new portfolio

I started a new little portfolio where I blindly buy 15 stocks based on a result of some screens (very carefully chosen screens). I then short indexes until the expected risk/reward of the portfolio is equal or less than that of large cap stocks. For the week: The portfolio is down 2.3% (net). QQQQ down 7.1% Emerging Markets down 5.8% Small caps down 6.5% Midcaps down 5.5% SP500 down 5% I don’t know if I’m happy or sad?, or if I’m measuring this right? or when I should rebalance? Hmmmmmmm…

you lost money. you should be sad. you are worth less today then yesterday.

hi, I saw your post about this last year - interesting idea but not sure how/why it will work. If you are shorting (as you say) then you are up for the week across the board - so be happy! (but I presume you are down on the long stocks (?) - so are down overall(?) I spent years looking for these types of methods about 15 years ago - tried dozens of different things. Failed to find anything that consistently beat the market after taxes, transaction costs & time (time being the biggest cost). That doesn’t stop thousands of hedge funds trying to beat the index, paying the fund managers millions in fees and then promply losing billions after a few short months/years - aahh the endless search for alpha! No harm in trying new things - but my humble advice would be to do lots of research before committing big dollars - ie back test over years/decades, then paper trade, then start small, then continually analyse/modify/refine rules, and only commit money you can afford to lose. Personally I concluded many years ago that there is no holy grail waiting to be found - or at least I couldn’t find it anyway!. Now I make most of my money just going long based on long term ec outlook - use ETFs as core + some opportunistic/tactical plays and some option spreads - very boring stuff. The big wins come from PE/VC where I can add real value and have input/control) But do hang in there and please keep us posted on progress!

so you’re buying some screens and shorting indices until the anticipated sharpe ratio is higher than historical or anticipated large caps. How do you know your portfolio is efficient? You may have eliminated systematic risk if your shorts are balanced against the weighted betas of your long positions, but you still have stock specific risks left over. Remember that you don’t get paid for stock specific risks, and you shouldn’t be taking risk that you aren’t compensated for. Not trying to grille you here; just curious as to what you’re thinking.

Strikershank, I lose money all the time but usually I make it back. I got the transaction costs, time involved in trading and tax management down to insanely low levels. I spent several weeks figuring out ways to automate the process… everything from the screening, to the spreadsheet work, to the order placement and to the tax management(tradelog is awesome for taxes). I can update & rebalance everything in an hour. Bchadwick, of course I used a mean variance optimizer so that the portfolio is (relatively) efficient and diversified (as much as possible for 15-20 stocks). That’s also how I know the estimated statistical risk/reward. I do it over a few different periods cuz some of the gurus are saying now that the most recent periods should be more heavily weighted. FWIW, I’m mainly a buy’n’hold value/special situations investor. This represents a new & small part of my investments. If it goes well, I’ll start a hedge fund so I can earn 2-20 or whatever. You can say “I knew him when…”

I normally visit AF during working hours (not on a Friday night after dinner and drinks), but I’ll go out on a limb: It looks as if you are trying to gain upside exposure to large caps while limiting downside to a myriad of companies turned up by your blind screen? So your aim is to get the return on the large caps with less risk? Assuming I’m even near the mark with this, I’d say being down 2.3% vs. the listed indexes is good to neutral. I don’t know what stocks your blind screen turned up, so I hate to refer to this as a synthetic (but hedged) long position in large caps, but if that’s what it is, maybe you need to adjust your benchmark? If I’m way off you can blame Jose Cuervo. :slight_smile:

Oh, notwithstanding, I think it’s cool what you’re doing. I’ve been paper trading over the last year 60/30/10 on gut/a monte-carlo simulator I’ve been building/and my limited knowledge of options. It’s interesting to see what other people are doing (especially with some real scratch on the table). Keep us informed!

virginCFAhooker Wrote: ------------------------------------------------------- > I started a new little portfolio where I blindly > buy 15 stocks based on a result of some screens > (very carefully chosen screens). I then short > indexes until the expected risk/reward of the > portfolio is equal or less than that of large cap > stocks. > > For the week: The portfolio is down 2.3% (net). > > QQQQ down 7.1% > Emerging Markets down 5.8% > Small caps down 6.5% > Midcaps down 5.5% > SP500 down 5% > > I don’t know if I’m happy or sad?, or if I’m > measuring this right? or when I should rebalance? > Hmmmmmmm… The things you are quoting are down, but they are also indices, which you supposedly shorted, so maybe it’s not so bad. The question is whether your long positions went down less than the indices you shorted. (you’re using SI Pro to do your screens, yes?) Why don’t you tell us what your aggregate long portfolio of 15-20 stocks did, tell us what your short indices did, and then tell us what the combined portfolio of long stocks + short indices did. That can give us a better sense of what’s going on, without giving away your secret screening formula.

