This is an idea strongly promoted by IBD. I think they put the limit at 8%. If that really worked, the academic world would have discovered it long ago. They have data dating back 100 years and could run the models on it to confirm or deny. There is no lack of grad students and computing power.
IBD has been publishing their data and theories for about 30 or 40 years or more . with their 8% limit and it appears they still have to sell newspapers and books to make a living.
Back testing serves no purpose. Past results is no guaranty of future results. If if works in the research experiment and turns in super results, are you going to put your money on the system based on last year’s results and stick to the guidelines you yourself set? I truly question that because the times will be different, so the results WILL HAVE TO BE DIFFERENT
The only true system is to actually do the research and put your money on the table based on your goals --Something like what Saul does. The copy-cats hurt his performance because they don’t have the same temperament as Saul does and there is a tendency for .copy-cats to attempt to front run It is very difficult doing what Saul is doing with everyone breathing over his shoulder. That could be a reason why his results have not been as robust over the past 3 years since he went public with this public site.
My hat is off to you Saul, but I believe you picked a hard game to win.
It is very difficult doing what Saul is doing with everyone breathing over his shoulder. That could be a reason why his results have not been as robust over the past 3 years since he went public with this public site.
Hi B&W, You are correct, posting what you are doing, and your results does, of course, add a layer of stress. As to whether it has affected my results, I don’t know, but I don’t think so. I’m pretty thick skinned and just go on with what I’m doing the best I can. I would probably attribute any change in my results to a couple of other factors.
First of all, the increased size of my portfolio makes it less nimble. Specifically, it is much harder to invest in really low cap stocks because they are less liquid and it’s more difficult (and it’s more dangerous), to take a significant percent position in one. But it’s simply harder for me to move around when necessary when positions are bigger, even with large cap stocks, not because they aren’t liquid, but because of psychological factors about taking or selling a large position.
Second, I think that the incredible availability of information, and mis-information, and unfounded rumors, on the internet has changed investing as well. Now, if a company misses guidance by 2 cents, all the world knows it instantly and half of them sell the stock at once, which makes things very labile, compared to the days when only a few analysts knew the guidance, and no one else found out anything until a few days after earnings were announced to the analysts, when they got around to writing up their recommendations and mailing them out. The public often wasn’t even allowed to listen to conference calls, and there were no transcripts. I don’t know if all that has affected my investing for the better or the worse, but it certainly is a different world.
Saul, thank you for adding a new word to my dictionary!
labile liable to change; easily altered.
• of or characterized by emotions that are easily aroused or freely expressed, and that tend to alter quickly and spontaneously; emotionally unstable.
I think the mistake that is being made is thinking that results must be continually improving. JP Morgan said it best when asked what the market would do: “It will fluctuate.” I consider that to be The First Law of Markets!
The market is not the only place where variation upsets some people. Some people need to have a fixed salary to feel comfortable even if commissions, paid unevenly, would in the long run produce much higher income.
The copy-cats hurt his performance because they don’t have the same temperament as Saul does and there is a tendency for .copy-cats to attempt to front run It is very difficult doing what Saul is doing with everyone breathing over his shoulder. That could be a reason why his results have not been as robust over the past 3 years since he went public with this public site.
fwiw, unless you run very large sums of capital this is almost never true in my opinion - there isn’t enough money here on Fool to alter stock prices over any period longer than a few hours at most (the market is VERY big place), so the idea that lack of performance is due to Saul’s visibility is doubtful.
Course, on the other hand, posting results real-time with all decisions would be INSANELY stressful, and I can’t imagine doing it without it impacting something. Besides, a tweak here or a tweak there in any particular price can shift the returns in a heartbeat, so unless Saul declares DEFEAT and sells his picks at a loss there is no conclusion here, so the idea that ‘his results aren’t as robust’ is absolutely irrelevant for now.
Thanks for all you do Saul. And for heaven’s sake, be perfect…
Anybody that traded in the 1990’s and kept meticulous records had their numbers boosted significantly by that greatest bull market ever. These lucky investors are able to show incredible average returns. It will take many years for those averages to erode back to reality.
The S&P 500 had an annual return of 18% in the period stretching from 1982 to 2000. Everybody was a genius back then.
if it matters, I get paid to do this.
