Using a Stock Rank system for one year

30th Sep '15 by John

18 comments 12644 reads

I decided last October to use a Stock Rank system for investing in UK shares. My criteria for dealing have evolved over the year to the following and for the last three months I have held strictly to these. (Before the final 3 months I was tending to cash in part holdings and stop loss at 10%) so not sure how the strict system would have worked out over the year!

Choose only Stock Ranks over 90
Choose Quality Rank over 75
Net Debt to be <0 or at least reducing.
Diversify as much as possible.
Sell and re-invest if above criteria broken.

My dealing costs averaged around 1%. and all dividends were re-invested.My percentage return for the year to 30th September has been 25.87% against FTSE100 of -7.50% and FTSE 250 of +9.7% for the same period.
Comments (good and bad) would be welcome!

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underscored

30th Sep '15

How many holdings, and how many churns over the year? Thanks for sharing.

imranawan

What was your buying and selling rules when running the portfolio ie. did you try and time your buys to achieve the best prices, and what were your rules when selling ie. sell when stock rank falls to 80?

John

Underscored
Currently 40 holdings. Total holdings for year 78.
Churn has calmed down considerably over the last 3 months since I formalised the system!

imran
Buying and selling rules as stated in OP. I did not try to time buys to achieve best prices.
Sell if SR goes below 90 or QR below 75. I was not so mechanical earlier in the year when I had not quite decided fully on the system. Plan for the next year to follow the rules to the letter!!

PhilHofGrowYourDough

1st Oct '15

Hi Joe,

Would you consider mirroring your selecyions using a fantasy fund on the site. This would allow us comment more closely on your selections, for example I'm interested to know which of your selections generated the biggest losses. Are you UK only or European/US?

Personally, I screen out stocks with weaker balance sheets, insolvency risk and I'm not as strict with debt as I'll take a company that whose debt < 3 * operating profit. But I'm also looking for strong momentum, rising EPS estimates, rising share price, etc.

Still a very good performance

Regards
Phil

pka

Joe, that was a very good performance of your portfolio last year.

You and others might be interested that I also set up a mechanical Stock Ranks portfolio in October last year, but I used different rules from yours. My portfolio's performance was not as good as yours, although it still comfortably beat the FTSE 100 and 250 indices. My rules were:

Select 20 stocks from the FTSE 350, with £5,000 initially in each stock, making a total initial portfolio value of £100,000. Each stock at the time of selection had a non-zero dividend yield, a Stockopedia Stock Rank of 90 or over, a Stockopedia QV Rank of 70 or over, and a Stockopedia Momentum Rank of 70 or over. I ordered the stocks that satisfied the above rules by decreasing Market Capitalisation, and then selected stocks for the portfolio by going down the list in that order and selecting no more than one stock from each Stockopedia Industry Group (to ensure some diversification in the portfolio). If a stock's Stock Rank fell below 70, I sold that stock and reinvested the proceeds plus any dividends received from the portfolio in another stock that satisfied the above rules. My reasons for the above rules were to try to reduce risk by investing only in larger companies and in ones that had sufficient cash available to pay a dividend and by diversifying the portfolio across different industries, and to try to improve performance by requiring a high Stock Rank as well as good Momentum and QV Ranks. My portfolio is now worth about 17% more than a year ago, including any uninvested dividends, and including all transaction costs. The downside-volatility of my portfolio over the past year seemed to me to be no worse than that of the FTSE All Share Index, e.g. if the All Share went down by 5% over a week, my portfolio's value did not go down by more than 5% and it often went down by less (that may have been partly due to good diversification of my portfolio).

Comparing my results with yours, perhaps ordering the qualifying stocks by decreasing Market Capitalisation reduced the performance of my portfolio, because it meant that the stocks in my portfolio almost all had a Market Capitalisation of at least a billion pounds, but smaller companies tend over the long run to perform better than larger ones and they certainly performed better last year. Also it meant that some stocks in my portfolio had Stock Ranks close to 90 when they were initially bought, whereas I guess most of the stocks in your portfolio had Stock Ranks close to 100 when they were initially bought. However, if there had been a major bear market last year, perhaps my portfolio would have gone down less than one comprising smaller companies..

Hi pka
Thanks for your interest and for sharing your rules. I suppose one beauty of the Stock Rank screening system is that we can all choose screens that suit our tastes. I tried to make mine as simple as possible although I now still look every day at the SR and Q values of my holdings and automatically sell the "no longer qualifiers" and reinvest basically in the highest ranking share, paying only a little attention to diversification. Looking at main sectors my diversification does not look great but looking at sub sectors I have 40 companies spread over 24 sub sectors with the largest of any sector being 11%. I think there are currently no shares within my criteria in Energy, Telecoms or Utilities, but I could be wrong here.
I seem to always be able to find stocks close to 100 when re-investing. I am for now ignoring market capital but your point is well made that in a bear market my portfolio would probably suffer more than yours. I am hoping that insisting Q is more than 75 this problem might be alleviated!

Hi Phil
I did answer your points but it seems to have got lost in the ether.
Not sure how to use a fantasy fund on the site but as it is the beginning of a new year for me I could list my current holdings and update as I buy and sell during the year.
My biggest losses were PLUS £4291, LAM £2639 and LGLD £2260. All other losses (5) were under £1000. Am only invested in UK shares (all within ISAs).
Best
Joe

2nd Oct '15

As suggested above I am listing my holdings as at 1st Oct 2015. (Ticker, QR, SR).

