Learning from mistakes
Investors naturally tend to focus on their current holdings and how they are performing. Decisions about whether to buy, add, hold, or sell are weighed up and decisions reached. As time goes by these decisions are vindicated, or otherwise. Wise investors reflect and learn from their mistakes and refine their strategies to avoid repeating them.
Keeping an eye on previous holdings
While this kind of advice is often heard, not many commentators cast a backward look in their rear view mirror and systematically write about what they have sold and then reflect on whether they made the right call. One welcome exception is this very honest post from Mark Carter.
I think that this general lack of interest in previously held stocks is just part of human nature. Once we no longer have a direct stake in something, it is natural that we should lose interest and redirect our energy into our current holdings and the next crop of potential buys.
However, it seems to me that a retrospective analysis of what we sell is just as important as what we buy. Indeed, for any type of trading strategy, if what we buy does not go on to outperform what we sold to fund our purchase, what was the point in selling?
A retrospective of sold stocks
With this is mind, I have done just such as review of the first year of the Mechanical Bull portfolio. Sixteen stocks were sold and replaced by sixteen others during the year. Stock rotation is a fundamental design principle of the Mechanical Bull approach, but this was slightly higher than I was expecting.
This may have been because in setting up the portfolio initially, the methodology was picking up a couple of stocks with lower scores then what generally occurs once the portfolio enters a more mature phase. There were five stocks in the original portfolio that had scores of 102 (all now sold). Typically, new entrants score 103 or higher so all other things being equal there should be less rotation over the next twelve months.
Some stocks were both bought and sold during the period, so tracking relative performance gets quite messy. So, for simplicity's sake I have compared the performance of the original 15 stocks over the last year with the performance achieved by the MB portfolio. This will provide an indication of whether all this rotation has been worthwhile. The results are…
