Low-Risk investment strategy ?

Jegersmart

aliciathyme wrote: »

I was hoping the results form a variety of different datasets and lot/investment ratios might have persuaded sceptics that the strategy was in fact "low risk" and worth trying on their portfolios to see if they would benefit. Anyway, thanks for your interest, I agree that ITE Group met the trend condition on 13th December, but the price was higher than previous day so it would not have been a target.

Alicia

Alicia, I think the definition of "low risk" is the problem here as it is very subjective. It may well be that 3 initial holdings did better for some reason than 5 or 10, however that does not convince someone else that this sort of activity or system is "low risk". Generally speaking, it is regarded as lower risk to hold a larger number of equities because you are more diversified - but it doesn't always work like that in reality - it depends on many other factors - foe example if you hold 15 AIM oilers, compared to 1 large holding in Voda for example....:)

I am not a mathematician, but I choose to view your results above as showing that for *some* reason 3 initial holdings performed better than 5 or 10, but not that it necessarily proves that it is "low risk" for the reasons stated:)

With regards to ITE Group specifically (and hypothetically) what happens on the 18th December, when the stock has risen by 20% over the last month but the close is lower? It doesn't become a target on that day?

J

aliciathyme

Jegersmart wrote: »

I am not a mathematician, but I choose to view your results above as showing that for *some* reason 3 initial holdings performed better than 5 or 10, but not that it necessarily proves that it is "low risk" for the reasons stated:)

Maybe the 10:1 version would qualify better from a conventional view of minimising risk, but the median win ratio was 67% compared with 81% for the 3:1 ratio version. And this was measured over 84 FTSE100 datasets each of a 5 year period so I would have thought the chance of multiple holdings at any one time in same sector would be very small.

With regards to ITE Group specifically (and hypothetically) what happens on the 18th December, when the stock has risen by 20% over the last month but the close is lower? It doesn't become a target on that day?

I update my FTSE100 constituent prices mid afternoon to look for new targets. Since you mentioned ITE Group (FTSE250), I had to collect closing prices to check it out. I found ITE Group at 232.5p on 13th December, and since then the closing price has been higher than 232.5p .... until yesterday. 18th December saw a low of 230.84p which could have been a target, but close was 233.1p. Having said that, there was also a better opportunity the day after detection (14th December) with a low of 229.4p.....

My process looks only for a lower price on the day the trend reaches 20%. There are many occasions when the trend condition alone is met, but the point of the additional lower price condition is to reduce the number of targets - if targets are too frequent in one particular equity there is not enough time for price to rise.

Fortunately I make enough out of collecting only mid afternoon prices, otherwise it would become an obsessive activity !!

Alicia

aliciathyme

novadragon849 wrote: »

Hi Alicia

If you don't mind me asking how much have you made using this investment strategy and over how long a period.

I may give it a try in the future, I understand all your steps to this strategy but I still can't get my head round picking the 3 shares to start of with...

You will find all the details in the preceding posts on this thread, but by way of an update, as of yesterday:
original "5yr portfolio" £10,500 now £49,650
2010 ISA from £10,000 now £23,758
2011 ISA from £10,500 to £10,050
2012 ISA from £11,280 to £11,949

There are clearly many places to find advice on what to buy. I have previously discussed in detail the trend part of my selection process, but I would encourage you to try the Sell-to-Buy strategy on your past dealing to see if you could have done better. Assuming you have bought wisely, it's knowing when to sell that is usually a difficult decision. I am suggesting a solution to that dilemma by selling ONLY when you want to buy something new, and pocketing the profit to build up the portfolio.

Alicia

Jegersmart

aliciathyme wrote: »

Maybe the 10:1 version would qualify better from a conventional view of minimising risk, but the median win ratio was 67% compared with 81% for the 3:1 ratio version. And this was measured over 84 FTSE100 datasets each of a 5 year period so I would have thought the chance of multiple holdings at any one time in same sector would be very small.



I update my FTSE100 constituent prices mid afternoon to look for new targets. Since you mentioned ITE Group (FTSE250), I had to collect closing prices to check it out. I found ITE Group at 232.5p on 13th December, and since then the closing price has been higher than 232.5p .... until yesterday. 18th December saw a low of 230.84p which could have been a target, but close was 233.1p. Having said that, there was also a better opportunity the day after detection (14th December) with a low of 229.4p.....

My process looks only for a lower price on the day the trend reaches 20%. There are many occasions when the trend condition alone is met, but the point of the additional lower price condition is to reduce the number of targets - if targets are too frequent in one particular equity there is not enough time for price to rise.

Fortunately I make enough out of collecting only mid afternoon prices, otherwise it would become an obsessive activity !!

Alicia

Hi Alicia

I used to have a Reuters terminal up until a few years ago which could have done this easily. I am not sure whether there are any free tools to calculate this easily on an intraday basis? I know of several tools that could be used on closing prices and if that is what I may use then I guess I scan every day for shares that have gained more than 20%. When I find one, let us say it is BP which gained 20.56% based on the closing price to 450p. The next day before market open I would then process a limit buy order slightly below 447.48p (which is 450p minus 0.56%) and if it triggers I buy, if not then BP is no longer a valid target? When does BP become a target again potentially?

