As outlined in my first article, my methodology identifies the best performing portfolio on a given date, and the alpha of the portfolio is very close to linear. However, this does not last and the portfolio subsequently tends to index returns.
What does happen is that a new portfolio can be formed which continues to outperform as shown in the following graphs. The bifurcation is quite pronounced. The newer portfolio may retain some of the stocks of the previous portfolio, but adds upward movers and drops laggards. The upward movers are usually near neighbours on my risk/reward metric, so there is consistency in the methodology.
The latest portfolio has outperformed significantly over the past two weeks, due to the gold sector stocks, which appear to be reacting to the gold price, and specialty chemicals sector which have great run ups from time to time. Interestingly, another China stock appears.
The absolute return for portfolios formed as at 2 Sept and 26 August are shown below. It is interesting that even in this market, it is possible to find stocks with positive returns. Stock picking is not dead yet. Each portfolio is labelled by date of formation to avoid confusion.
[Click all images to enlarge]
I have also prepared two graphs showing active return. The top graph shows the active return for the usual 3 month period and the second covers the past two weeks. Bifurcation of returns is easier to identify in the later graph.
As to the stocks which comprise these portfolios, the portfolio formed as at 2 September portfolio contains the following:
CSR
China Security
Business Support Services
RGR
Sturm Ruger
Defense
GRO
Agria Corp
Farming & Fishing
AUY
Yamana Gold
Gold Mining
BVN
Buenaventura Mining
Gold Mining
NEM
Newmont Mining
Gold Mining
ABX
Barrick Gold Corp
Gold Mining
KCI
Kinetic Concepts
Medical Equipment
MDS
Midas Group
Specialized Consumer Services
VHI
Valhi Inc
Specialty Chemicals
POT
Potash Corp
Specialty Chemicals
MTZ
Mas Tec
Telecommunications Equipment
SWM
Schweitzer Mauduit
Tobacco
KNM
Konami Corp
Toys
NLC
Nalco Holdings
Waste & Disposal Services
For reference, the 26 August portfolio was composed of the following:
RGR
Sturm Ruger
Defence
CSR
China Security
Business Support Services
AUY
Yamana Gold
Gold Mining
AEA
Advance America Cash
Consumer Finance
KNM
Konami Corp
Toys
BTH
Blyth Inc
Nondurable Household Products
ZNH
China Sthn Airlines
Airlines
NLC
Nalco Holdings
Waste & Disposal Services
BVN
Buenaventura Mining
Gold Mining
MLI
Mueller Industries
Industrial Machinery
KCI
Kinetic Concepts
Medical Equipment
SLW
Silver Wheaton
Platinum & Precious Metals
COG
Cabot O&G
O&G Exploration & Production
ABX
Barrick Gold Corp
Gold Mining
AN
AutoNation Inv
Specialty Retailers
My experience is that stocks at this end of the risk reward spectrum might have limited time for out performance, usually two to three weeks, hence our title. This is a high turnover strategy.
Disclaimer: The content in this document is provided as general information only and should not be taken as investment advice. The contents in this explanatory paper shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author. The author may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis on this site is ultimately your responsibility.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.