Stock Picks | Forget About Stock Picking - Follow The Leader?

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31st Aug '16 by plank

16 comments 5782 reads

I know this forum is primarily for stock picking ideas, but the point I want to make is that guys like me should forget about picking out stocks and just follow the leader.

I have read that I am likely to overrate my stock picking abilities and that the best advice is to pick a method and stick to it.

I have very limited time available for research, plus I find myself quickly overwhelmed by the information.

But I still have an interest in companies and investing, I do not want to hand it over to a manager.

Surely that best thing for someone like me is just to copy one of the Guru screens or make a simple screen of my own with the top Stockrank stocks and copy that to the letter.

What do others think?

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About the Author

Plank

Premium Member

16 comments

Trigger14

31st Aug '16

I think you are absolutely right and you are in the right place! The high stockranks are a good starting point but you also want to think about diversification and a strategy for when to buy and sell. The NAPS portfolio article is an interesting read on setting up a portfolio based on stock ranks.

Blissgull

31st Aug '16

What a good post Plank!

In most cases the simple answer is probably yes. That raises another question of whether financial institutions should sack their overpaid fund managers and replace them with a simple computer (a very simple one would do in most cases). That might help reduce their charges for investors.

There are some problems with using a purely mechanical system.
1. A mechanical system such as the Stockranks here will sometimes throw up questionable companies. Globo and Camkids are a couple which come to mind. The figures all looked good to the computer, but the figures turned out to be misleading.
2. Your biggest problem is to stick to the system. Much harder psychologically than it might appear. If your system involves selling a share once it drops out of a particular screen or falls below a certain stockrank you need the discipline to actually do it. If not you end up with a portfolio full of losers.

Ramridge

31st Aug '16

Hi plank -
When I read the headline I immediately thought you were referring to the leader of a company, a CEO.
Now that is interesting because I have a theory that if you follow known top class leaders who have already notched up successes. i.e. have form, then they could be worth following blindly when they join a new plc.
As an example, have a look at Luke Johnson. Every time he joins a company, the share price goes up substantially within 6 - 12 months . To balance this, there are also a few so called top managers with good CV's who have been disasters. A bit like Premier League football managers.
I have a mental note to test this theory by back-testing when I have some spare time. Can't help feeling that it has some merit.

PJ0077

31st Aug '16

A fascinating topic.

The key feature of Luke Johnson's continued success has surely been his narrow business focus on food/restaurants. Whatever business skill-set he possesses, he would surely come unstuck through the cycle if he switched industries to (say) Plant Hire, Steel or Staffing Agencies. (Buffet: "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact").

Difficult therefore to ex ante forecast success when a CEO switches industry e.g. Andy McCue moving from Paddy Power Betfair (LON:PPB) to Restaurant (LON:RTN). His success at Paddy Power Betfair (LON:PPB) may have been due to a good organisational structure (which may not be in place at Restaurant (LON:RTN) ) or even due to good luck (which will mean revert).

The sources are CEO success are numerous.

Ramridge

31st Aug '16

PJ007 -

What you say is true.
But Luke J , to use consultancy jargon, sticks to his knitting, not by accident but because he knows that is the right thing to do. BTW I read his Sunday Times column regularly. The man is a true dyed-in-the-wool entrepreneur, with both feet on the ground.
Your comment about Andy McCue is interesting and it will be fascinating to see if he can transfer his skills to a new environment for him.

PhilHofGrowYourDough

31st Aug '16

Hi plank

Back in 2013 I came to the same sort of conclusion. I scanned the performance of the guru screens and found that the top performing screens generated very few selections.

I eventually settled on The Naked Trader strategy which at that time had excellent returns and a super smooth growth chart. I forked it, added some balance sheet checks (from Paul's SCVR), bankruptcy checks and I haven't looked back since. Whereas the guru screens rebalance quarterly I buy on break outs and sell on loss of price momentum.

Whilst my screens don't generate very many selections I chose to diversify into Europe, then the US and more recently Australia rather than compromising on my approach.

For those that want to truly 'know' the company they are investing in (through their research) I challenge you to run a fantasy portfolio based on a guru screen rebalanced quarterly to see if you can outperform it. If you can then happy days, if you can't then perhaps you need to ask yourself "Am I the limiting factor in my investing strategy?'

Best of luck
Phil

iwright7

1st Sep '16

Phil,

The NT screen chart is still pretty smooth and has impressive 22% annualised returns. Also worth noting that the screen tends to pick up high SR companies. Of the stocks I hold only Trifast (LON:TRI) passes the NT screen and I am curious which other UK stocks (if any) fit your criteria?

