The real meaning of buy and sell orders.

[garilou]

Careful this is a long post!!!

In another thread (French re; corrections) Super Stock Picker referred me to the Virtual $50,000 portfolio.

I had been there before, but had never downloaded the .xls files.

Now I did and had a look at the one dated August 27 2007.


This spreadsheet gives an example of the reallocation of the shares in the portfolio.
There I had a surprise:

I read:
New Orders
      Sell TIM
      Sell CUQ
      Sell ALS
      Sell DRX
      Buy VRS

If I had received such an email, I would have thought it's time to sell TIM, CUQ ALS DRX, and to buy VRS. Not you?

Well it was not so.
Only parts (odd lots) of the 4 "sell" were actually sold:
TIM 479
CUQ 166
ALS 126
DRX 532

Just enough to have enough cash to buy 1017 shares of VRS.


If I compare the "New Weights" in the Theoretical New Portfolio, before the orders, I can see that to a few decimals, all stocks are close to 1.

The column named: Adjustment Needed shows that the number of shares sold from each of the "sell order" is calculated in order to keep approximately the same amount of money in all stocks.
And as a matter of fact, after the re-allocation,  if I copy the formulas from "New Weights" down to the Actual New Portfolio, the weights are the (again with only a few decimals difference) again all close to 1, the highest being TIM with 1.228915663.

First I do not understand why the New Weights are calculated with the formula 1 + % performance...


In Re: Other Stock Picking Strategies, dhamel writes:
"I am tracking SSP very precisely, even with the exact allocation mechanism for number of stock."
I guess dhamel understood something I still do not understand 100%.

OK, but that was old stuff. Let's come to a recent case:

The last order we received was to sell TEC, and as a matter of fact, TEC has disappeared from all portfolios.
But who knows how the cash brought in by those sales was re-allocated between the different stocks that are still in the portfolios?

So now I make the calculations for the last order (sell TEC), in portfolio Ultimate Price Momentum v3 and try to guess how many shares of HLB and WTN we now have.

There are so many possibilities:
Do we want to keep the actual relative weights?
Do we want to share the cash generated by the sale of TEC equally between the 2 remaining stocks?
Do we want to buy more of one of the stocks (and which one?) in order to have (or show) better results.

The spreadsheet that I attach will show my calculations, where I made 2 scenarios of the easiest solution: buy more of either HLB or WTN.

In the first case: I buy 11,418 new shares of HLB, and get a performance increased from -36.78% to +30.36%. (Performance of WNT stays the same: 40.55%) In this case though, the amount of money allocated to each stock is closer to beiing equal as in the next case

In the second case: I buy 1614 new shares of WNT: the performance of WNR jumps to 107.66%, and the performance of HLB stays naturally at -36.78%

But the relative weights of each are not so close to 1 anymore.

From the spreadsheet in the case of a new buy, it was not too difficult to understand (at least the calculations, maybe not the underlying logic of it).

In the case a reallocating the cash generated by a sale, it was not that easy.

How does SSP really reallocate the money?

I would like dhamel to explain me how he "got it" so easily!

Does all this make sense? It's a hard work!
The signals might be automatically generated, but I doubt that the reallocation is done without a human touch...

Louise

[Super Stock Picker]

Hello,

First, 'll give you some pointers to older posts where a lot of those topics are already covered:
- How do we calculate the portfolio performances? This one explains the weighting rule.
- How to reallocate profits?
- Rebalancing Porrtfolios

Plus, I'll try to add some other comments:

This spreadsheet gives an example of the reallocation of the shares in the portfolio.
There I had a surprise:

I read:
New Orders
      Sell TIM
      Sell CUQ
      Sell ALS
      Sell DRX
      Buy VRS

If I had received such an email, I would have thought it's time to sell TIM, CUQ ALS DRX, and to buy VRS. Not you?

Well it was not so.
Only parts (odd lots) of the 4 "sell" were actually sold:
TIM 479
CUQ 166
ALS 126
DRX 532

Just enough to have enough cash to buy 1017 shares of VRS.

Indeed, the only recommendation you would receive on that day is to buy VRS.
But, as the portfolio is already fully invested (no cash left), you need to free some cash first from the other positions in order to open the new VRS line.
There is no sell recommendation for the other stocks, but you need to sell parts of the positions to buy the new one.

