My Stockopedia 20k Farmed Portfolio - The PLUS500 effect and why I am happy

Just came across this informative 10yo thread and it's an excellent example of how short term considerations may interfere with a hands-off screening approach: Plus500 (LON:PLUS) has ended up a 5x multi-bagger to date :)

Hi Purpleski, to be honest I don’t think that the screening I use would have readily alerted me to a red flag for Plus500.

There were various mixed views in Plu500 around, indeed as there are with all stocks but the one that finally persuaded me to call it a day was an article by Richard Beddard dated 27th April. Taking on board his views and my uncomfortable feelings about the business persuaded me to sell out on 29th April. Can’t really claim it was good stock management on my part; really more good fortune in selling when I did.

Thanks for this. I will continue to follow with interest.

I agree entirely that the important thing is the overall performance of the portfolio.

Hi Michael, sorry for not replying sooner, I have been travelling so not have had the chance to reply.

1. Is I would screen out all not UK companies based on the fact that you can not be certain on the level of governance/why are this listing on a (to them) foreign exchange rather than their local market

I am going to exclude them from AIM.  If they are main listed (FTSE All-share) etc then I am happy to add them into the portfolio due to reporting regulations and qualification of main listing is more stringent.

2. Have you thought about rebalancing based on the Stockrank rather than a set period? As rebalancing quarterly is just an arbitrary period.

Yes.   This is something I plan to do especially when the portfolio is still being constructed up to 20 stocks.  The 'review' period was when I report my portfolio on Stockopedia discussion boards.  I may just do this every 6 months.

3. Somebody above suggested screening for companies that have been listed for 5+ years, which is an interesting thought but can this be done.

I do not wish to add too much rules in the screener and believe (although not fully researched) that some listed for less than 5 years may well produce high share price returns based on their stock ranks.

4. is there a quantitative criteria on the Stockopedia screening system that you could have added that would have screened out Plus500 (LON:PLUS) but not any of your winners.

On a quantitive bases I have no idea. 

What I would like to point out is not the focus on PLUS and what went wrong, rather than the performance of the portfolio as a basket of shares.   That is the way to use StockRanks effectively and for me so far it is working.    To date the portfolio has performed above my expectations so far.  However it is too soon to say if the rules that I have put in place are enough to allow the portfolio to continue to outperform.

There is always a chance another stock in this portfolio could go wrong and fall like PLUS did.  But as long as the majority in the portfolio do well then the way I use StockRanks is actually working.

Dosh really interesting comment are you able to explain why you "...became very uncomfortable with the stock (£PLUS) after at the end of April...." and whether anything in all the screening ratios available would have flagged it?

Thx.

Great discussion, really enjoying it; as I see it the use of a system such as stock ranks has an added value for investors in that it acts as a risk management aid. Yes, I totally agree that from within most investors portfolios there will be real successes and some failures; I have been investing for many years and that’s all part of the package. What we can do with the likes of stockranks or indeed hopefully any favoured screening system is firstly give us an edge on the market by sieving down to the most likely package of stocks that are possibly more likely to offer a decent return and secondly providing a degree of risk management. The risk management aspect, which is probably more influenced by quality and value rather than momentum, does give me a degree of comfort.
Like Grindertrader I also exclude certain geographies from my portfolio. Sadly some of this is based on past experience. I will not invent in anything with a heavy Russian bias, Chinese companies listed in London, stocks with a heavy African bias. Such areas may well work for some investors but as they say “once bitten….”.
In addition to my main portfolio I also operate a funded Stockranks segregated portfolio. The portfolio has not been running that many months and as such is a learning process. I have real admiration for Grindertrader for the way he has set his portfolio up with equal weightings etc. My approach has been included lager purchases of stocks that I have felt very comfortable with; Berkley, Galliford, Medium sized purchases in a couple of stocks that I also feel comfortable with: Finsbury and Matchtech. I then also have equally sized smaller purchases in other stockrank stocks that I still feel generally fine with: Somero, Epwin, Bovis, Zytronic, Lookers, Headlam & 32Red.
The portfolio has been coming together since November 2014 and gradually becoming more populated with stocks. To date I have sold one holding and that was Plus500 for a return of 35%. I became very uncomfortable with the stock after at the end of April and fortunately sold. To date the portfolio is showing a gain of 20% and I am very happy with that performance.

