“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.

David Fuller's view

Here is Tim Price's Letter.

Obviously, I have just shown you the introduction above, but I strongly suggest that you read the rest of this report by Tim Price.  I think investors of all ages and experience will find it, at minimum, to be a very useful reminder. 

Personally, I would cull momentum shares and high multiple plays in investment portfolios.  These have often been great performers over at least the last two years but risks are increasing in a number of markets.  I would favour conservative valuations and reasonable yields that are well covered by earnings.  I would avoid bonds of over a year’s duration because if you think the global economy will grow stronger on average over the next few years, as I do, yields can only go higher over the medium to longer term.  I would deleverage.  I have not yet done this, to some cost in the last few days, although my spread-bet trading positions are small.  None of my long-term investment positions are leveraged.

Two of the most attractive markets in terms of valuations are Japan, currently near medium-term resistance, and China, represented by SHASHR and also HSI.