If I compare the "New Weights" in the Theoretical New Portfolio, before the orders, I can see that to a few decimals, all stocks are close to 1.

Weights will very often be close to 1 as the formula is 1 + performance of the recommendation. So, a recommendation needs to reach 100% before the weight of the stock is 2. That happens, but not that often

So now I make the calculations for the last order (sell TEC), in portfolio Ultimate Price Momentum v3 and try to guess how many shares of HLB and WTN we now have.

There are so many possibilities:
Do we want to keep the actual relative weights?
Do we want to share the cash generated by the sale of TEC equally between the 2 remaining stocks?
Do we want to buy more of one of the stocks (and which one?) in order to have (or show) better results.

After a stock is added or removed from the portfolios, the remaining stocks are still weighted with the same formula 1 + performance of the recommendation.
This equation gives you how to allocate your position the same way as we do for our portfolios
Do not forget that the formula uses the performances of the recommendation (as listed on our website, not the performance of your line that would be different if you buy lot of stocks not all at the same price)

The signals might be automatically generated, but I doubt that the reallocation is done without a human touch...

It is all automatic all the same. You just need to apply again and again the same weighted formula...

[garilou]

Thanks Super Stock Picker,
Here are other small questions or comments.

1. You are many "Super Stock Picker", so I'm never certain I will be read and answered by the same person. This makes the communication somewhat difficult, at least from my side. I'm not even certain if you looked at my spreasheet.

2.
You write:

Indeed, the only recommendation you would receive on that day is to buy VRS.

In that case, the spread sheet 50000_portfolio.xls should be corrected, because one can really read:

New Orders
Sell TIM
Sell CUQ
Sell ALS
Sell DRX
Buy VRS

And this is what made me think that positions with Sell orders were not totally executed.

3.
You write:

After a stock is added or removed from the portfolios, the remaining stocks are still weighted with the same formula 1 + performance of the recommendation.
This equation gives you how to allocate your position the same way as we do for our portfolios

But the "equation" 1 + performance does not include the amounts of shares.
The performance changes every day, so does then the weight of each.
What could the weight equation tell you about how to re-allocate (in number of shares) the cash produced by the sale of TEC?


In one of the references that you gave to me,
http://www.superstockpicker.com/forum/index.php?topic=3.0

you wrote:

Indeed, we overweight the good performers and underweight the bad performers.

This topic treated of the question of how to re-allocate in case of a new buy. Not of the present situation of re-allocation in the case of a sale.

Anyway, this is what I did in my calculations, buying in the second case only shares of the best performing stock, WTN, but the result was totally illogical: buying a few more shares of WTN increased its performance from 40.5% to 107.7% on the very day they were bought!
Never happened to me in real life !


OK! Let's first agree that the whole is very theoretical, because it would mean that one is able to buy (or sell) odd lots of stocks at the closing price!!!
In real life, results are maybe not exactly the same as yours, but still very interesting...  at least in bull markets.
In my case, the biggest profits I had were when you sold IMN: I shorted it twice, and regret already to have covered my second short last Thursday.

But since I love playing around with numbers, I would still like to understand, and I have spent so much time trying to figure out how to do it.
I have no problem calculating the weights, once I know (or assume) the number of shares and the price bought!
I understood pretty good too how you calculate your performance, even though I an not yet convinced, but I'll think more before I discuss the way you do.

But the main difficulty is: we do not know how many shares the portfolio, in this case v3,  are held from each of the stock before the sell of TEC.

In my calculations, I guessed them, assuming that at the beginning, all stocks had the same $ value, (which was not the case since v3 has been running for quite a while) since this is what you suggested somewhere else.

And later you tell me:

It is all automatic all the same. You just need to apply again and again the same weighted formula.

Again and again... you certainly have a very sophisticated macro if its done automatically since (again) the formula for the weighting does not include the number of shares!


Since you seem very open and not reticent to explain your system, could you tell us simply (in numbers or in proportions) how many shares were in the portfolio when it still held HLB, WTN and TEC, and how many shares from HLB and WTN were bought (and at what price) after TEC was sold?
Because as today, if I look at the portfolio v3 and its history, I always see the buy date and buy price. Did you keep the cash generated buy the sell of TEC in the form of cash, which you normally do not recommend?

Please explain how the equation 1 + performance can calculate (without a human decision) how many shares of one or both stocks left in the portfolio to buy?