When do I sell? Well as yet it’s not a date related or stockrank value for me at present. If I discover something I feel uncomfortable with then I sell e.g. Plus500. If the ranks fall but I still feel happy with the news, momentum and numbers, then I will hold on. A good example of this is one of larger holdings Telford Homes. Note Telford is not included in the above numbers as it was bought for a variety of reasons not just stockranks but the ramks did influence my purchase. When I bought Telford it had V78, Q93, M95 and Stock Rank of 99 and a price of 360p. By January 2015 the ranks had slipped to V64, Q45, M90 and Stock Rank of 78 with the share price unchanged; currently we have V41, Q44, M96 and Stock Rank of 65 the share price is now 489p. The reason I mention Telford is that I am sure that I would follow a momentum/news/TA approach to selling any of the stocks in my stockrank portfolio i.e. if the news flow remains good, the momentum/TA is favourable then I will continue to hold.

Grindertrader, thanks for sharing your thoughts; excellent stuff, please keep it up.

Hi Ian

My further thoughts on your really interesting post:

1. Is I would screen out all not UK companies based on the fact that you can not be certain on the level of governance/why are this listing on a (to them) foreign exchange rather than their local market.

I asked Stockopedia last week whether this could be done within the screen but it cant which is a shame. They added that not all overseas companies are bad but then not all companies of with a Stockrank below say 70 wont produce stellar returns (Christie (LON:CTG) £PRU) but screening out the overseas companies is a valid screening criteria I think, easily as much as screening out high p/e or hight debt to profit etc.

2. Have you thought about rebalancing based on the Stockrank rather than a set period? As rebalancing quarterly is just an arbitrary period.

My thought would be to sell after the Stockrank fell below a certain Stockrank or ranks for more than a certain number of days/weeks.

3. Somebody above suggested screening for companies that have been listed for 5+ years, which is an interesting thought but can this be done.

4. is there a quantitative criteria on the Stockopedia screening system that you could have added that would have screened out Plus500 (LON:PLUS) but not any of your winners.

Thanks as ever for a great column.

Michael

The FTSE AIM All-Share Index is up 10.8% over that period, whilst the All-Share has beaten it, up 16.2%. It makes the performance of the high ranks even more remarkable.

hmmm with 50 stocks I might as well buy a tracker and with only £20k the transaction costs would be high. My aim is a portfolio size of £40k and a around 20 - 25 stocks is my aim in which i believe is a good balance.  I plan to have this complete in the next 12 months but I am taking my time in the construction.   

Hi pka, thanks for the comments. I wouldn't exclude AIM stocks as there are some very good AIM stocks out there. It is just they require more focus.

As David Shredder a very successful 'ISA millionaire' pointed out on twitter on 22 May

Carmensfella: From start Feb AIM All Share has beaten the FTSE100 gaining 10.5% against 3.8% by the "Footsie". AIM to be avoided ? no just be very careful

Grindertrader, I think you made the right decision on selling PLUS.

I respectfully suggest that it would be prudent, if one is creating a portfolio containing less than perhaps 50 stocks, to exclude all AIM stocks from that portfolio. This is because AIM stocks are much more volatile and risky than stocks quoted on the main UK stock market, and therefore one needs a portfolio containing a great many stocks to diversify away that volatility and risk.

I have just fully sold out of PLUS. my reason is a straight forward psychological one. I would think about it during the bank holiday weekend. I also stated that I wished the outlook statements to be positive.

When I spend more than three days discussing a single stock rather than my system of investing then becomes a time that I have to admit that single stock no matter what happens in the future should no longer be part of my portfolio.