I suppose you could argue that with NT growth/value screening and price breakout there is no need to thoroughly research a company, because other investors have already done this and are buying into the story. Ian

PhilHofGrowYourDough

1st Sep '16

Hi Ian,

Trifast did pop up on my screens at various stages but it was consolidating rather than breaking out and currently it doesn't pass my screens as earnings upgrades are reducing.

Currently I dont hold any UK stocks. You can see my current holdings in my fantasy fund.

The US version of the NT screen is currently running with a 28% annualised return.

Best of luck
Phil

Rusty2

1st Sep '16

I do like some of the screens although I don't follow them when buying shares. The ones I look at are Jim Slater ZULU Principle Screen, NT and Richard Beddard's Nifty Thrifty Screen. Jim SLater's is closest to my holdings, I have had 4 out the current 6 until recently, I only hold Burford Capital (LON:BUR) currently. I also held Trifast (LON:TRI) until recently, I took profits after Brexit. NT screen I do hold or have held recently quite a few of those stocks.

If you do pick a screen I would pick one that does not trade too often, some add many shares each month. The other one to consider is the Winning Growth & Income this is probably the best performing screen only problem it has quite a few "foreign" companies.

You could copy a screen over and then adapt it to your rules. So yes I think it's a good idea to follow some screens. Over the last year for me picking the top Stockopedia ranked shares (NAPs) in each sector has not really worked for me, the one I set up last June 2015 is showing a small loss. Whilst the screens above are up 20% - 35%, NT being the lowest since beginning of June 2015.

Paul Flanagan

1st Sep '16

Plank,

I watched all the stockopedia youtube videos and came up rule based portfolio.

1) Equally diversify between the 10 sectors. (10% in each sector)
2) No one stock takes up more than 5% of the portfolio.
3) Select stocks with a stock rank of over 80.
4) Select stocks with a market cap of over £30m.
5) Select stocks with a low bid ask spread,under 500bps.
6) Re-balance every 3 months. Sell stocks with a stock rank under 80. Add in stocks with a stock rank over 80.
7) Re-balance every 12 months. Cut back on the winners and top up the losers. (Sell high / buy low)
8) Add money into the portfolio every month or every quarter (dollar cost averaging).

Recently I have put 20% of my portfolio into 8 international growth funds.

I also have no knowledge about the companies I invest in and to be honest don't have time to research them. As long as the company is meets my criteria I buy it.

Since the start of March my portfolio is up 7% which I am more than happy with. It was down 10% post Brexit but I kept strong stuck to the rules and didn't sell.

From what I have read online it is important to have a plan and to stick to it through good times and bad.

Paul

plank

5th Sep '16

Thanks for the feedback.

I have set up a number of folios.

1.A NAPS with 20 stocks as shown in the videos.
2 Follow and copy the Best dividend screen and Winning growth screen but added the rule that spread must be below 3% and Stockrank above 50 - which has eliminated a few.
3. Set up my own Quality and value screen.

I now want to stick to it - I am terrible for chopping and changing. Hopefully it will be successful.

shauniekent

5th Sep '16

Plank -you are spot on.
Follow the stockopedia method, overlay with a human 'is it potentially a fraud check' (you can do this by a quick google and scanning Paul Scotts daily small cap reports for example).

Review and rebalance once every 6 or 12 months. You will not go far wrong, you'll probably out perform.

If tempted to stock pick - create a side pot and prove to yourself you can make money over *at least* a 3 year time period, before doing this with your whole portfolio.

plank

12th Sep '16

As mentioned above, I have set up a NAPS which I leave alone. However, I am trying to follow a couple of the Guru screens (with minor alterations to eliminate high spread).

I am struggling to know how to mange entry and exits. My plan had been to check everyday, if a stock is added to the screen I should add it to the folio and sell when a stock leaves the screen. Is this micro-managing, should I be happy just to make changes every couple of weeks.

One problem I have already come across is that a stock can enter one day, be out a couple of days later and then in again the next - is this quite common? If so, I am going to be hit by a lot of charges if I carry on with this plan.

Rusty2

12th Sep '16

I don't think being in a screen for a few days is that common but some screen sdo have a lot of trading, so I would avoid those. If you look at Naked Trader and Jim Slater Zulu screens these have little trading maybe 1 share per month. I would try to avoid over trading and wide spreads. Selling is upto you but I would be looking to hold for months unless something has changed.

plank

12th Sep '16

Maybe the criteria I have added has caused the stocks to pop in and out - ie Stock rank above a certain level.

PJ0077

12th Sep '16

If your StockRank threshold was (say) 75+, then to avoid over-trading maybe just select from those stocks with a StockRank of 80+... those on a rank 75-80 would therefore be on your 'watch-list'?

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Plank

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