How I'm using the systems

[Victor]

Hello, here's how I'm using the systems.

Initial
When a stock first shows up in the Price Momemtum Weekly (PMW) I use my money mgmt. rules to determine the initial size.  The rules are based on 1% risk plus a few wrinkles.  As posted elsewhere, I'm using an initial stop of 19%.

Weighting
I then add it to a list that uses an adapted weighting scheme from that used on the site.  Instead of using a single portfolio (of the six) I keep track of the number of buys issued for stock.  I multiply the current return % by this number and add it to one.  These "factors" are then used to apportion capital to each holding.  Since TIM has kept moving up so strongly I've added a rule that none of the stocks can account for more than 25% of the portfolio.  I could distribute the excess to the other stocks, but for now the surplus allocation stays in cash.

Stops & Risk
As others have noted in this forum, stops with these systems would have to be wide.  On the other hand, simply allocating capital based on performance isn't taking into account the substantial profits one would give up if a stock reversed sharply.  So I have a competing allocation scheme.  It uses the performance based allocation percentages to dole out "dollars at risk" based on stops.

And the winner is...
If both, performance & risk based allocations, indicate a purchase is required I'll us the lower amount.  Vice versa for a sell signal.  Intuitively, as a stock rises the performance allocation will call for new buys, while the risk based one will not.  As a stock falls towards the stop the risk allocation will want to buy more stock, while the performance based one won't.  The way to get both to agree is to move stops up as the stocks progresses.  Another way this can happen is if relative performance improves for a stock while its risk has not (the other stocks fall).

I also monitor the % loss if all the stops were hit at once, and try to limt this.

Some history
I started this in late July (2.5 months ago) and currently the annualized gain is 54% with 13% at risk and about 9% currently in cash.  This is after a number of stumbles.

Mistakes
1) Wasn't aware of the performance allocation method on the site so I didn't use it for a number of weeks.
2) That meant, among other things, my initial purchase of TIM was small relative to where it should have been, and the returns have suffered because of this.
3) At one point I was over-allocated to DRX which caused me to miss the first few days of ET as I wanted to get a decent price for the former.  The overall effect is likely small, but it's a mistake none the less.
4) I didn't have a stop in the market and missed one on SMX.

Notes
1) The good performance is relatively recent.  Starting this at the end of July was certainly bad timing.  A couple of weeks ago the annualized return was hovering around the low teens.  Before that I was simply "sticking to the system" and developing my tracking tools.
2) You have to be able to book losses.  Except for one small sale of TIM for reallocation purposes, all the sales have been at a loss.  Mind you, after today all open positions are showing a postive P/L.
3) The last point means my entire profit since July is in open positions.  This has clear implications for risk in the portfolio.
4) Since I'm keeping the stops quite wide I haven't had any hit yet, but it'll be interesting if it happens before the system calls for a sell.

While the current performance is stellar I don't anticipate to close out the year this way.  Lulls and down spells are sure to come our way at some point.  In the meantime, I'll take 2%+ days like today anytime they come along.

I'd appreciate any feedback on this.

Cheers,

Victor

[bryanmcn]

Hi Victor
Are you using real money or trading on paper?
Bryan

[DCA]

Isn't money paper?

[Victor]

Hi,

Real money, real commish, real every-ting.

In a way it's an experiment, but the real money part makes it, well... real.

Cheers,

Victor

[Victor]

Today was another stellar day... annualized return got into the 70%+ region. Realistically I'm expecting a correction on these numbers.  However, like I said before, I'll these kind of returns anyday.

Cheers,

Victor

[bryanmcn]

Hi Victor
So if you divide the gains in your portfolio into the size of your original portfolio what percent increase would you have?
Bryan

[Victor]

Good question... I went back through my statements and noticed I was basing returns on the total value for that account when I started using the SSP systems.  I removed from this total the amount invested in other things in the account at the time.  My spreadsheet computes the P/L for the SSP strategy only, so as long as I get the initial amount right all should work well.  As a double check I can review the SPP totals against my account total and see if the remaining investment do in fact cover the difference.

So... with that being said...
Return since inception: 18.12%
As I said, you have to be careful:
Return on closed positions: -7%
Return on open positions: 32.69%

You see how closed positions are still in the hole?  Just means all profits are in open positions, which fluctuate.  So I'd take the current 88% annualized returns with a grain of salt.  That's the number I come up with after adjusting my initial capital to what was available to the strategy at the time I started this.  Really, I think this is a non-sensical number until I've given this more time, maybe 6 or 9 months.

After Tuesday's trades I should have about 10.5% in cash.

Where's the edge?... So far I've got 19 wins and 21 losses, for 48% win percentage.  Average win: 30%, average loss: -10%.  Overall that's a 9.36% positive edge. 

We'll see how this develops over time.

Cheers,

Victor

P.S. I need to warn you all... these returns reflect the fact TIM and CUQ are way up.  That's a good thing, right?  Well, given the strategy's performance based allocation system those who have followed this for longer than I would have incredibly high weights in these stocks.  From a risk mgmt. perspective I think it's ok to concentrate a portfolio in a few stocks, but it's another thing to put most of the portfolio into one or two stocks.