The latest RNS doesn't satisfy me of a positive outlook.

Sleep sound, play well.

Gerald Loeb - the great American trader & author on stock markets - once said "All stocks are speculative".   This is why I put such a high focus on diversification.  Too much conviction leads to over-concentration and the possibility of significant losses due to events out of one's control & the emotional fallout that comes with it.

Personally I think it's easier to identify a few factors that work (e.g. momentum, value etc) than it is to identify a few stocks that will work. If anyone wants to shoot for the moon - its a far smarter approach todiversify & leverage than it is to concentrate.   

Plus 500 is a classic example of how these tenets can save your skin when trades go bad.  Trades will go bad - it's part and parcel of the stock market.  All stocks are speculative !

Well even if this all turns out to be fine in the end (I doubt it) I am going to extend my rule from 'No Russian, Russian influenced or Chinese stocks to a complete blanket ban on foreign AIM stocks as not only a risk reduction but to alleviate from any drama too.

I am trying not to impose too much rules but I think we can all agree this is a sensible one.

They seem to be blocking trading as well as withdrawal, which is strange if AML is the only problem...

This comment on their Facebook page is interesting if true, the author alleges he did mirror trades on Plus and Oanda, a reasonably reputable forex broker:

Under the new account that plus500 opened for me in end March, there was no position that did not end up in a margin call. Which is kind of ridiculous if you compare my same trades in oanda. My oanda account is still going strong with no margin call close out with the exact same trades.

Suspended.

I have Plus in a portfolio of 25 stocks. The impact has been so negligible I haven't even considered selling out early. Will evaluate at the quarterly rebalance.

Hi Mayne,

Thanks for a very valid and worthwhile point to what I am doing. To be honest I have had to apply some hunter intervention from the start due to the amount of stocks listed in the screener now that I am subscribed to US and EUR editions of Stockopedia. However I have chosen the stocks that (at the time) seemed to me to be more likely to do well. So I do agree the lines between Hunter and Farmer are blurred although I am trying my best to provide as little intervention as possible. One very real consideration that I may only use UK stocks for this portfolio. I am having some issues with Halifax my provider to buy some EUR and USA listed stocks that qualify.

With regards to PLUS I feel I have only intervened in the rebalancing rule early. I decided to keep within the portfolio because it still qualifies and thus the tinkering in my opinion is only minor due to rebalancing.

But your right the more tinkering that I do then the more temptation there is to modify the portfolio further.

One point I want raise is that I am still at the point of portfolio construction in that I do want to increase the number of stocks in the portfolio to 20. I am doing this as and when funds become available from my other portfolio(s). So until I reach that magic 20 number I (may) do some rebalancing.

HI David, I would always want to look at the StockRanks on an ongoing basis. But one reason that I am interested in this path is because (at the very least) I could go away for a period of time and know that I am not worried about the portfolio and I certainly do not need to glance at it every 5 minutes.

Yep the pure farmer approach is to buy qualifying stocks, and then ignore them until quarterly review but I would want to have some sort of human intervention when news comes out that dramatically effects a stock (as in PLUS) which I think is fair to do.

However it is a good feeling for commentators to prod me when they feel I revert from the original plan and thus helps me stay disciplined and not stray too much.

Thanks Mark good spot!

But thanks everyone for the comments

Very exciting! I'm green with envy.

I have noticed that if you had eliminated the shares with less than 5 years listing (Epwin and Plus500), your portfolio would have eliminated the worst two out of 3 shares.

I think Mayn's point is very valid. It seems as if the overall intention is to test whether choosing high StockRank shares and rebalancing quarterly generates a worthwhile return. If there is any extra research done as news unfolds, it surely starts to defeat the object? All those cognitive biases we like to think we can avoid would keep interfering in the overall result. To my mind, if the portfolio is based on StockRanks, and is meant to be a passive 'farming'/portfolio approach, why would you even look at the share price movements and Ranks other than on a quarterly basis? It's obviously interesting to see how things are progressing, but if it were me it would simply prompt unnecessary tinkering.