(III, 88, 98) (ABBY 93, 98) (AIR 94, 99) (ALU 91, 98)(AMO 91, 93) (ANCR 98, 95) (BKG 92, 99) (BMY 81, 97) (CCT 98, 97)
(CFX 98, 98) (CCC 89, 96) (CVR 77, 95) (COST 89, 96) (CRE 84, 99) (DWHA 92,96) (EMR 92, 99) (EPWN 90, 99)
(GAW 97, 98) (HAT 96, 99) (HEAD 91, 98) (HGG 98, 93) (IMT 94, 97) (INDV 92, 99) (IGR 94, 98) (LTHM 85, 91)
(JUP 99, 93) (ALY 86, 95) (LOOK 85, 95) (PAY 98, 95) (PNA 86, 96) (PSN 99, 98) (QQ. 87, 92) (RNK 92, 96) (REC 98, 92)
(RM. 97, 97) (RMG 79, 98) (SFE 93, 96) (SOM 98, 99) (ATK 90, 94) (XPP 94, 94) (ZYT 96, 93)
I shall try to update anytime I change any of these.
Joe

Hi,

I'm not entirely sure why people are giving the post a thumbs down perhaps they'd care to comment.

Surely one would want transparency if one is to consider a system viable. Also by tracking the portfolio in a fantasy fund one could consider how the system could be improved.

The reason I asked about the biggest losers is that my hypothesis is ... a high stock rank portfolio limits your exposure to nose diving stocks. I'm also interested to know if my strategy to filter for bankruptcy risk, excessive debt, strong momentum and a Euro/US focus makes a difference. The more alternatives I have to compare against the more I/we might be able to hone the approach.

There are already a few fantasy funds that do this including The Mechanical Bull, John Rosier also publishes his top 10 holdings, Ed has a QVM fund and I publish mine too.

I've long given up following hints or 'wisdom' from others on individual share, it's a mug's game. Find your system and stick to it.

Best of luck to all
Phil

GrindertraderUK

Phil has a good point here on the ethics of posting ideas. No one should thumbs down anything unless it is abusive (which should be reported) or off topic in my humble option.

Phil I found your posts to be informative in the past and you always ask good questions. Keep it up.

regards
Ian

Edward Croft

Oh no - don't read too much into my QVM fund ... There's an internal Stockopedia staff learning league here and I have to admit I barely look at it. I was hoping it was under the radar !

It was randomly picked in about 10 minutes using the principles laid out on the site... but the good news is it's managed a 14% return year to date - so that's not too bad in this environment !

Well just imagine that. 10 minutes to secure a 14% return.

I wonder how many out there spend hours and hours pouring over their investment decisions and would bite your arm off to secure 14%

Here are the top ranked community members fantasy funds for a 1 year ...

Pooledaniels fund +31% "Semi-mechanistic trading based on a combination of Screen of Screens and stockrank."

The E Fund +30% "A StockRank Test"

The Mechanical Bull Portfolio +30% "Mechanical investing combining StockRanks and Screen of screens"

For a 2 year perspective The E Fund & The Mechanical Bull Portfolio also top the community members rankings. Good evidence for the success of the approach in current market conditions me thinks.

Best of luck with your investing

Phil

Phil - well that's the thing. I've become a strong believer that if the basics are followed (i.e. select strong factor exposure stocks & diversify) then the results follow.

Across a diversified portfolio, individual stock selection really doesn't matter... what matters is the exposure of the portfolio to factors (i.e. value, momentum etc). This is the problem with much wasteful institutional fund management... managers fight tooth and nail trying to beat each other with better stock selection processes (faster jets?), when ultimately the end result is an expensively delivered portfolio that is often not well exposed to factor premiums.

On a related note... there's a great chapter in Victor Niederhoffer's"Practical Speculation" that shows the results of Henry Hill who "religiously rebalanced his portfolio based on ValueLine Group 1 rankings". ValueLine is a great US product with a long history. They have an value + earnings momentum biased ranking system. He turned an initial $80,000 into $48m between 1977 and 2000. I do hope we'll end up with a story like that here.

(PS Value Line's own funds didn't do so well... just tracking the market... but that's because apparently they didn't follow their own rules. The managers over-rode them !)

As a matter of interest my biggest loser, as I said above, was PLUS500, which I bought in March and sold in June.
Was there anything in the Stock Rank numbers which could have hinted that it could fall off a cliff in May. Failing that, was there any other way of forecasting the imminent drop?

Novice Investor

If you are going to use stockranks without any amount of further company specific research, then you must take a portfolio view. Rule based investing can increase the likelihood of a successful outcome, but only with a statistically valid sample size. A sample size of one is not, and never will be, that number, however refined the rules become.

NI

I was on the panel of ShareSoc event earlier this year where we had a good discussion about Plus500 before it tumbled. David Stredder had been long since the IPO and had 7-bagged and stayed long. Paul Scott and I were highly skeptical. It's the one share I have actually sold this year based on a 'judgement' call and I am glad I did. It was only because I had to speak at that event that I did some due-dil on Plus500 as you have to appear slightly intelligent or you don't get asked back ! If I hadn't done the research I may have still held it as these days I don't do much further analysis on stocks beyond the rankings.

There was nothing in the ratios wrong from memory. Even the M-Score was fine. The problem was 2 things that I saw... Firstly the business model was unsustainable, and there was growing concern over the reporting of numbers. It was also a foreign listed AIM stock the kind of which I've been burnt in before (RCG 2007). Sometimes it's worth listening to your gut as occasionally there can be a high ranking stock that's dubious.

I agree with the sentiments of Novice and recommend reading this article about using the rankings. http://www.stockopedia.com/content/how-to-think-ab...

Using a Stock Rank system for one year

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John

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