Am I asking too much?

Thanks in advance,

Louise

[Super Stock Picker]

Hi,

Sorry for the delay. We had to handle this server issue these last days and we lost track of some stuff like this.

So, the answer to all your questions is in our allocation formula and why it is easy to apply once understood properly.

It is a good thing to discuss in details as many others are wondering the same so if this explanation is read by a lot of people that would be a good thing.

First, our portfolios will never indicate the number of shares..... because we have no idea of the value of YOUR total portfolio. So, when we set up those strategies, we have made the choice to show our results as an index would do. It has no size, only a proportion of each instrument that gives the final performance.

Then, in order to be always fully invested (no cash position), we have made the choice to overweight the good performers versus the low performer. Our portfolio are "long-volatility" so the more volatility the better. We push that way with our rule.

Now, what we could show on the site, as it is very simple to calculate is the proportion of stocks in the portfolio. We only miss time to implement this properly.

To answer your question, I can tell you, right now, how many shares of WTN and HLB you should have in your portfolio following the sale of TEC..... only if I could know the value of your portfolio...

So, I'll assume 50,000 as in your example and you'll modify this value to fit your numbers.

To calculate our weighted formula, you need to use the performance OF THE RECOMMENDATION AS POSTED ON THIS WEBSITE. It is not the performance of your line, that could be different if you buy the shares at different time and price.

So, today, in the Ultimate Price Momentum v4, the performance of the two recommended stocks are:
- WTN: +79.59
- HLB: -40.1
Then, the weight of those two stocks are:
- WTN: 1.7959
- HLB: 0.599
- The total of the portfolio is the sum of the two: 2.3949
With 50,000 in your portfolio, you would allocate:
- WTN: 50.000 * 1.7959 / 2.3949 = 37494
- HLB: 50.000 * 0.599 / 2.3949 = 12524
You divide those values by the close price of today, and you get the number in shares...

That would have been the formula to apply after the sate of TEC and at the moment of re-allocating the money on those two lines.
You first sale the TEC shares. With the proceed and the two other lines of your portfolio, you know the total value of the portfolio. Then, you apply the formula. And finally you buy what ever share are missing to get to the numbers.

It is theoretical as indeed you cannot do all these operations with the close prise at the close of the session, but if you do that in the last 30 min of the session, you could come up with really close numbers.
You could also round the lots to the closest 100 if you'd like.

Last point about the weights that are different every day:
for sure, as the stocks will not have the same performance, the weights will constantly change. But, if there is no new buy or sell recommendation in a portfolio, you have nothing to do to keep your portfolio allocation in line with the above formula.
Do the calculation two days in a row, the portfolio value will be different, the stocks weights will be different, but the number of shares will be the same...

With numbers:
you buy two stocks, equally weighted, 25,000$ each.
Next day, one stock goes up 10%, the other goes down 10%.
You portfolio is not equally weighted anymore but you didn't do anything to come to that point.
Apply our formula on those numbers and you'll see, obviously, the number of shares is still the same.

To conclude this long post, the formula with this weight strategy is used mainly to keep the portfolios always 100% invested whatever the number of stocks in the portfolio is. Plus, in order to get the maximum of exposure to the volatility of the stocks in the portfolio, we have chosen to overweight the good performers more than applying an equally weighted strategy. We are following trends. As long as the trend is there, we want exposure to it.

[garilou]

Wow Super Stock Picker!

This answer was really good and deserves another applaud.
(although somewhere else, I'll "smite" you because the answer was totally irrelevant to the question asked)

If you wanted your post to be read by many members, I think you reached your goal.

What I had not seen until now, in the formulas, was the division by the total weight:

Total available cash x weight for a specific stock / the total weight.

Now I present you an hypothetical case of me being not a Senior member but a total Newbie.
By Newbie, I understand not only someone who is new to trading but also new members who might have a lot of trading experience, but are new to the SSP system and "How it works",
I attach my .xls with all calculations.
I think this post (if you confirm that I really understood this time) should also be read by all "Newbies".

In that spreadsheet,  I first construct a totally new portfolio.
Then I react to a sale, and reallocate the money.

I know that sometimes, the calculations will  be more difficult, if for example, in order to go with a new buy, I must sell part of my other positions.

