I want to run some back testing on a couple of value portfolios. They’re both based on picking relatively small cap stocks with a low PB, preferably below 0.5.
The first portfolio holds the stock for a year and if the criteria are no longer met (cap too large or PB too high) I sell, otherwise I hold for another year.
The second method buys the same stocks but holds them until the PB reaches 1, regardless of cap. Will this outperform the first method or will I just end up holding a bunch of stocks that are going nowhere, i.e. never reach par? Only back testing and time will tell.
This could be mixed in with the sliding cash holding method of the last post, or I could just be strict with the criteria and if the market is overpriced then there won’t be many if any stocks with a PB of 0.5… there certainly weren’t many between 1999 and late 2001.
