Berkshire Ruminations

Thursday, January 22, 2009

RBP Investing Update

Back in June I mentioned on this blog that I had started working for a company called Transparent Value, which developed the Dow Jones RBP Indexes based on their proprietary methodology called "Required Business Performance," and that I had been writing a blog for them.

While I realize it may sound like I am just trying to sell the company, I seriously think anyone with an appreciation for value ought to give this methodology a look because it looks like the guys at Transparent Value really are on to something. This is evidenced by the performance of the indexes in 2008. If you had used their methodology to construct a long/short market neutral portfolio you would have beaten the market handily (and actually earned a positive return in 2008!). Granted we only have one year of performance history, but what a year it was to test an idea like this!

For an academic and value investor like me, their methodology is the perfect blend of empirics and fundamental value. Basically they take each company determine what assumptions one would have to make about it in order to make a DCF valuation yield whatever the current stock price is. Then based on historical performance the assign each company a probability that they will be able to deliver up to those assumptions. The indexes simply select stocks based on this probability.

I am always looking for empirically solid but economically logical investing strategies (in fact my other blog, Empirical Finance Research, is devoted to this idea alone) and RBP fits in perfectly. If any readers of this blog have questions about it, let me know because its sometimes hard to understand at first. But once you get the gist of it it's pretty rockin.


  • I know historical performance is no indication of future performance, but I would still like to see a chart of regression tested performance back to at least 1960 but preferable early 1920's.

    Yep, the devil is in the details, and when anyone says an algorithm is 'perfect' my old CompSci and engineering training comes out and my 'bull hockey' shields get turned on high gain.

    I am not disputing your word, but more than one or two samples are needed to in-validate my fears.

    By Blogger servant74, at 15 February, 2009 11:13  

  • Well, I never said this was a "perfect" algorithm. For one thing, its not even an algorithm but rather a style of analysis. Nor is it "perfect." It is however, a very intersting and useful technique. But your point is well taken. If you have access to Bloomberg you can see the backtesting data on the RBP Indexes, and in the near future I will be posting more extensive backtesting data on the RBP Investing Blog.

    By Blogger Andy Kern, at 16 February, 2009 16:35  

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