Low Price To Book Ratio For Singapore Stocks

Had you put in the same amount of money into the low PTB portfolios every month and liquidate each of them after a three-month holding period, the cumulative returns on your capital would have been 343 per cent. You would lost money had you done that with the high PTB portfolios.

A similar strategy using the STI would have given you a 45 per cent return on capital. For one-year holding periods, the returns of the low PTB portfolios even more dramatic. On average, they outpaced the high PTB portfolios and STI by 29 and 16 percentage points respectively.

By buying one lot of each stock, you are over-weighting stocks which trade at a higher absolute price. Instead of buying one lot each, you may decide to put 10 per cent of your capital in each of the 10 stocks. The outperformance of the equally-weighted lowest PTB portfolios is even more spectacular.

On average, they beat the highest PTB portfolios by 12.5, 20.5 and 38 percentage points for holding periods of three months, six months and one year respectively. The corresponding outperformance vis-a.vis STI was 7.3, 11.6 and 28.4 percentage points. Of course, the lowest PTB portfolios did not beat the STI or the highest PTB portfolios in each and every one of the periods under study.

For example, in 1997 when Singapore was sucked into the Asian financial crisis, the flight to quality had understandably caused lowest PTB stocks to come out worse than the higher PTB stocks. But those who bought the dogs

portfolio in the depths of the crisis in July, August and September 1998 were handsomely rewarded with returns of more than 200 per cent a year later.

Low PTB stocks tend to have low prices. So their upside potential is larger. Fama and French attributed the superior performance of the 'dogs' portfolios to higher risk. Being 'dogs', they have more uncertain earnings stream and some may even have problems surviving. Investors who buy such companies are thus assuming a greater risk and therefore have to be compensated for it.

In contrast, growth companies like Venture and ST Engg are the most highly regarded issues, with the most promising earnings streams. Holding them is a must for funds. Thus the market does not mind paying more for that security and potential for earnings growth. That leaves less room for future appreciation.

So, you think you have a high risk tolerance and can stand up to ridicule for investing in dogs? But before you rush to the market, note that you should take a portfolio approach when it comes to buying low PTB stocks.

By buying 10 or more stocks, you are diversifying away the unique risks of the stocks. So even if one of the stocks goes belly-up, the most you will lose is 10 per cent, assuming you have a 10-stock, equally-weighted portfolio. If you are ready, the 10 stocks which now have the lowest PTB ratios are AFP, Acma, C K Tang, Hong Fok, Lion TC, GenMag, Dragon Land, Ipco, Low Keng Huat, and Orchard Parade.