Foreword:

I have a surprise for you at the end of the year.

A strategy that has not only historically outperformed the S&P500 by a factor of more than six, whose excess return can be systematically justified, but which cannot be exploited by institutional investors and is invertible for private investors.

The Tiny Titans strategy made famous by James O'Shaughnessy.

I will refrain from introducing this gentleman at this point and devote myself to the strategy. If you want to learn more about him, here is his Wikipedia article:

https://en.wikipedia.org/wiki/James_O%27Shaughnessy_(investor)

(yes, the little orange one at the bottom of the chart is the S&P500)

https://stockmixology.com/tiny-titans/

A simplified explanation of the strategy

Note: The original strategy was explained in 2006 in the book "Predicting the Markets of Tomorrow". However, I will refer here to a slightly modified "yearly adjusted" version.

Put simply, we look for companies that are mispriced, buy them cheaply and sell them at a profit after holding them for a year.

However, according to the market efficiency hypothesis, this should not be systematically possible.

So we look for markets that are NOT efficient, which is why we enter the world of nano caps. (Companies with a market cap of less than $250 million)

In other words, companies that are so small that almost no fund can buy them without immediately becoming the majority shareholder.

As these companies are completely uninteresting for institutional investors, there is also no research on them. Very few market participants look at such companies, which leads to mispricing.

We are looking for companies with the following characteristics:

• Between 25 and $250 million market cap
• Price-to-sales ratio < 1.0
• Average monthly trading volume of >10,000 shares

You can also extend this list, for example you can exclude companies that have a short ratio of more than 5% or you can add a momentum screening.

When we have finished our search, we buy the top 25 stocks that meet our criteria and hold them for a year.

At the end of the year, we sell them again and repeat the process.

Problems:

It is not necessarily easy to get hold of the relevant shares, and trading costs are often high. As if that weren't enough, this strategy is also very disadvantageous from a tax perspective, as shares are bought and sold at regular intervals.

Solution:

We replicate this strategy via a Wikifolio - $DE000LS9UJX6 (+0,02%)

At 0.95% TER and 5% performance fee, the domestic ETF investor's heart is racing, but unfortunately there is no ETF for this strategy (and there never will be)

https://www.wikifolio.com/de/at/w/wfyetitans?src=search_extended&searchTerm=tiny%20titans#tradingidea

(You are welcome to find out for yourself what a wikifolio is 😘)

Conclusion and own opinion

Due to the low correlation with the global markets, this strategy is suitable as a yield-driving diversification.

However, the annual returns fluctuate greatly. There may well be years in which we see a 60% loss and others in which we make a 100% profit.

So the volatility is massive. Therefore, this strategy should only make up a small part of the portfolio and should be implemented consistently.

Personally, I have made a one-off investment that will not be touched again for the next 20-30 years. If the first year is particularly bad (-40% or worse), I will invest again next year.

The proportion of this strategy in my portfolio should be 1-2%.

The reason why this proportion is so low is that the Wikifolio mantle entails some special risks that I don't want to go into here.

What do you think of nano caps?