I have meticulous records
Captools http://www.captools.com/
I’ve owned it for almost 30 years now
I know every single stock’s return and can quote you gains on any stock in any period in the last 30 years. I can quote time weighted and dollar weighted ROIs over any period in the past 30 years. The vast majority of my data is downloaded directly from the custodian.
I have seen that statement before and it is one I struggle to understand. Can somebody please explain why I should not copy Saul’s every step?
Cause Saul might 1) die.
Cause he might get 2) sick
Cause he might have 3) an off-year (he has before; it happens)
Cause his style might not 4) match yours
Cause his 5) time horizon might be different
Cause he 6) might fail to post
What Saul is doing is an exercise.
The way to approach is to treat each idea as a tip and then do your own analysis and any idea that interests you. Period. If you like an idea, you ask questions to further your understanding, and you take 100% responsibility for your results.
Anybody that traded in the 1990’s and kept meticulous records had their numbers boosted significantly by that greatest bull market ever. These lucky investors are able to show incredible average returns. It will take many years for those averages to erode back to reality.
Not sure what the point is, but possibly a relevant snip from Saul’s KB:
“At this point I have a little reminiscing: I remember in 2010 there was a lot of talk in the media about the “Lost Decade” for the stock market, which apparently had finished roughly unchanged after 10 years. At this point I was up 570% in those same 10 years, in spite of 2008, so I was wondering what they were talking about.”
I have now back-tested the proposed portfolio management procedure on a mock equal-weight portfolio of 12 growth stocks supposed to have been created on January 6, 2015. The stocks were chosen on the basis of the proposals by Saul and other contributors in January 2015. The results are given below.
For 4 stocks, AIOCF, POL, WAB and XPO (marked *), the year end loss was more than 10%. As it is now difficult to work out manually how the sale proceeds would have been redeployed for adding to the then three top performing stocks as required by the procedure, I have assumed the sale proceeds were kept as cash. Although exact prediction is not possible, this assumption will provide a lower overall gain than with the full implementation of the proposed procedure.
The year end gain of this portfolio as a whole is 10.46% with about 36% of the original investment remaining in cash. Compared with a GAIN of 3.59% of the S&P 500 Growth ETF, IVW (108.81 → 112.72) and a LOSS of 7.03% the S&P 600 small cap value ETF, IJS (112.88 → 104.94) the performance was quite satisfactory.
Percent Gain (loss) of stocks as on January 6, 2016, which is one year after purchase:
For 4 stocks, AIOCF, POL, WAB and XPO (marked *), the year end loss was more than 10%.
Alpha, what you proposed was different! You are using a starting and ending price, but what you proposed was to sell any stock that HIT “down 10%” when it hit it!!! You would thus have to sell any stock that ever hit down 10% from the purchase price. As probably almost all of them did hit down 10% on or about Feb 11 last year, you would have been sold out of almost your entire portfolio at a 10% loss, and been all in cash on Feb 11, just in time to miss the 20% rise that took place in the next couple of weeks.
Just for example BOFI dropped to $13 something in Feb from $17 something in Jan. You’d certainly have been out of that. You bought SWKS at $66, but it fell to $56 in Feb, etc.
My proposal is to sell if the price goes below 10% of the ‘purchase price’, not the then price. To the best of my reading of the charts the price of the stocks other than the four I mentioned did not fall below 10% of the ‘purchase price’ and were not therefore sold.
I will accept that there could be cases where a stock hits the proposed sale criterion in the middle of the year but at the end of the year shows positive gain. In such a case one has to sell it at that time. However, please note that the sale proceeds are to be immediately used to buy additional shares of the three best performing stocks at the time. It just happens that this situation did not arise for the stocks in the mock portfolio.
I should also add that I did acknowledge in my original post that the procedure may lead to a portfolio consisting of a much smaller number of stocks than at the beginning. Perhaps there should be a provision to add new stocks in the portfolio in the middle of the year if that happens, but it is difficult to foresee this.
As an alternative to bring the proposal more in line with reality–Why not use your personal portfolio. Using your own guidelines that you proposed you could easily see if the system you propose would have improved or hindered your portfolio performance in 2016, and if so, by how much.
Figures might have more meaning against a true portfolio and the averages for the year.
Suppose you have a $20 stock and you place a stop loss at $18.00, that does not guarantee that you get out at $18.00. At $18 the stop loss order becomes a market order and it goes into the sell queue. It could sell at $18, or $16, or $6.
To solve that problem there is the limit stop loss order. Say you set the stop at $18 and the limit at $17. If the stock goes to $16 them your order is not executed.