For example: I should be lightening up on TIM 'cause it's now at 28% of the portfolio.  DRX is at 12%, CUQ 24%, TRE 8%, ALS 4% (as of Tues.), TKO 7%, ET 6%.  Why are TIM and CUQ so high... I've got returns of 62% and 47% on these respectively.

To clarify the warning... if TIM and CUQ gap down on some terrible corporate news, I may easily lose all my profits to date.

Another take on this is that if TIM and CUQ flatline from here on out, their stellar performance to date will not allow larger allocations to the other stocks until they reach similar returns.

Things to keep in mind when putting these things together.

Cheers (again),

Victor

[tuzo]

To clarify the warning... if TIM and CUQ gap down on some terrible corporate news, I may easily lose all my profits to date.

Since you only started in July, you missed out on that type of action in March/April 2007 where LPX and IEX lost about 75% and 50% respectively and LPX was a massive gap down.

I'm just curious if you are using any tools to assist you?  Or is it just excel?

[Victor]

Hi tuzo,

I'm using Excel, no other tools.

So far I've been able to avoid VBA code, except for a nifty price grabber for Yahoo data.  It's a bit slow to update, but serves the purpose.

I have sheets for:
Monitoring the main #s (day P/L, day %, etc. etc.)
A larger summary sheet that contains today's quotes, portfolio changes, stops, peaks, re-allocation results, etc. etc.
Another sheet calcs the re-allocation methods I'm using.
I also have an Orders sheet that keeps track of all orders.
Then I've got a Pivot Table to summarize Closed and Open positions
To round it out... a Daily Report sheet which gets printed at day's end, and a Historical sheet which captures most of the Daily Report for each day.  This last bit does have VBA code behind it, but a manual copy/paste special... values would do the trick just as well.

This last feature only started a week or so ago, but when I get more daily data I'll be able to chart it easily.

Cheers,

Victor

[bryanmcn]

Hi Victor

I think it's ok to concentrate a portfolio in a few stocks, but it's another thing to put most of the portfolio into one or two stocks.

I don't understand this statement. It sounds like a contradiction. Can you clarify?
Thanks

[Victor]

Hi Bryan,

Diversifying works with uncorrelated assets.  In a portfolio of equities you can achieve benefits of diversification very quickly as you add stocks one at a time.  As you keep adding more the benefit of the last addition is less than the previous stock added.  Once you get past eight the benefits continue to come, but at a very slow pace.

Here's another way to think about it.  If volatility is .60 with one stock you might get it down to .50 after adding a second one.  That was worth .10 vols.  Now add a third, this lowers volatility to .42, the fourth to .36, fifth to .32, sixth to .29, seventh to .27, eighth to .26.  You see what happens is that if you keep adding positions after 8 the benefit in lowering your porfolio's volatility is really small.

The problem with over-diverisfying is that your performance moves towards the "market" or index average.  I'm not sure how quickly this occurs, but it's logical that if you have an evenly weighted 50 stock portfolio in which one stock becomes a superstar, it really won't matter much.  You might as well buy a low MER index fund/ETF.

What I was getting at is that if you follow a purely performance based allocation strategy TIM and CUQ would each have over 25% of the portfolio weight.  Currently I start trimming when a stock gets over the 25% allocation.  I may change this in the future, and simply stop buying more if they account for more than 20% and start trimming at a higher percentage of the portfolio.  Haven't figured this one out yet.

What happens in the case of CUQ and TIM is they would dictate the return, but also the volatility of the portfolio.

Also, the above assumes you don't buy 4 banks and 4 insurers as your "diversified eight stocks."  In such a case I'd make each group a "unit" and ensure you have 7 or 8 uncorrelated units.

One last thought, in times of crisis the use of historical correlation is bunk.  When crashes occur, or wild bull markets, everything moves together, just when you need the protection.  There are other ways to look at your risk exposure, but it gets pretty "mathy."

Don't know if you've read Taleb's "Black Swan" but his strategy would be to have most of your financial assets in super-safe stuff like T-bills and bonds, and invest in options.  That is kinda what we're doing with SSP since you can think of these fast moving stocks as options.  In a fundamental way, a stock is a call option on the assets of the company.

Hope this helps,

Cheers,

Victor

[bryanmcn]

Hi Victor
Thanks for the clarification. I used to play options but the Canadian market is not liquid enough.
With the recent "correction" I'm guessing you are glad to be diversified.

I have placed some tight stops.

Does any one remember black monday - 20 years ago?

[Victor]

Hi Bryan,

Yes, I wondered after Friday if it was going to be a precursor of another bad Monday.  Seemed to be shaping up that way and then everything bounced near the end of the session.  Today all is green, so far anyway.  And this is were trimming my positions shows the other side of the sword.  My gains today will be smaller than those posted by SSP since I've trimmed TIM twice and CUQ once already.  I'm ok with that though, because I'm limiting my exposure to monster downside moves, which are the real portfolio killers (along with never ending down ticks, the death by a thousand paper cuts routine).  Who knows, in the long run taking the bigger risks might pay-off, or maybe I'm a little chicken.  Whatever the case, I'm happy with the way things are going.

I've just completed my first quarter of using SSP as a basis for this portfolio.  I think I'll post an update as a new topic later.

Cheers,

Victor