I guess everybody who will read this post will be able to open the .xls spreadsheet.
I worked a lot (I think I could deserve an applaud for this one  ) and I do not feel like copying every thing in words here.

Just a few notes copied from that spreadsheet:

Preliminaries:

Step 1:
Consult SSP and choose a Portfolio to follow.
(Just for the sake of making it simple, I chose Ultimate Price Momentum v3 because there were 3 stocks in it: ONR, HLB, WTN).

Step 2:
Read all the posts from Super Stock Picker on "How in works" in order to really understand :-)

Step 3:
Decide the amount I want to invest in this portfolio
[I'll assume I am very rich and I can afford to put 50,000$ in small volatile stocks.]

Step 4:
Calculate how many shares I'll buy from each stock in the portfolio.
My only departure: I buy full lots of shares.

I also assume I start all this on July 17 (2008)
I use the data from SSP site for Ultimate Price Momentum v3 as of July 17.
http://www.superstockpicker.com/portfolio_Ultimate_Price_Momentum_v3_historical_orders.html

===================================
I computed my-self the data for July 18, because at the time I did the calculations the data for July 18 were not yet updated on the site.
Now they are, and I am very proud that my calculations matched exactly!

I also assume something that did not happen: a sale order from SSP for ONR, in order to see if I understood well the re-allocation of new cash generated by a sale.

All this means a lot a discipline, and most of all (at least for me) to resist to the temptation of not selling (or not buying) when I receive no order to do so.
Maybe because I use the volatility to trade very often, and to short a lot!

Please tell me if I at last really understood, because I just happen to have so cash available (not $50 000 though), and I might try to start to follow you system more systematically then I did until now.

Should I tell you the truth?
Although you show nice returns, I am a little bit afraid! me who usually spend a lot a time first with technical research, looking at all the technical indicators and then in fundamental research (but never trust analysts recommendations)

I'll try, and I might spend less time on front of my computer and more in my garden or on the back of my horse if I follow you orders  .

Thanks again,

Louise

[Super Stock Picker]

Hello Louise,

Sure, you deserve an applaud for that, this is great work!

A few more little steps and that would be the perfect article to send to newbies indeed.

First remark, in order to download the attachments on the forum, YOU NEED TO LOG IN FIRST!

So, in your example you got everything right until the reallocation of the cash from the sale on day 4.
In order to know how many shares you should buy of HLB and WTN, you need to apply the formula with the weights found on line 70-72 to the whole portfolio (current holdings + fresh cash) and not only to the cash coming from the previous sale.
The idea of the new weight is to allocate the whole amount in the portfolio and to buy the corresponding amount of missing shares of HLB and WTN.

A note also on line 108: why is there no change recorded for ONR and HLB?

Once more, congratulations, you are really close to perfection there.

[garilou]

Hi again Super Stock Picker,

I don't know why you tell me:
"in order to download the attachments on the forum, YOU NEED TO LOG IN FIRST!"
I was logged in, and I had no problem to upload it.
Maybe you said that for other members who would like to download it... probably.

You also wrote:
"A note also on line 108: why is there no change recorded for ONR and HLB?'
For ONR I did not think it was important, I was going to sell it (on paper only).
For HLB... the quote (July 18) was in the part "Performance calculations" with the 2 other ones.
The daily change... simply forgot

===========================

OK I have redone my homeworks, and I attach the corrected spreadsheet, somewhat updated with July 21st data.

People who would read this post should read the preliminaries I wrote in my last post:
« Reply #4 on: July 19, 2008, 02:11:28 AM »

But your last explanation made things much more complicated to apply in real life!
In order to re-balance my whole portfolio, (in the hypothetical case of the ONR sale order,) I did not only need to buy new shares, but also to sell others that I already had!
It is fun to do on a spreadsheet, but when it's time to give the orders, I am not sure it is so simple. 
Let's say my spreadsheet is well done for all possible cases the calculations will be, as you earlier, said all automatic: I used a relatively easy one, but eventually, I shall make it more complete, as for the eventuality of a new BUY in an existing portfolio and other cases.
But unless I resign on giving my orders to the market, which I rarely do, things do not get that fast.
But I guess this, like the matter of odd or full lots, would be another discussion.
Anyway, I'll try to build up my new portfolio, and hope all this was not in vain
This whole exercise was to see if I had really understood everything.
Everything from the side of the members, because I guess what exactly triggers a BUY or SELL order remains your secret :-)

Thanks for all the time you take to look so careful at my posts and spreadsheets.
I just hope this will be useful to other members too, from whom I would have like to receive comments.
Maybe they are all in vacations...