(oops… double post…)

I was looking at Canadian Small Caps myself for a couple of weeks. Never got in, but was tempted a few times. I suppose Technical Analysis is NOT really all it’s cracked up to be, eh? Willy

virginCFAhooker Wrote: ------------------------------------------------------- > I started a new little portfolio where I blindly > buy 15 stocks based on a result of some screens > (very carefully chosen screens). I then short > indexes until the expected risk/reward of the > portfolio is equal or less than that of large cap > stocks. > > For the week: The portfolio is down 2.3% (net). > > QQQQ down 7.1% > Emerging Markets down 5.8% > Small caps down 6.5% > Midcaps down 5.5% > SP500 down 5% > > I don’t know if I’m happy or sad?, or if I’m > measuring this right? or when I should rebalance? > Hmmmmmmm… i think you’re doing more work then you have to. i don’t even think its sound to even to that. trying to mimic the performance of a “sector” with alternative investments will only lead to unexpected risk that you didn’t forsee. if you’re looking for arbitrage strategy, it should be grounded on sound economic principles and not deviation from historical norms. Lots of people around me use TA. They claim its effective. I say its speculation. I ask for their “rate of return”. they can’t report the results. might as well invest based on astrological patterns.

Frank, I don’t understand your post. Are you calling this an “alternative investment” because there is shorting going on? As far as I can tell, virginCFA isn’t in PE or hedge funds, just buying some stocks and shorting some indices. True, it looks like it might resemble a relative value strategy that hedge funds use. Personally, I’ve also been thinking of shorting out some of my market index exposure over the next quarter or too, given the questionable macroeconomic outlook. In fact, I wished I had had the guts to get my broker to do it last year on Dec 31st, when I did my end-of-tax year stuff. After last week’s beatings, it would have been a good idea. I’m not sure how you concluded that virginCFA is using TA? All we know is that the stock choices used some screens, which could very well be selecting on things like company size, value factors, cash flow quality, or whatever. Or was the TA comment just a comment in general about TA. As for the viability of TA, I originally took the CFA line of thinking that it’s as good as astrology, but I’ve been warming up to it over time; mostly because good TA involves behavioral hypotheses about investor behavior. You can certainly get a historical rate of return on a trading strategy that uses TA with proper record keeping - so maybe the folks you’ve been talking to just don’t do that. However, I’m not sure how one would get an ex-ante alpha out of something like that, the way you would with, say, a MPT style analysis, so mostly you’d need to hope that past results are relatively stable. BTW, I applaud virginCFA’s initiative to do this and willingness to share results with us. One question: are you using special software to track your P&L or investment results, or are you just typing them into Excel?

sorry i couldn’t explain myself clearer, no time to type. the subject matter is technical (at least to me). TA was with regards to Willy R’s post. i really hate TA and they really hate me. i can track my p&l with a pencil and paper. i don’t have the experience to implement sophisticated strategy (hedge fund type stuff). I’m just looking for good companies. value. i dont’ want to base my investments on what other people think. only 1 thing matters, the green. everybody thinks that’s worth having.

i think it’s an interesting exercise virgin, good work. agree that this is very far from TA or alternative investing. knowing this guy he probably is using fundamental screens. so what are the tools best used by individuals for portiolio optimization? if this something you crunch yourself in excel? or some sort of program?

BigNodge, I built my own optimizer in excel but it was a mess once I started adding more than 4 assets. I ended up trying a bunch of ones that I found for free (demos) on the internet. The ones I tried are portfolio pilot, smartfolio, visualMvo and expertInvestor. I liked portfolio pilot the best but they wouldn’t sell me the full version. VisualMVO does everything I need so I settled on that one. The backtested data from the screens I found was based on just an equal weight in each position but I thought that was too sloppy/risky so I used the optimizer (with a lot of tweaks of the constraints). I don’t normally use any optimizer on my regular holdings but I do use a self-made montecarlo for some portfolio decisions. For you other guys… I don’t use any technical analysis but there is a relative strength component in one of the screens (I use a blend of screens… I chose the blend based on mean variance optimization of the backtested data!). I’m not trying to replicate large caps with this, or any sector per se … I just used the large caps risk/return expectations because people tend to think of that index as conservative (for equities). The returns I posted for the week were the NET long/short positions. I posted the other indexes returns to show that my returns were better (even though I lost money). I decided to rebalance this weekend since I’m going away next weekend. Based on that, there was a 44% turnover in shares (by $ value) and about a 20% turnover in the names of the stocks… because that was a very volatile week. The screens historically average about 30% monthly turnover in the names of the stocks. Rebalancing will cost me about $20 thanks to Interactive Brokers.

