Avoiding Financially Distressed Companies Using a Simple Value Investing Heuristic

In a previous presentation we showed how it is possible to use a set of financial ratios to create a value portfolio that is capable of outperforming the aggregate market. We labeled that method the O-S heuristic approach to value investing. This paper presents evidence that not only is the O-S heuristic capable of selecting desirable assets for inclusion in the portfolio, it also avoids 100% of companies that either become insolvent or experience some form of financial distress