdin. I had asked Blackrock if I could have a look inside. Surprisingly the guy in charge of their PR said yes. But a little while later he left the company in what seemed to be a reorganisation.

But it didn't really matter - because you know what it will look like. Row upon row of servers roaring away, and surrounded by giant batteries that will rescue the system if the power supply goes.

Here's the shot from the car driving past the computer sheds that house Aladdin. A 37 seconds tracking shot, and you can see how dull it is.

It is the modern world of power - and it's incredibly boring. Nothing to film, run by a cautious man who is in no way a wolf of Wall Street. It's how power works today. It hides in plain sight - through sheer boringness and dullness.

No wonder we find it difficult to tell stories about it.



The Alarmist's picture

Idaho ... Utah ... wonder what someone has in Montanna.

Salsipuedes's picture

Warren Buffett met with George W. Bush the afternoon of September 11, 2001 in Omaha. I bet I'd do better if I could get meetings like that (in the temporal world anyway).

medium giraffe's picture

Winston Churchill and Warren Buffoon?  Jesus, I think I'm gonna throw up.  Hope there's no blood.

Super Hans's picture

Peer lending? anyone got a tip on a legitmite site for my new start up?

lasvegaspersona's picture

Remember...another word for creditor is ..'saver'.

If you do a search with google for 'debtors and savers' this is the #1 result...


It is one of his best blog pieces and deserves the rank.

Oil_City_News's picture


If you think Blackrock is so bad-ass check this out. Unbelieveable IMO,



Australia, ‘better slave than dead’



Explosive: Australia, ‘better slave than dead’

by Jon Rappoport

July 30, 2014

Remember the name "Pine Gap." It lies at the heart of this story.


Salsipuedes's picture

Bloody good link mite! 'Pine Gap' indeed. These bloody seppos seet out thea in the middle a bloody nowhea an' go bat shit crazy like in that bonkers box in Utah. "A dingo ite me buy-be!" Where's the bloody Commandos when ya need 'em 'eh? Fair dinkum!

edifice's picture

A word from your sponsors:

"Just buy your 120-inch curved LCD TV (paid for with your student loans), take out your 60-year mortgage and 7-year auto loan, and shut up, slaves."

hedgiex's picture

Good article except the part on relative abundance of deep value investments in Asia. Your investments float on many entrenched crony governments bolder than US/EC with regulations and oversight that you are just experiencing.