virginCFAhooker Wrote: ------------------------------------------------------- > I started a new little portfolio where I blindly > buy 15 stocks based on a result of some screens > (very carefully chosen screens). I then short > indexes until the expected risk/reward of the > portfolio is equal or less than that of large cap > stocks. > > For the week: The portfolio is down 2.3% (net). > > QQQQ down 7.1% > Emerging Markets down 5.8% > Small caps down 6.5% > Midcaps down 5.5% > SP500 down 5% > > I don’t know if I’m happy or sad?, or if I’m > measuring this right? or when I should rebalance? > Hmmmmmmm… But he beat the market

That’s a lot of turnover, for a fundamental based screen, it seems to me. Good thing it’s cheap to turn over. What is your rebalancing rule (time based, meaning every X days, or target based, meaning every time the portfolio gets X points away from target allocations)? BTW, because of the effects of estimation error on optimizations (small changes in correlation and relative returns can lead to big changes in MVO weightings), it turns out that equal weighted portfolios usually don’t do too badly. If you actually have perfect estimates of expected returns, volatilities, and correlations, then MVO is clearly superior, but if you have some estimation error, equal weighted isn’t really that bad after all, and you don’t fool yourself into thinking that the formula is perfect. virginCFAhooker Wrote: ------------------------------------------------------- > BigNodge, I built my own optimizer in excel but it > was a mess once I started adding more than 4 > assets. I ended up trying a bunch of ones that I > found for free (demos) on the internet. The ones > I tried are portfolio pilot, smartfolio, visualMvo > and expertInvestor. I liked portfolio pilot the > best but they wouldn’t sell me the full version. > VisualMVO does everything I need so I settled on > that one. The backtested data from the screens I > found was based on just an equal weight in each > position but I thought that was too sloppy/risky > so I used the optimizer (with a lot of tweaks of > the constraints). I don’t normally use any > optimizer on my regular holdings but I do use a > self-made montecarlo for some portfolio > decisions. > > For you other guys… I don’t use any technical > analysis but there is a relative strength > component in one of the screens (I use a blend of > screens… I chose the blend based on mean > variance optimization of the backtested data!). > I’m not trying to replicate large caps with this, > or any sector per se … I just used the large > caps risk/return expectations because people tend > to think of that index as conservative (for > equities). The returns I posted for the week were > the NET long/short positions. I posted the other > indexes returns to show that my returns were > better (even though I lost money). > > I decided to rebalance this weekend since I’m > going away next weekend. Based on that, there was > a 44% turnover in shares (by $ value) and about a > 20% turnover in the names of the stocks… > because that was a very volatile week. The > screens historically average about 30% monthly > turnover in the names of the stocks. Rebalancing > will cost me about $20 thanks to Interactive > Brokers.

Thanks. So, can you direct me towards some resources on learning about building your own monte carlo simulator? I’d be really interested in that, as I’m always curious about how various strategies would work under a wide range of outcomes.

So basically you lost money but outperformed your benchmark, and you want to know whether that’s good. Answer: that’s good. If you keep doing that you will be happy in the long run. However, using stock screens without doing any DD on the companies themselves is just asking for trouble, not a great way to try and outperform IMO. You don’t think you could add any value by looking at the dozen or so companies your screens spit out at you?

BigNodge, I make monte carlo simulators in excel using the random function and a repeat loop macro. Excel has many statistical tools including NORMINV which will take an expected return and a standard deviation and give you a random output based on that. For a simple example: if you wanted excel to generate a random return similar to an asset class with a 12% long term expected return and a 20% standard deviation of returns, you would just use this: =norminv(rand(),12%,20%) Take that formula and paste it down for 50 columns Run your capital through those 50 columns of prospective returns. See what you’re left with. Do it 10,000 times more and take the average. Voila. You can make it more complex by adding additional columns for additional assets and liabilities (especially drawdowns of capital), each with their own return characteristics. Bchadwick, the data I used from the backtests was rebalanced monthly to equal weights and I think maybe that is a good thing and I might lean that way over time by tightening the constraints. Really, the only purpose for the mean variance optimization for me was to make sure I didn’t buy 10 homebuilding stocks, or 8 fertilizer companies, etc. This is a blind screen and I’m trying not to do any due diligence. It’s the easiest way to see if I have any assets that are too correlated with each other. It also gives me the expected return and variance of the portfolio (which is just interesting, not useful I guess). Newsmaker… I’m not doing any due diligence on the names! The screens have been backtested and I’m diversifying. Trust the force luke.