J

aliciathyme

Jegersmart wrote: »

Hi Alicia
I used to have a Reuters terminal up until a few years ago which could have done this easily. I am not sure whether there are any free tools to calculate this easily on an intraday basis?

I have not found a source of intraday prices either, but there are sources of day's highs and lows as well as close, so I guess it would be possible in principle to run an historical model working on a fall for the next (or any subsequent) day following the initial potential target. I have not tried it, but it would inevitably produce more targets, which may/may not give a better result.

The next day before market open I would then process a limit buy order slightly below 447.48p (which is 450p minus 0.56%) and if it triggers I buy, if not then BP is no longer a valid target? When does BP become a target again potentially?
J

One could imagine several ways of create a valid target. There is nearly always a series of consecutive days when the trend condition is met, but I have ignored all but the first day. If BP is higher on the first day then it is no longer considered and would only become a potential target again if a subsequent series of trend-met conditions occurs, and of course I would then be looking for a price fall on that first day in order to confirm the target.

Alicia

aliciathyme

I notice that there have been in excess of 100 viewings of this thread already today.

How about some response from the followers ?

To repeat the rules for Sell-to-Buy:

1. Divide an initial investment sum by 3 to give a lot size for all subsequent purchases.
2. Buy your first three holdings.
3. To buy your 4th holding, only do so if you best holding is showing at least 5% profit.
4. Bank the profit and continue to accumulate profits each time you sell.
5. Buy next holding from banked profits when possible
6. If bank is insufficient and no holding is in profit when you want to buy, do nothing.
7. Apply a 40% stoploss to each holding.
8. Sell all on market crash (10/10/2008 and 3/3/2009)
9. Track your stoploss companies and rebuy if they fall below 50% of original price

Let's see if it would have worked well on your portfolio.


Alicia

bowlhead99

Hi, another long post from me I'm afraid . I've looked in again from time to time, so am some of your viewing figures - the last half of the thread has been mostly about how you 'pick the winners' using your trend analysis etc, and one can't help be curious when the results are good.

As mentioned though, it's difficult to model your 'cash in your highest performer whenever you want to buy something and keep the spare money in cash until you want to buy something else', against ones own actual portfolio development.

I would speculate that most people on a casual money-saving forum like this are buy-and-hold investors rather than technical traders, and from that they would have fewer trades and keep hold of shares which are still showing strong fundamentals, rather than rotate them out every time an opportunity comes along - unless they have new money being deployed into the portfolio. If something compelling comes along, and they don't have any spare cash, they might sell their least favourite stock to fund it.

For example I own £5000 of A, £4000 B, £3000 C. The first two of them are good stocks and would be a 'buy' at todays price, while I am no longer too fussed about C, it hasn't performed, prospects have weakened and I don't have much desire to keep it.

If I want to buy £3000 D, which is also a buy, I would probably dump C. In your system, I have to cash out of the stock which is on paper the best cumulative performer and not necessarily the weakest buy at that point. Fair enough.

Say I sell all A for 5000 to buy 3000 of D and 2000 cash. My perceptions are that A is still a good stock on prospects and fundamentals, and I'd like to buy it. So I immediately sell B for 4000 and buy back 3000 of A and 1000 cash is added to my pot. At this point, I have 3000 cash. I consider that B is worth buying, and buy back 3000 B.

So by following your system, I think, I get 3000 of 4 stocks and have effectively rebalanced my portfolio, which is a pretty standard piece of advice for anyone to do from time to time when looking at asset allocation between stocks or sectors.

Whereas my old portfolio had quite a bit of exposure to A and B which I really quite liked. As we can't predict the future, I suppose rebalancing down is OK and left to my own devices I might have top-sliced A and B to finance D. There is not really a right or wrong on whether I should keep running A and B or slice off some of the profit, because it depends what you think about their prospects, potential, and where they fit into a balanced portfolio of complementary assets and ones own risk profile. Because your purchasing model has no particular regard for sector allocation, just treating all the FTSE 100 as 'UK large cap' with same risk, this might not be a concern to you.

A concern I have is that by forcing me to exit my two favourite stocks in favour of rebalancing, I am left with C in my portfolio. I do not want C. It has not performed since purchase (or perhaps it grew and then declined), there have been no recent buy signals. I just don't want the thing any more! But until it becomes my best performer, I can't sell it under your model. I have to keep holding it until it becomes top of the league table of A,B,C,D, which may never happen.

Your system is unconcerned with holding a dog stock because it has no real regard for reviewing a share's prospects or fundamentals, believing instead in efficient markets and that everything you added to the portfolio will one day have the greatest cumulative profit and be in a position to be exited. The problem with this is that having acknowledged that C was a bit of a bad pick, I am tying money up on a share I don't believe in, doesn't fit in with my portfolio objectives in terms of risk, market sector exposure etc, and can't exit unless it falls 40%. If awesome opportunity 'E' came along tomorrow, I couldn't buy it, as post-rebalance I now have nothing in profit, while I do hold £3000 of something I don't want.