No nitpicking intended ;-)

Rgds

David

It's useful to see these types of investing strategies played out for real.

From what I can see, the initial hands-off 'farming' approach based on stockranks has - at least with this news from PLUS - suddenly started to involve the hands-on 'hunter' approach. It now seems as if trades can now involve some subjective intervention based on news, extra research and good old intuition, rather than the original stockranks plan.

I think for this portfolio to give a reliable indication of whether the hands-off farming approach can really work, the original quarterly review and stockranks<90 rule should be adhered to when it comes to trading. Otherwise in a few years time when this portfolio perhaps has done well, there'll always be doubts because "ah yes, but you used your gut feel and urge to do something with PLUS and others and that's the only reason the portfolio did well".

Ultimately you don't want to have any doubts that the farming approach works - and can be made to work in reality - and i think the intervention with PLUS has created the first doubt.

Just my 2p though.

Mayn

Yep absolutely the type of questions to ask Phil and thanks. I believe PLUS drop is over done and hope to ar least get 20% back but well it is high risk. Is it better than any other in the financial sector that qualify for my screener? It is something i am continuing to look :)

With respect to plus another way of looking at it is ...

1) I've (as in grindertader) demonstrated that I can achieve 20% growth by selecting high stock rank shares.

2) if nothing else changes the stock rank of plus is only going one way and that's down as the momentum rank decreases as moving averages sink

3) what odds would I put on plus returning 20% over the next six months or would another high stock rank selection have a better chance of success.

I dont know the answers to those questions but I hope it helps.

Regards
Phil

I have decided after a few days consideration to keep PLUS in my portfolio but in a way that I do not expose myself too much to the risks of future down side.

I believe that the drop has been over done and of course Dan McCrum of FT Alphaville has asked some serious questions in his WINNING WITH PLUS 500 SERIES.  I note that the FCA have been watching PLUS for a while on a number of issues including marketing and customer identification procedures.

The stock has now been beaten down by around 40% and despite my own thinking that this has been over sold I have had a look at my three options.

a. Sell Out

b. Do nothing

c. Fully top up and rebalance the portfolio.

I have favoured the do nothing approach because I think it is too early to make a good judgement on whether PLUS is just another high risk over hyped stock.  I would like to wait a few more weeks and wait to see if all customers who has their accounts frozen (that handed over identification) are now trading normally.

I would also like to find out how much this has cost PLUS in revenue losses and then decide if the fundamental long term business model is sustainable and subsequently PLUS will recover from this.

I note Odey Asset Management has increased their holding as a mark of support but Valiant Capital management and Ennismore have taken up short positions.  In this case I accept that the share price may take months (possibly) years to recover.  Who knows.

The bear case is certainly strong and for once in many years I face a dilemma.   So I admit my human emotion is playing some part in this.   I want to do nothing, but I do not want top bury my head in the sand, thus I feel the 'urge' to do 'something'

I have thus decided a middle ground between fully topping up/ rebalancing and doing nothing.  I have decided a 'partial top up' of PLUS 500 in which if the underlying business model is not sustainable and PLUS is unable to move away from the current 'crisis'? then the risk of damage to my overall portfolio profit % is still manageable.

Portfolio before partial rebalancing

As it stands the portfolio is around 22% Profit since October 2014

As always I would like to produce my portfolio as it stood before the transactions and PLUS showing the big red nasty -45.7%  £912 loss (based on 258 shares).  My current highest gain is JD. Sports at 63.4%   £ 1267 gain (based on 521 shares)

Plus clearly shown to be well below my 5% minimum weighting limit, so my idea here is to top up enough to go over the 5% without weighting too much.

StockRanks JD. Sports v PLUS 500

Both StockRanks are still qualified for my holding because they are above my exit limit of >= 90.  However although the momentum is still very much in favour of JD. at ranked 97 it has become expensive as you can see on Value Rank 48.   As long as JD. Sports is on momentum and ranked above 90 then I do not want to cut back too much, however it is a good time to take some of the gains to rise on PLUS 500.

