Hello Byculla,
"Both AIM and VSS seem to be predisposed towards rising markets and operate accordingly."
I don't think that AIM and VSS are predisposed to rising markets. AIM does better in a volatile market (i.e. big swings both up and down) and VSS does better in a falling market (i.e. cheaper, undervalued stocks that will eventually recover over time). The Buy and Hold strategy is predisposed towards a rising market.
From VSS's perspective, at some point, strong, fundamentally solid stocks that have been undervalued by the markets will come back to their intrinsic values once people catch on. Of course this could take some time and nobody can predict when that will occur -- hence the fact Buffett underperformed during the tech bubble of the late 90s but laughed all the way to the bank during the tech crash and the subsequent sub-prime fiasco.
However Buffett has repeatedly stated that he doesn't care if it is a bear, bull or sideways market because he doesn't look at short-term stock prices. He purchases undervalued businesses and then holds them for long periods of time.
My investment philosophy is similar. I like to purchase strong undervalued businesses and hold them for a long time. The difference between my method and Buffett's is that I will hold any one of a group of stocks for long periods (not just one stock).
With the Canadian banks, for example, rather than simply purchasing, say, BMO and holding it for a long period, I am content to hold any one of the major 5 banks.
At any point in time I am always invested in a bank (thus satisfying Buffett's long-term requirement), but the bank might be any one of the 5 -- not necessarily always BMO.
There have been some VSS users who scan for highly rated companies and then base their investing decisions on the number of stocks returned. So, for example, if only 2 or 3 stocks were returned, they would consider the market overvalued. If 14 or 15 were returned, they might consider the market undervalued.
However I haven't run any tests on this strategy.
"Does VSS identify overvalued stocks using the same methodology?"
Yes, VSS does identify overvalued stocks using the same methodology.
"What percentage of stocks identified by VSS as undervalued then proceed to gain and in what time frame?"
There is no clear answer for this question. Purchasing strong, undervalued stocks is what value investing is about. When the rest of the market actually catches on and bids up the price to its intrinsic value, or beyond, is not predictable because it's based on what people think -- which itself is not consistently predictable.
At the end of the day, I think almost 100% of strong, fundamentally solid stocks will go up. The variable is when. The longer the time frame, the higher the probability for a price increase. And since the stocks are fundamentally solid, the chance they will go out of business within an investor's holding period is low (although not zero -- hence the recommended use of diversification).
I've had some stocks go up almost immediately after purchasing them and others not do anything for 2 years.
I think many people don't use value investing for this very reason. It is possible that they can be doing nothing, sitting on their hands, for long periods of time. Most people like action or like to feel as if they're doing something.
On the other hand, my backtests and many studies have shown that value investing is the best way to make money in the stock market. Once you've purchased great stocks, you should do nothing and sit on your hands. It's difficult to do, but it appears to work the best.
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