At Global & Local Asset Management, we use the “Avoid the human factor” strategy to manage our collective investment portfolios. The strategy focuses on managing the portfolios like an actuary and not a portfolio manager.

Avoid the human factor

The Human Factor (H-Factor) is an actuarial portfolio tool, developed by New York-based asset manager New Age Alpha, aimed at mitigating the risk of human behavior in stock selection.

The H-Factor does not seek to generate returns by applying traditional methods such as smart beta mutual funds and exposure to factors that we all know. Instead, the H factor quantifies and avoids the risk of human bias in stock selection.

New Age Alpha’s Human Factor tool, which is free to use, has more than 6,000 stocks worldwide, including many JSE-listed stocks.

Probability uses the only two things that we are sure about a listed company: it is the current stock price and the profitability of a company as shown in its published financial results. From these two data inputs, we can calculate the probability that the company will not be able to produce the implicit results in the stock price based on whether the company has done so in the past. Last 16 reporting periods.

Simply put, the lower the human factor score of a listed stock, the lower the risk of owning that stock.

Use a probabilistic approach for portfolio management

By using a probabilistic approach to security selection, we identify and avoid the risks present when equity investors interpret vague and ambiguous information inherent in stock prices consistently incorrectly.

The human factor score measures the likelihood that the listed company will not be able to generate the growth involved in its current share price.

The strategy is to develop probabilities that indicate the chance that a listed company not be able to achieve the growth implied by the current price of its share.

The approach taken by Global & Local Asset Management and New Age Alpha in New York is not to manage portfolios like a portfolio manager but rather to adopt actuarial techniques for asset management.

Look back to look ahead

In 2021, we published a number of articles in which we focused on the human factor score of some listed companies that were important in the business news at the time.

So, for this article, we thought we would revisit these companies and see how their human factor scores have changed since we wrote the articles.

Remember that the probability reflects the ability of the company not to be able to provide the results implicit in its share price, so the lower the probability. better the chance that the company can achieve the growth involved in the share price. The human factor scores of the listed companies that we mentioned in the articles at the time of publication were as follows:

So where are we now?

Netflix

In recent years, Netflix has become a part of the lives of many passionate viewers. Many of us are subscribers and we find that the content is so much better than what our old satellite TV content provider provided. Plus, everything on Netflix is ​​available on demand when you want it – no more waiting for the next episode of our favorite series to air on a scheduled schedule.

Before Covid, some feared that with the launch of other streaming services it would lead to competition for Netflix, but with severe lockdowns around the world, it seemed to have strengthened Netflix’s position as the world’s leading service. online streaming.

Netflix’s Human Factor Score as of December 31, 2021 reflects an improved likelihood of being able to deliver the results involved in the share price.

The human factor score for Netflix is ​​6.1%.

Distell

Distell is one of those companies that every South African should know about, as it produces brands like Klipdrift Brandy, Amarula Cream, Savanna cider, and Bain’s Cape Mountain Whiskey.

In 2021, announcements were made that Heineken was looking to buy Distell.

By the end of 2021, it seemed more likely that Heineken would buy Distell and that Distell would then be delisted from the JSE.

From the table above, we can see that Distell’s human factor score increased from 31.4% to 61.4%. This means that the likelihood that Distell will be able to generate the growth involved in its share price has decreased.

Discovery

We have been following Discovery with interest in 2021.

Discovery started the year with the highest human factor score of any JSE-rated stock that New Age Alpha measures.

That all changed in 2022, as Discovery announced that all of its employees should be vaccinated by January 2022 (Well, here we are. I wonder if that was respected by Discovery employees?).

In September, we took note of the article on Moneyweb which stated that Discovery had “rejected its annual dividend” and went further by stating that “it may have to raise equity to cover the costs of its investment in Chinese Ping An ”.

Read:
Discovery abandons its dividend and reports a possible capital increase
Discovery’s human factor score increases dramatically

Discovery’s human factor score fell from 6.2% to 55.5%, which means that its probability of being able to deliver the results implicit in its share price has deteriorated sharply since early 2021.

Indeed, Discovery only has a 44.5% chance of being able to deliver the results required to justify its share price.

Our full and updated list of human factor scores for the companies mentioned above is as follows:

Now, let’s wait and see what 2022 brings.

Happy new year of capital growth in 2022 everyone.