As it stands on PLUS 500 and although the rankings are changing on a daily basis, PLUS500 still qualifies and with the risk of the StockRank 95 lagging I am willing to take a small risk, long enough to wait for more news.

Portfolio after partial rebalancing

I have sold 168 shares in JD. Sports and bought 258 shares in PLUS.  Pretty much take £1000 is from JD and put it into PLUS.

I am happy with this weighting again.   JD.  Sports has a weighting that I believe will still benefit my portfolio should momentum continue to drive the price up, while reducing the risk if momentum runs out of steam.

Likewise with PLUS, I believe I have allowed PLUS a small chance to remain in my portfolio taking advantage of a claw back without risking too much of my over all profits should I have called this wrong.

Conclusion

I believe I have satisfied my human urge to do something, while not doing enough to destroy the successful gains of the past 6 months.  I am still planning to double the number of stocks in this portfolio to around 20 to which i believe will reduce these risks further in future.

Time will tell

Dav, I am happy to answer questions and receive different views of course. It seems i did get the wrong end of the stock so i myself will apologise.

I am happy to clarify a few points you raised.

"In this approach StockRanks are used as a screen to decide what stocks should be bought"

Correct I am using StockRanks to decide what stocks should be bought. My original plan was to simply buy the top two ranked stocks of each sector (farming type approach) if they qualify in the screener. However I have ended up actually picking what I think is most suitable (hunter approach) so in a sense the distinction is already blurred between a farmer and hunter. As a subscriber to US and EUR there is far too many stocks then some further research is required that goes beyond the StockRanks.  I am however trying my best to stick with StockRanks as they are a better indicator to success than I am.

In my quarterly reviews I will try to explain my rational further for choosing a stock.

Not immediately.  I would wait until the quarter review.   Some stocks may fall out of the screener just for a short while and then appear again.  Teroso was one Stock that went to 89 (my exit point) but only for a fortnight before raising back up past 90.   

I am still not fully decided how to exit yet but 90 is my rule of thumb.  

"if news comes out which is not reflected in printed numbers used for calculating a StockRank, then StockRank as the sole criteria may prove to be an extremely lagging indicator. In such a scenario, would you sell first or stick rigidly to the quantatitive/mechanical approach?"

Very good question and good timing.  I have always been strict in an outlook statement must always be positive and nothing really negative surrounding a stock.   PLUS has challenged this view and forced me from quarterly review to look into this.  In such a scenario i cannot stay rigid to the quantitive approach.  I have to examine the circumstances surrounding the fall in the share price.   This is what I am currently doing.   But I have been fortunate in that the StockRanks approach has bought me time as explained in the article. 

"I won't bother you again. Stupid of me to assume you were interested in optimising your approach."

I am always keen to answer questions, receive and share ideas or even receiving criticism.  I am new to writing anything publicly really (which everyone can see in my typos etc) and in answering questions that I need to consider everyone's approach with more respect so one again I apologise to you

Sorry - I am not trying to pick holes - I think you have got the wrong end of the stick. I'm just interested in your approach - mine is very similar - it's just I use a self-penned screen or two rather than StockRanks. I believe in the quantitative over qualitative.

Occasionally a stock like WIN or PLUS or QPP comes along which scores high but has problems but generally, for most stocks, StockRanks reflects quality/outperformance (imo).

I see you have answered my first question elsewhere: "Exit Plan

A stock will leave the portfolio when it goes below StockRank 90 and a more suitable qualifying stock can take its place."

But you haven't answered my second question about the lagging nature of the signal. No matter. Good luck with it. I won't bother you again. Stupid of me to assume you were interested in optimising your approach.

"The countenance of one man sharpens up another" - iron sharpening iron.

I've explained before about how I may exit and if you are trying to continually pick holes in what I am trying to do I shall refrain from answering any more of your questions.  

