I hate having to do this, but I think a few caveats are in order at the start of this post. What I am going to describe is a hypothesis which I am going to test out over the next few weeks. It may or may not prove to be worth trying — clearly I think it may have merit and is worth testing out or I wouldn’t be writing about it. But, long story short, if you run out and trade this right away, you’re a braver man or woman than I am.
Those who read this blog know that I have been looking at the distributions of returns from the ST50 and the IBD50 for a few weeks, without having any great flashes of inspiration. Also, this last week, while updating the ST50 Top-10 portfolio (I generally do this about a week in arrears) once again, I could not help but notice that if we had stuck with the previous week’s selections instead of making the changes reflecting the latest top-10 rated stocks, I would have been about a thousand dollars or more better off. “Tilt, game over”, as we used to say back in day when we had real pinball machines. It also did not escape my attention that whereas my monthly IBD50 Top-10 portfolio has returned 12.98% since August 8th, the ST50 Top-10 and IntersectioNx watchlist weekly portfolios have returned 3.39% and 2.42% respectively for the same period. Now, nothing wrong with those profit numbers under the circumstances but it’s clear that there is a significant performance difference. So, I went back and took a look at what has gone on with the ST50 and the IBD50 since August 8th.
I picked August 8th as this is when I started tracking the weekly ST50 Top-10 portfolio. It also happens to be the low spot in our recent market. And, I don’t have the time, energy or inclination to go back and model any earlier.
In four out of the six weeks, the IBD50 full list outperformed its Top-10 stocks four times or 67% of the time. In the case of the ST50, it was even, three out of six or 50%. And, for what it’s worth, the IBD50 and ST50 beat the overall market’s performance by the same numbers but not always in the same weeks that they outperformed their Top-10 lists. (I determined “market” by averaging the returns on the S&P500 and NASDAQ composite). Conclusion: Just because a stock is rated into the top 20% of its fellows does not automatically make it a winner. Well “Duh!” you might say at this point, but stick with me. If the Top-10 picks can’t be relied upon to repeatedly beat their fellows, why bother with them? Sounds a bit harsh, but you get my drift.
Looking over the lists it became clear that in a significant number of cases the larger lists beat the Top-10 lists because of outstanding returns in one or a very few stocks. So the challenge was, how to capture some of those. Now, an individual may be able to spot these from a chart or sit watching the lists and catch a mover early as its numbers change, but I am looking for a rules-based system that eliminates involvement (i.e., not all of us trade full-time for a living) AND removes emotion, which I confess, also removes the subjective or objective judgement depending on how you look at it. We might not beat the winners but can we do better than OK? (Putting “OK” into perspective, 1% weekly compound wins is 66% a year. I think we get a bit blase and not a little greedy about returns sometimes.)
I went back and looked at the histograms of weekly returns on the IBD50 and ST50. Their originators will be pleased to hear, I’m sure, that there were more positive than negative returns. I went back and redrew the histograms eliminating the central +/- section forcing either a positive or a negative outcome. These are the revised histograms for last week by way of illustration. I’m showing them separately as the IBD and ST lists skew quite differently although it’s not as clear if they are presented together.
I have done several statistical evaluations of these results which I won’t bore you with, but, as I said earlier, you will see that these two lists present very different skews in the results. What we did see was that 72% of the ST50′s results were positive, 70% for the IBD50. We are going to build an accumulation over the next few weeks to see how this distribution stacks up.
So, having concluded that the Top-10 rated stocks did not have any majority on beating the whole lists, and that there were more winners than losers, why not select the ten stocks to invest in randomly? Statistically, this should produce more winners than losers, IF the lists as a whole have more winners than losers. If, and that’s a big if, the distributions stick with the shapes demonstrated here, that tactic should be more profitable in the St50. I used Excel to generate the random selections. After all, a dartboard isn’t truly random.
I’m not going to say what the stocks are until the end of the week, but looking at the results today I had a chuckle to myself as I realized that this is how people get suckered into losing their shirts in the Forex market after they paper trade successfully for a day or two. In the ST50 our ten randomly selected stocks handily beat the full list, the Top-10, and two other ten stock selections picked using proprietary indicators from one of the companies I subscribe to. Random beat the next best, which was the Top-10, by an additional 70%. In the IBD50 the random ten was #2, at half the return of the Top-10 but it beat the pants off the whole list and the proprietary indicators.
Calm down. I’m the first to admin that a day does not a fortune make, but it sure beats bombing on a first date. We will see how this tactic — I hesitate to call it a strategy – works out over the next weeks.