Louise

PS: If I get a 100% this time, shall I at last receive my applaud? I'm dying to get 1 karma, whatever it means  .

PS2: If you or other French speaking members would find it useful, I could translate the whole, but only when you tell me it's OK.

[Super Stock Picker]

Hello,

Congratulation again for your work.

I'll add a few remarks here and there...

I don't know why you tell me:
"in order to download the attachments on the forum, YOU NEED TO LOG IN FIRST!"
I was logged in, and I had no problem to upload it.
Maybe you said that for other members who would like to download it... probably.

Definitively, it is a question that is coming quite often, so I wanted to clarify that it is required to log in before getting access to the files attached on the forum.

Thanks for all the time you take to look so careful at my posts and spreadsheets.
I just hope this will be useful to other members too, from whom I would have like to receive comments.
Maybe they are all in vacations...

Thank you for your hard work. It is becoming a great post and it could become a reference that we could send to newbies in the future after they register. It will be very useful, no doubt about that.

PS: If I get a 100% this time, shall I at last receive my applaud? I'm dying to get 1 karma, whatever it means  .

You got it! You deserve it even if you're not at 100% yet...

PS2: If you or other French speaking members would find it useful, I could translate the whole, but only when you tell me it's OK.

That would be great indeed. Such a reference will ave to be shared with the French speaking members too.

But, let's finish up the corrections first...

The main mistake is when you calculate the lots of shares you should buy to build the portfolio at first. You have mixed up HLB and WTN.
I have made correction in red there with my propositions for the lots' sizes.
I guess this was in your previous XLS as well but I missed it the first time.

In my opinion, that would explain why you had to sell some shares when you were only reallocating the proceed of a sale. In that case, I can hardly see how you could come up with selling some shares to weight the portfolio...

Adjusting your file with this modification could be the missing step to get it perfect.

[garilou]

Hi again Super Stock Picker,

Thanks for the applaud  .
I am very happy to think that my work could be useful to "Newbies".

But this time, I would smite my-self if I could  !
After applying your correction, I do not need to sell shares of HLB.
In my new calculations I need to:
1. Buy 4500 new HLB
2. Buy 1400 new WTN.

But if we look at your 50000_portfolio (which by the way has not yet been corrected, if I was right to think it should be) we can see that in some cases, in order to add a new stock, one has to sell shares from the existing portfolio, and that IRL is not so instantaneous as on a spreadsheet:

Assuming that I put my orders on limit (which I usually prefer), it can take a while, especially on stocks that are not heavily traded) and in between the price of the other ones have change, so I must come back to my spreadsheet to recalculate,

The problem will be the same if I sell to the market, in which case, I do not know what price I'll get. When you gave the message to sell TEC I really wanted to sell fast and I sold my 2000 shares to the market, I got 500 at 0.94, 1500 at 0.93, 500 at 0.92 for an average of 0.93. In this case the difference was negligible, but in other cases it could make more important differences.

But for the moment, let us stay in the theoretical, as you say clearly on your site that our result might differ than yours.

I do not attach a second corrected .xls file, I will try to work out a new one, separating the process of building a new portfolio from zero, and then other ones for different cases of buy and/or sell orders, like the one we received for 2008-07-21. It might take me a few days.

Thanks again

Louise

[bryanmcn]

Louis
Perhaps you should set up a virtual portfolio yourself. You seem to know how to keep it updated and SSP can't seem to find the time to update their own.

[Super Stock Picker]

But if we look at your 50000_portfolio (which by the way has not yet been corrected, if I was right to think it should be) we can see that in some cases, in order to add a new stock, one has to sell shares from the existing portfolio, and that IRL is not so instantaneous as on a spreadsheet:

Indeed, we haven't changed those old files. The post associated with it indicates the orders as you would have received by email and the spreadsheet is here to show in more details what orders to execute.

I do not attach a second corrected .xls file, I will try to work out a new one, separating the process of building a new portfolio from zero, and then other ones for different cases of buy and/or sell orders, like the one we received for 2008-07-21. It might take me a few days.

Take your time, it is great work and we know it takes time to achieve this.