Anybody who is beating these markets? Can you share what you are doing right?

Just curious, what does it takes to be beating the markets ? Is it some simple factors? Diversification?

The only thing thatā€™s helped offset my equity losses is short commodities. But thatā€™s not a game I would try to learn quickly during this cycle. However, it can be a great diversifier in the right environment.

Cash, bonds, shorts, and puts/volatility.

Iā€™ve stayed fully invested in equities and Iā€™m beating the markets. SPY was down 12.49% in March and Iā€™m down 9.31%. In February, SPY was down 7.92% and I was down 5.98%. My current drawdown from my peak (2/12/20) is 18.80% while SPYā€™s (2/19/20) is 23.37%.

What does it take to get these results? Itā€™s not just luck, since Iā€™ve beat SPY in 33 out of 53 months since I started using ranking systems on Portfolio123, with an excess CAGR over SPY of 17.39%.

What it takes is very hard work. Constant investigation into what factors work and what factors donā€™t, constant testing to see which factors work well together, constant consideration of new ideas. Constantly making minor tweaks to your system but never departing from it. Reading constantly and learning from what you read. Following strict rules and never letting your emotion get in the way. Being willing to hold your nose and buy companies with terrible reputations when they show up in your system. Looking at quality first and foremost, but allowing value, growth, sentiment, momentum, and volatility factors to influence your buys and sells. Emphasizing high alpha and low beta in strategy design. Prioritizing fundamentals and concentrating on accounting principles. Never trying to time the market, never doing any tactical asset allocation, never spreading your bets too thin, never owning more than thirty or thirty-five stocks at a time, never trying to guess the direction of the market. Investing internationally, not being afraid of ADRs. Casting the widest possible net. Avoiding risky stocks (overvalued, poor fundamentals). Accepting volatility, but minimizing it through wise portfolio management. Attempting, through a carefully designed system, to look at every stock from every significant angle in order to reduce risk. Above all, STICKING WITH THE PLAN, no matter how painful it gets.

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40% cash and a bit of precious metals.

Marc,

I wonder if you would expand on your method.

I understand from one of your posts that you are looking at the market ā€œregimeā€ and working on what you will be doing after the problems with the virus: Tired of Covid-19; thinking about the next ā€œregimeā€

Your Cherry-Picking the Blue Chips model now has the same return as the benchmark after more than 6 years (see image). That is a lot of work and P123 fees to keep up with the benchmark.

Fortunately, you said in a post a while ago that you moved out of Cherry-Picking the Blue chips. I may be wrong but I never understood you to recommend staying with one system.

I wonder if you would take the time to correct anything I might have gotten wrong so far and expand on your methods here. I do understand that it may be a repeat of your courses but it seems that some people thought you recommended staying with a single system.

Some have said P123 was started with the purpose of developing a single system to stay with in all market ā€œregimes.ā€. Is that correct?

Do you think that it is even possible to beat the SP500 benchmark with a single ā€œall-weatherā€ strategy?

I am happy with any memberā€™s success. I do not think we are all going to be able to move to a single micro-cap strategy just because of liquidity considerations alone.

If there is a method that P123 recommends or caters-to I wonder if you would clarify what that method is.

It does seem that more and more history is being re-written. We are being told that P123 was developed to use stock IDs and even/odd universes to allow for bootstrapping on spreadsheets. Or to allow for splitting of universes and running correlations. Or whatever (changing) quantitative method is recommended recently.

Was P123 developed for using (ever changing) quantitative methods on micro-caps?

If it was developed for this, is it P123ā€™s policy that we should be doing all of this on spreadsheets and that this should not be streamlined?

If that is the official method for P123 I would prefer not to be c*ssed out when I do that myself. I defintely think there are better ways to do this than on spreadsheets and programmers should be looking at that if these are the methods being recommended by P123.

I am good with these quantitative methods. I can use them as well as anybody here. They should be streamlined if this is indeed the P123 method.