A wise old broker I used to have recommend “mental” stop loss orders but not real ones.
My proposal is to sell if the price goes below 10% of the ‘purchase price’
Doesn’t that introduce the dreaded price anchoring thinking and behaviour into the equation - again something that Saul writes about in his strategy and approach?
As we all know there are a great many ideas for investment management and there are volumes of very well known books written by successful investors. In spite of all that we see experienced well paid fund managers delivering poor results time after time. Surely, they have all read these books from cover to cover, again and again!
Clearly, no single method has been established that an investor can follow at least with a high chance of success. Maybe, it cannot be done.
Having followed the discussions on this board almost from its inception and having seen the amount of effort involved in discarding bad stocks and adding new ones, not always with good outcome, I wanted to try a rather simplistic (even elementary) approach myself. In fact I have created a eleven stock growth portfolio and would be monitoring it closely and managing it using the rules I proposed. I am not sure selling a stock when the price is X% below the purchase price is ‘price anchoring’, but if it is then that can’t be helped.
My intention is mainly to beat the S&P 500 growth index. Very much depends on the initial selection of stocks, and I will be heavily relying on the information and suggestions I get on this board. In future years I may look for suggestions from other sources as well.
I will discuss the results of my study at the end of the year.
I think the point is, this is an experiment that has been conducted many times over in various themes and variations. There have been backtested against historical data and followed in both real money and virtual portfolios. Periodically, someone comes up with something that sounds good and backtests well for some periods and then falls apart completely over some other prior period. A contributing factor is fitting to historical data even though trends and patterns keep changing, so that which worked at some time in the past fails in the future.
Whatever you set up and whatever results you get over one year will tell you nothing about what will happen 5 or 10 years hence. In a way, the worst outcome will be that it does well this first year and so you dive deeply into it with real money and maybe it even works for a while then, so you begin to deeply believe in it … only to have your faith and wealth shattered when it fails to work and you fail to act because you now believe in your “system”.
Now, I know that you aren’t talking that way now, so this might seem harsh, but I am being very blunt because even believing the experiment is worthwhile is starting down this path. The best thing to happen would be if your paper experiment failed miserably.
Whilst I think it is great to have a real world experiment rather than back test with some mechanical rules in place and I certainly don’t want to pour cold water on your enthusiasm and efforts; I can’t help but think why.
Basically I worry you might be answering a question that no-one is asking and that doesn’t survive.
First off - unless they cure ageing (which I guess is a possibility), not Saul or any of us are going to be around forever which means that you won’t have his 13 stock starter holdings to work off.
Secondly - if you do find it beats the S&P, great - but we know Saul can beat that anyhow so again what’s the point.
Thirdly - if you produce your results the one interesting comparison is whether it beats Saul. So you then have a rule based documented mechanical system with full trade transparency versus Saul’s record which does not totally disclose intra month buys and sells, top ups or top slicing so you don’t know what you are comparing against and where the delta arises.
I do think Saul has proved over and over a master at ruthlessly culling positions and choosing when to top slide and add to positions. I would be surprised if mechanics could beat that, on the other hand none of us are as good at Saul at this game so we could choose to learn from Saul, build a mechanical system that half captures this or just copy. Copying doesn’t help anyone in the long run, however a mechanical system could be an interesting experiment if it was able to capture, codify and improve on key success factors of Saul’s investment decisions.
To me the biggest investment decision success drivers that Saul has demonstrated that would be interesting to automate might be:
Which stocks to buy, why and when
Which stocks not to buy and why
When and whether to add to holdings
When to sell and why
Saul already has some other disciplines/rules on: always staying fully invested, avoiding Chinese stocks etc, what kind of instruments to own.
I’m not sure your mechanical system would help on those. I think the 1PEG metric is a start on the first and second
It seems to me that experience, psychology and judgment drive the rest which is hard to capture in a quant/mechanical system.
If you were to experiment with mechanical rules that helped with some of these questions it might be very interesting.
I don’t expect to match Saul’s results over a length of time nor is it the intention. Doing substantially better than the index is the objective. Anyway, I don’t think anyone exactly knows that saul’s method is. So, I will try my method and learn from experience.
I totally agree with the top items in Ant’s list, namely, it is of utmost importance to choose the right stocks, to buy them at the right price and discard them when the story changes. These are the most difficult parts of any portfolio management.
