Low-Risk investment strategy ?

Jegersmart

jamesmorgan,

I don't see anything in Alicia's system where the target is to sell as soon as a 5% gain is made? In certain markets, especially out of the hole in 2009 I can see that there may be many buy signals as a broad market rally ensues and then it could be the case that if the system is such that you *have* to sell your most profitable holding *every* time there is a buy signal that holdings can be short-lived, but in the limited history Alicia has posted there doesn't seem to be any evidence of this? Does this mean that there is a minimum gain to be realised before selling/acting on a new buy signal?

I may have missed something (a lot?) - and in any case there are other factors in this system which are proprietary - and rightly so perhaps - but it is interesting to discuss nevertheless.

J

jamesmorgan

Jegersmart wrote: »

jamesmorgan,

I don't see anything in Alicia's system where the target is to sell as soon as a 5% gain is made? In certain markets, especially out of the hole in 2009 I can see that there may be many buy signals as a broad market rally ensues and then it could be the case that if the system is such that you *have* to sell your most profitable holding *every* time there is a buy signal that holdings can be short-lived, but in the limited history Alicia has posted there doesn't seem to be any evidence of this? Does this mean that there is a minimum gain to be realised before selling/acting on a new buy signal?

I may have missed something (a lot?) - and in any case there are other factors in this system which are proprietary - and rightly so perhaps - but it is interesting to discuss nevertheless.

J

There is not an explicit strategy to sell as soon as 5% gain made, but whenever a new buy signal is achieved she sells the max gaining share as long as it has made 5% gain. If buy signals were made every day, then shares would effectively be sold as soon as they had made 5% gain.

In practice this is not happening because she is restricting the number of buy signals (by restricting shares to the FTSE100). This creates a somewhat variable return based on the relative number of shares held and the relative strength of the market. If few shares are held and the market is relatively strong (ie lots of buy signals) then the chances are that a buy signal will be made shortly after a share has reached the 5% gain so it will be sold. This probably reflects the initial years of the portfolio. If lots of shares are held in a relatively flat market, few buy signals are generated so most shares are held long-term and returns trend towards that of the underlying index.

At least that is my understanding - no doubt Alicia will correct me if necessary.

aliciathyme

jamesmorgan wrote: »

Initially you described your approach as 'sell-to-buy'. You could equally, however, turn this around and say your sell criteria is to sell as soon as the share rises by 5%, but only if there is another share that meets your buy criteria on that day. Depending on your share selection pool (and you have limited it to FTSE100) it is theoretically possible to have buy criteria every day. In that scenario you always sell as soon as a share rises by 5%.

So very simplistically your share strategy could be described as find shares rising steadily, sell once rise by more than 5% or fall by 40%. This type of strategy needs a win ratio of more than 88% to consistently make money. In practice you can make money with lower win ratios as you have restricted your share pool to 100 shares, so you often hold onto shares longer than planned as there are no new shares to buy.

That is theoretically true but would give much of my gains to my broker whereas I want to reinvest them.
By allowing an interval between trades gives an opportunity for shares to rise in value (and of course to fall, but then I am selecting on the probability of rising, not falling). My best holding was ARM which I bought twice, 15/6/2010 at 291p and sold 24/2/2011 at 572p, and again 27/7/2010 at 338p and sold 11/7/2011 at 615p. The first of these was held for 179 days and the second for 241 days. The worst holdings were 8 sold at 40% StopLoss, most having been held between 113 days and 156 days, with one held for 497 days (LLOY). On the other end of the scale, the shortest holdings were miners RIO and VED, both held for 4 days FROM 24/3/2009, making net 9.9% and 5.3%.
It seems that sell-to-buy gives the necessary interval to allow more holdings to grow than to decline.

a) You started with 3 shares. If you had been unlucky and these shares never rose by 5% (or fell by 40%) you would still be stuck with these 3 shares today. Personally I would have started with a higher number. However, this is a historic risk for you and only relevant for someone trying to mirror your strategy.

b) Stop loss of 40%. This appears high in comparison to your sell target. In a down market, all shares can drop 40% so you would lose 40% of your entire portfolio. In is not unlikely that this could be followed by a bear market rally (when you purchase new shares) followed by another 40% drop. You could soon find most of the value of your portfolio wiped out.

c) Current portfolio size is around 15 shares. This is not high risk, but you should note that as the number of shares you hold increases the more your returns will trend towards the underlying index. You have made some exceptional returns in the early years (around 90% in 2009) but with 15 FTSE100 shares currently held that is unlikely to continue. In particular you run the risk that there are insufficient new buy signals to ever trade out of the shares you currently hold.

My initial position was that I had a limited sum to invest and I needed a strategy to provide long term growth, not to provide an income.
I experimented with various starting numbers because I too felt intuitively that a larger number of holdings would reduce risk.
I have just rerun my portfolio data through the model based on 5 starting holdings. The net profit to date would have been 203%, with 91 holdings bought and sold with a win ratio of 78%. For 10 starting holdings the result would have been 153% net profit, 111 bought and sold, win ratio 70%.
The down side with higher starting numbers is that the lot size per holding is reduced (only £1050 of the 10-off start-up) and costs begin to have significant impact on net profits.

How to cope with the down market? I sold all holdings on 10/10/2008 at an overall profit of 5%, and again on 3/3/2009 at an overall profit of 12%. In both cases I was back in the market immediately.


For people with lager sums to invest than I have, the system would be scalable, but capital gains erode the reinvestment strategy.
Because I came close to CGT I have now moved over to using my sell-to-buy scheme in the ISA wrapper, which nicely fits my investment sum limitations.
At close yesterday my 5-year portfolio had risen to 360% net, My 2010 ISA is now showing 134% net, my 2011 is -4% net (loss) and my 2012 ISA is 3% net.
Which is why I continue to stress the long-term nature of my system, and not to panic when you are losing.