BUT, I donā€™t think these methods are for everyone. There are a lot of great strategies the P123 members have described that do not involve endless use of spreadsheets, THANKFULLY.

I am thankful for these methods and I think none of them are ā€œsilly.ā€ Personally, I would prefer to use ANY method that Yuval may think is ā€œsillyā€ rather than try to do bootstrapping in a spreadsheet.

And personallyā€”even though I like (usable) quantitative methodsā€“I look at the market regime, as I think you do Marc.

Best,

Jim


Nice post. What do you mean by quality?

I mean factors based on fundamentals (quarterly and annual SEC filings) that donā€™t include price. For example, the ratio of total accruals to total assets, the ratio of net operating assets to total assets, the stability of sales, asset turnover, debt to EBITDA, and so on. I also include growth rates in quality factors, but many people donā€™t.

I wonder when a more streamlined ETF history will be available (for use as a universe). Is this still being planned?

I have had great success selecting diversified ETFs. I use MPT in similar time-periods to get a first idea of which ETFs to select. I then look at how the present market regime may affect those ETFs.

I then use discretion to decide which of these ETFā€™s to exclude or overweight or underweight.

Georg, thank your your idea of using sims/ports to select particular stocks from ETFs.

I would like to look at using sims/ports to select stocks from those ETFs. I would then use Marcā€™s ideas on DDM to make final discussions on selecting or excluding individual stocksā€”taking the market regime into consideration.

For an example on this, maybe I like QQQ but perhaps the port excludes Tesla. And maybe I exclude some consumer discretionary stocks if I think people will not be going into crowds as much for a while. Then look at the DDM for these stocks.

Selecting ETFs using the above method has been very effective for me. Thanks to Georg and Marc it may work even better in the future.

Marc, thank you for making ETFā€™s history available in a usable manner on P123 (if you are still planning on doing this).

Best,

Jim

Iā€™m down about 8% from my all-time high vs about -25% for the Russell 3000. To get there, I dumped my model, held stocks that I think will do OK under quarantine conditions, wrote covered-calls, bought a couple of healthcare CEFs, and bought OTM QQQ puts. The puts saved my account.

So what does it take to beat the market? In this case, recognizing that this isnā€™t the normal, periodic, garden variety repricing event. Massachusetts just extended its non-essential business shutdown to May 4 (from April 4). I think other states will follow and that the national economic impact will be greater than expected. Iā€™m also following several traders on twitter and my impression is that most of them are operating under a business as usual attitude.

Iā€™m continuing to lower my long exposure and going more neutral. A great deal of money can be made over the next several months and if I were younger, I would be betting on the short side.

Walter

thanks Yuval. Can you please also let us know the median market cap of you portfolio? Is SP500 the right benchmark? Though if you beat SP500, you probably beat all other benchmarks. Some characteristics like portfolio level ROA, P/FCF, P/E etc compared to benchmark would be nice also.

I appreciate your willingness to share

Yuval,

Why not post your actual portfolio as an R2G, so we can see/ track itā€™s performance moving forward? The issue for the average P123 user with most stock systems that ā€˜beat ETFā€™sā€™ is still beating them after transaction / trading costs and after paying the ā€˜model builderā€™ and system runner theyā€™re ā€˜hourly rateā€™ for maintaining, building and revising and trading them. If you add in whatever your hourly salary rate is X number of annual hours and then also subtract out taxes, trading costs, etc ā€“ the gains you need to have on anything thatā€™s truly short-term cap gains ā€“ are significant.

So, Iā€™d love to track your ā€˜Yuvalā€™s best / live portā€™ R2G and see how it does over longer periods. That would be interesting for me, and maybe a lot of us.

Best,
Tom

Yuval,

Whatever you decide on this I would ask that you not use your ports as some sort of proof of how we should be investing.

Again, do what you want on this but I would be happy if you never discussed your ports again and broadened you ideas to include what Marc and other people are doing as reasonable ideas.