I'd like to think your system would allow me to override and sell C to finance E. But if you don't follow strict rules and put blind faith in the system, it will cease to be a system, it's just some principles which you can tweak and do your own things to, and I end up messing with it so much for my own personal circumstances and investment beliefs that it's no longer your system - it's me doing whatever you I would have done if I hadn't met you!

Hope this helps explain why it is hard to implement for some people. Without spending hours on a subjective model, I can confirm I don't want to use it, as I don't think it creates value. I accept that it instills/forces the discipline of periodic rebalancing, which is generally good for risk management and is recommended by all sensible investment books, but that feature does not 'create value' per se, just modifies risk. I do this on my own as part of ongoing reviews rather than being forced into a 'computer says X' management style.

srcandas

bowlhead99 wrote: »

Hope this helps explain why it is hard to implement for some people.

bowlhead totally agree. I get the feeling (I admit it is no more but seems logical to me) that this system over say 10 years would leave you with a stagnant bunch of very average stocks. It seems designed to do so as with your share C example.

I remember playing with an interday spreadbetting on major indexes program. It would place bets and action stop loses almost instantly on index movements. For 8 weeks it appeared to work well for the 4 target indexes (FTSE, CAC, DAX and DJ). After some months it then only had consistent success for the CAC. The CAC continued to perform for over 3 months. We analysed the nature of the CAC and identified reasons that seemed very logical (peak/trough percentages, size of companies, trading volumes, spreads, etc.). Surely 5 months of successful daily trading could not be luck

However over the rest of the year the CAC lost its magic. And then a year on we identified the reasons why we couldn't expect anything better than a very small profit that would be eaten by expences.

This taught me that it takes very long trials before you can say something works or not.

While I wish you well Alicia I have much greater faith in Bowlheads logic than your system because it simply makes sense. But when you are sipping cocktails on your private yatch you will rightly be able to smile at the sceptics :beer:

grey_gym_sock

well, i can't back-test this because i don't have a system which generates buy signals. i have ideas of things to buy, some of which i act on eventually, some of which i reject after further research, some of which i just forget. (yes, perhaps i should record them more systematically, but it still wouldn't give me buy signals.)

it's also hard to say retrospectively exactly how much cash i had available to invest on a particular date, and therefore whether i would have needed to sell something else in order to buy. this is because i don't have a clear separation between cash available for investment and cash for other purposes.

some buys (not most) have been switches. however, that doesn't necessarily mean that i didn't have cash available at that point. it is often because i wanted to switch to a share which i regarded as similar to the 1 i just sold, but preferable in some way.

as a general comment on your selling method, it seems more plausible when the buying method is based on technical analysis rather than fundamentals. this ties in with some of bowlhead's comments.

perhaps you want to talk to more technical traders. i don't think there are many on here. try on motley fool?

Jegersmart

Bowlhead and srcandas

I agree with some of the points you mention, however one has to remember that profits on paper are just that - they are not actual profits until closed and if you never take profits then the cyclical nature of the markets will punish you over time unless of course the yield is extremely good and/or you need that income. After 20+ years of trading my own book using some evolving techniques and strategies over time I have *never* regretted taking profits regularly. Regularly doesn't necessarily mean on a monthly or quarterly basis - but whenever I buy or sell an equity or derivative I always have a price target in mind as well as a stop loss. What tends to happen is that if I am long an equity and my price target is say 23% above the current SP - perhaps because that would be 50% of the retrace from the last high to low range or something similar, if I get there I may not close the position entirely - but I will usually take a part of the stake out (say anywhere between 25-75%) and bring my stop loss to break even. In many cases if the share consolidates around the new level, I may take 25% of the position off the table and add a further stake based on a new price target. I have seen so many people who do not have a risk management system, they generally "buy and hold" and over a longer period many have been very unlucky and held shares such as RBS/LLOY etc - where they literally have holdings in LLOY at £4+ because they are long term holders. It is not "likely" to happen too often of course, but the problem with these cycles every so often (4-9 years?) is that is has the capability to wipe you out, or at least wipe you out for a long while in the hope of a recovery. This can theoretically not happen to me because I always safeguard my positions and take profits religiously based on my own analysis. Some of the worst losses I have seen are people who buy a stock, hold it for 5 years and it has risen 100% and they keep holding and then 3 years later their investment is worth 20% of what it was.....and that is a big problem. There is no profit until you take some remember?

The key to successful investment is money management, specially when trading leveraged but also in cash equities. This has to involve taking profits.

Having said all that, I take your point about "equity C", you *could* be stuck with it for a while, but as the stock would have risen 20% in a month when you bought it, there would seem to be enough movement to suggest that you either will be 5%+ in profit or stopped out at some stage....

It is a difficult and subjective conversation but I personally try to remove as much emotion (fear and greed) out of trading as possible and I prefer to do so through technical analysis and other indicators. I like the trend work which also forms part of my own analysis and I am interested enough to keep an open mind as to whether this could work or suit me. I don't necessarily have a problem with the "sell to buy" element, but the devil is in the details which is why I have been asking about the details of the stock selection - the sell strategy is quite simple whether one agrees with it or not:)

all imho

J