I have explained everything to the best of my ability in trying to work in a strategy of using StockRanks.  It is a learning and on going process

In this approach StockRanks are used as a screen to decide what stocks should be bought.

Therefore if a stock's StockRank falls below the screen threshold then the stock should be sold.

What is your StockRank threshold for selling a stock? and secondly, if news comes out which is not reflected in printed numbers used for calculating a StockRank, then StockRank as the sole criteria may prove to be an extremely lagging indicator. In such a scenario, would you sell first or stick rigidly to the quantatitive/mechanical approach?

In this portfolio I have 100% exposure . As I keep repeating it is this portfolio that I am using to test my StockRank conviction. 

Hi GrinderTrader - I suppose I was trying to get a feel for how much conviction you have in stockranks rather than how big your equity exposure is! So instead of answering my question - here's another one: would you be prepared to put 100% of your equity exposure in 8 to 9 high-StockRanks stocks?

hi Michael nice to hear from you again.

I filter out all Chinese , Russian and any stocks within the Russian sphere of influence, Should I have filtered out all foreign stocks listed on AIM? Well time will tell and this is part of the learning process of this account.

Incidently PLUS still qualifies and for now I am doing nothing but my view is to probably rebalance PLUS. I feel this current episode will pass and the share price will recover albeit slowly . As long as no further shocks are exposed.

Dasv , 40% loss on any individual stock.

The Stockopedia is a real money test portfolio in which I want to publicly tell the story of how I get on using astock ranks. I decided £20k as a beginning balance as a modest and sensible start, and one which most investors can follow without new investors being put off with larger sums being dealt.

I prefer to keep my total equity exposure on all my other accounts private so not to distract readers from the aim of this forum

Hi Grindertrader

Interesting post. I would not invested on Plus500 because I screen out not UK based companies. That said if I subscribed to the US Stocko I would include those because I believe they have a higher enough level of Corporate Governance over there. Otherwise just too many uncertainties for me. Something I have learnt from Paul Scott when discussses Chinese companies. What's your view on this?

Kind regards

Michael

Hi Grindertrader, "This is the first time in many years that I have held in any of my portfolios a stock over 35% (now 40% +)"

Do you mean a weighting in a single stock of 40%? Or a capital gain of 40%

If the former - then that's less diversification than Ed Croft is suggesting. If the latter - then yes I too run winners. E.g. I bought more CCT in the low 300's after buying in the low 200's initially.

Re: PLUS - I nearly bought in just now at 420 but now think there are too many uncertainties.
(see Numis Http://ftalphaville.ft.com/marketslive/2015-05-19/)

What percentage of your total equity exposure is in your stockranks portfolio? If it's a small percentage, do you plan to go 100% stock ranks?

(For my single stock equity I am 80% based on a quantitative screen - though not stock ranks based)

Hi dasv.

If my portfolio here was worth £20,000 - £25 000 and all holdings were 10 x increased then although PLUS was down 35% and resulting in a £6000 loss my overall point would remain. I would still look at this from a portfolio point of view.

This is the first time in many years that I have held in any of my portfolios a stock over 35% (now 40% +). My main portfolio I use Naked Trader style investing and stick to the very strict rule of stop losses so I am very used to taking a lot of losses but my overall gains are much larger.

In the case of this portfolio where no stop losses are considered I am going to stick with the StockRanks and having to able to not take rash judgements am considering actually part selling one of the larger gains to top up PLUS in order to rebalance the portfolio.

I also had PLUS - it met my quantitative screen in stockopedia and despite reading alphaville and posting bearishly on the stock on ADVFN thread I ignored the qualitative issues and bought. I also sold yesterday at 535p because of concerns - principally - customer acquisition costs, lost customers, lost revenue, reputational damage.

If you had a bigger stake (I had £7k (one of 20+ holdings) and crystalised a loss of about £2000), perhaps even with diversification you would still be smarting like me despite overall gains on the portfolio. I believe this is because of the Loss Aversion effect: http://en.wikipedia.org/wiki/Loss_aversion