I do like what you do. That is not my point. Itā€™s just that I am now usingā€“and likeā€”other ideas expressed in the forum. Their ideas should not be compared to your ports before deciding whether they might be good ideas.

Best,

Jim

Well played, Walter.

We acted similarly, with almost identical results. After the first leg of selling, we kept the stocks (from the models) that we thought would outperform, and hedged them.

Do whatever it is that Bill Ackman did.

Hi Jim,
Whatā€™s MPT standing for? Just like your approach, I want to thank Georgeā€™s idea about using ETF as universe. This saves me since I was able to dump my stock very quickly in bad time.

Iā€™m down around 1% this year. Sold half stocks quickly after virus start spreading in US. I bought long dated put to protect my account. I already sold my puts. Iā€™m rebuying out of money IWM puts while SPY is around 260. And will buy more if it goes higher. And start adding positions after I have enough puts to protect my account.

Does anyone know what Bill Ackman actually did (what he bought) to have 1:100 ratio hedging power?

Terry

Median market cap is currently $150 million.

The S&P 500 is not the right benchmark. I used it because if I werenā€™t doing this, Iā€™d have my money in the S&P 500. If I compare my portfolio performance to a benchmark like the Russell 2000 or the Russell microcap index, it looks far more stellar.

Median ROA is 6.6%, median price to free cash flow and TTM p/e are both 20.

I did just that a little more than two years ago. Itā€™s here: https://www.portfolio123.com/app/r2g/summary?id=1523689

Terry,

MPT stands for modern portfolio theory.

Let me know if I can expand on that or send you any Python code to find the mix of ports and ETFs that historically give the best Sharpe Ratio, lowest variance, gives a target return or a target variance.

A more advanced use would be to predict the expected return of different ports/ETFs and plug that into the python MPT. This could be discretionary such as: ā€œI expect XLV to outperform and XLK to underperform.ā€ You could also say: ā€œMy port had a 30% return in 2009ā€ and plug that in.

Ultimately, as Primus (David) is discussing in another thread one might use a model that predicts the expected return.

I believe one of the main problems with market timing here on P123 is that it tends to be 100% long then 100% cash or short. This is too large of a bet short.

The people that survive are people like Walter and Parker who ā€œhedgeā€ and do not make 100% bets short. This can be a guide as to how large of a bet to make based on the historical volatility, target volatility or target return.

Also, the bet is often placed on an asset that has a negative (or zero) expected return long term. It is possible to find hedges that have a positive expected return long-term. A common example of this at P123 is TLT that historically has done better than the SP500 (maximum period on and ETF port). If you think TLT will not do well with rising interest rates one can use AGG or another bond fund. Maybe you like high yield bonds or gold now.

Heck maybe you like BitCoin as a hedge and you might want to know how much to invest as a hedge and keep a reasonable volatility or risk profile.

I am all about using discretion now and this is where using expect returns rather than historical returns can work with this.

I have to give credit to Marco and P123. The numbers can be plugged into Books to see the equity curves and drawdowns or you can find the numbers in Books through trial and error.

A simple addition to the Books would be to allow entering the expected returns while continuing to use the historical correlation and volatilities. Any study on the subject will show that correlations and volatility tend to persist better than expected returns.

Ray Dalio has turned all of this into the largest hedge fund in the world.

Best,

Jim

Sadly we cannot invest in any of the Designerā€™s private models. And there is a word for one personā€™s returns for a single model: anecdotal.

One designer has a median 2-year drawdown of 46% for all of his models (worse than the SP500).

Acceptable, I suppose, if you know for sure that the particular model you are in will actually outperform the benchmark long-term going forward.

I still like Marcā€™s long methods better but that is my personal opinion based largely on my tolerance for risk and confidence in my ability to predict the future. Well, that and the fact that Marc is a professional with years of experience who has his own understanding of risk and the ability to predict the future.

Walter, Parker, Jeff and even Ray Dalio seem to have made good use of even more advanced methods (e.g., options).

Best,

Jim