As a side note what was the motivation behind your initial post - are you looking for feedback to try to improve your approach?

Well, I was not intending to discuss my buying methods!
(But as you can see, I have been open to explain myself when asked)

I want to find out if my Sell-to-Buy strategy is too geared to my FTSE100 dataset or if it is generally applicable to other datasets.
I have been trying to encourage others to have a look at their investments over the last 5 years and see how they would have performed with my system.

To re-iterate:

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

This should not be difficult to do with a simple spreadsheet.

Hey Guys - how about it?
Let me know ?

Alicia

aliciathyme

jamesmorgan wrote: »

If few shares are held and the market is relatively strong (ie lots of buy signals) then the chances are that a buy signal will be made shortly after a share has reached the 5% gain so it will be sold. This probably reflects the initial years of the portfolio. If lots of shares are held in a relatively flat market, few buy signals are generated so most shares are held long-term and returns trend towards that of the underlying index.

At least that is my understanding - no doubt Alicia will correct me if necessary.

Yes, the holding duration is completely dependent on the next buying signal. To illustrate this, of my current 15 holdings, my last purchase was two months ago on 24/9/12 (EVR, now showing 7% profit), and the previous was ESSR on 20/9/12, showing 5.2%. My best current performer is RBS, bought on 18/9/12 and now at 19.5% profit. These three were all bought close together but have benefited by no new buys turning up since.

And to illustrate the system, the following sales were made to fund the buys:

RBS held 251 days & sold 24/9 @ 9.2% to buy EVR
FRES held 177 days & sold 20/9 @ 12.2% to buy ESSR
ENRC held 19 days & sold 18/9 @ 17.9% to buy RBS

Note that this last RBS was bought as a parallel holding before the other was sold)

Alicia

jamesmorgan

aliciathyme wrote: »

It seems that sell-to-buy gives the necessary interval to allow more holdings to grow than to decline.

That has been true for the markets in the past 5 years, but may not be true in future markets. I developed my own strategy in 1999 by an analysis of FTSE100 shares over the preceding 10 years. Since then I have gradually tweaked the strategy to take account of different market types. In some markets, keeping your winners is the right approach. In other markets it isn't.

How to cope with the down market? I sold all holdings on 10/10/2008 at an overall profit of 5%, and again on 3/3/2009 at an overall profit of 12%. In both cases I was back in the market immediately.

Are you selling shares in a down market based on your 40% stop loss, or do you have some other criteria that you use?

At close yesterday my 5-year portfolio had risen to 360% net, My 2010 ISA is now showing 134% net, my 2011 is -4% net (loss) and my 2012 ISA is 3% net.

I assume you know you can simply add your ISA allowance to an existing ISA rather than open a new ISA. This would save you costs (as each ISA typically has its own costs).

Well, I was not intending to discuss my buying methods!
(But as you can see, I have been open to explain myself when asked)

Sorry if I have slightly hi-jacked the purpose of your thread. I am keen to give you feedback if possible, but felt I needed to understand more about why your strategy was working to be able to understand how 'sell-to-buy' fitted in.

My own strategy is also limited to FTSE100 so I'm not sure it adds to your existing data. I have in the past looked at the best strategy to sell shares. Across rising, falling and flat markets I have found the best overall approach is to sell a share as soon as it hits a specific target (whether there is a new share to buy or not). However, as my buying criteria are different from yours I'm not sure this really helps you.

Are you looking for feedback on markets outside the FTSE100 because you want to extend your potential pool of shares? If so, I think some caution may be necessary as I suspect part of your success comes from having few buy signals (as explained before, the more buy signals you get relative to the number of shares held, the more likely your gains will tend towards 5%/share). Out of interest, do have records for how many buy signals you get each year, and how many of these are acted upon as you have a share that can be sold?

grey_gym_sock

aliciathyme wrote: »

Note that this last RBS was bought as a parallel holding before the other was sold

oh, so you can have parallel holdings in the same share, which you treat as separate ...

suppose RBS (or an RBS holding) is your most valuable holding (and is in profit). and then you get a buy signal for RBS. would you sell RBS in order to buy RBS? which in effect would reduce the holding's size (since you always buy the same size holding).

Jegersmart

grey_gym_sock wrote: »

oh, so you can have parallel holdings in the same share, which you treat as separate ...

suppose RBS (or an RBS holding) is your most valuable holding (and is in profit). and then you get a buy signal for RBS. would you sell RBS in order to buy RBS? which in effect would reduce the holding's size (since you always buy the same size holding).

I assume that this would not be executed on.....?

J

aliciathyme

grey_gym_sock wrote: »

oh, so you can have parallel holdings in the same share, which you treat as separate ...

suppose RBS (or an RBS holding) is your most valuable holding (and is in profit). and then you get a buy signal for RBS. would you sell RBS in order to buy RBS? which in effect would reduce the holding's size (since you always buy the same size holding).

Yes, I treat every buy as an individual and this can happen. Rebuying the same holding serves no purpose and would be incur unnecessary costs. I take just the profit on the existing holding and keep the holding running. The profit is needed for the bank pool for future buys.

Alicia

grey_gym_sock

ok ... of course there's no point incurring the costs of actually selling and buying back ... but it does seem a bit strange to me: to be (in this case) reducing your holding precisely when you get a buy signal.

Jegersmart

aliciathyme wrote: »

To re-iterate:

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

This should not be difficult to do with a simple spreadsheet.

Hey Guys - how about it?
Let me know ?

Alicia

One clarification, do you sell the entire holding that is in most profit (assuming above 5% and a buy signal on a different stock) or do you sell the original stake size only?

J