My Stockopedia £20k StockRanks portfolio 3 years on (part 1)

29th Sep '17 by GrindertraderUK

23 comments 10642 reads

Introduction

The portfolio year end is 14th October, however due to my working plans I may not be able to update the portfolio during this time and so I produce the results 3 weeks early.

My StockRanks £20k Portfolio 3 years on (Part 1), is part of a series of blog posts about a real money portfolio based on the popular Stockopedia StockRanks. With an opening balance of £20K the portfolio came into inception during October 2014.

Why real money to test the system?

The purpose of the portfolio was to help me understand the StockRanks system better and to change my approach to investing effectively. I wanted to check my performance of stock selection based on a couple of hours work with StockRanks, over the year; compared to my discretionary portfolios in which I spend hours of research each week.

I wanted to feel the emotions of this important journey and learn how a StockRanks portfolio could affect me personally. While I considered a fantasy portfolio, I believe the only way to learn, cope and adapt effectively to a StockRanks system was to do this using real money. I believe decisions we make, risks we take, the fear and pride we feel in successful investing all come from real money experiences.

I felt £20 000 was a good starting amount. It is a recommended starting amount generally accepted within the investing community.

My Farming Rules

The Stockopedia QVM Recipe (Quality > 66, Value > 66, Momentum > 66)
Dividend Yield 12 month rolling > 0
Market Cap > £20m
Spread (bps) < 500
Sector includes - One screener for each sector (10 sectors in total)
Rebalance every 12 months
A wide non destructive Stop Loss will be placed. [new rules going forward]

Exit Plan

A stock will leave the portfolio when it goes below StockRank 90 and a more suitable qualifying stock can take its place. Once the Stock is part of the portfolio the Quality, Value or Momentum figures may go below 66. That is ok as long as the Stock remains above 90 at the time of rebalancing.

Although I wanted to provide as little human intervention as possible under this system I was able to choose stocks from each sector that I thought would perform better than others. I also reserved my right to intervene when an extra-ordinary or surprise…

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gus 1065

30th Sep '17

Hi Ian.

Thanks for the post.

I've been running a similar real money NAPs type portfolio for the past 21 months. Performance has not been as strong as yours - annualised CAGR in the high teens - but a perfectly acceptable result for an essentially mechanical trade with limited additional analysis being done. One thing I have noticed, which seems consistent with your own experience, is the apparent volatility of the Stock Ranks. From a running NAPs portfolio of 25 stocks, I have had to relegate 24 (i.e. 49 different stocks have been held in total) due to a deterioration in Stock Rank from an original 90+ to less than 70 at the point of my six monthly reset. Of the 49 stocks, 4 are now 35 or lower and a further 12 are between 36 and 50.

I'm not yet sure what to infer from this although I find it counter intuitive that so many apparently "good" (high stock ranking) companies seem to deteriorate rapidly over a relatively short time period. Perhaps one immediate lesson is that this isn't a passive "fire and forget" investment strategy of picking good companies and holding them forever but one that needs a fair bit more (albeit mechanical) supervision to keep it on the straight and narrow.

Gus.

Logic

Gus, did you happen to note if it was any particular part of the SR that seemed to change more than the others (V, M or Q)? Just curious if one of them is more variable than the others.

GrindertraderUK

Hi pka,

I agree having read the links you provided I can see a compounding method more useful than just a linear calculation. If CAGR is what most investors identify with them I am of course very happy to amend my post to display this figure instead.

Thanks for taking the time to point this out and your input is welcome.

best wishes
Ian

Hi gus,
Thanks for sharing your experience too and it's good to hear from you again.

I would need to look back the separate Q, V, M ratings as Logic is suggesting below in his reply. I do know that super stocks that have high QM, or VM tend to lower the full StockRank rather quickly as momentum slows. The new risk ratings could maybe help with a selection of less speculative stocks and more balanced, conservative ratings.

On the 'fire and forget' point I am continuing to trial stop losses in hoping that I can remain very passive over the year. However as demonstrated the stop loss can be helpful and yet doesn't allow that bounce back as what happened to NWF (LON:NWF)

With myself planning the double the portfolio to 20 I'll be interested on how 'hands off' I will be over the next 12 months.

I'll keep an eye out on your posts elsewhere so I can see how your getting on.

thanks again Ian

aye lol the expectations of the Santa rally certainly gets the investing community excited for a wee while. I remember a couple years back shorting retailers successfully, but then tried the same strategy with miners and got that one wrong.

As crazy as it sounds I do find shorting opportunities during and after the Santa rally. Due to receiving a lot of abuse (mostly on twitter) though I no longer post here or on twitter anything I short.

best wishes with it rjg. If your using real money it's a different ball game, so hope it goes well for you.

rjg

Many thanks. Yes, it's a real money portfolio. Very interested to see how the 'set and forget' approach works when compared to my 'normal' discretionary portfolio. Time will tell...

1st Oct '17

Hi Logic.

I've had a look at the five "hall of shame" stocks that have seen their Stock Ranks fall most between the date of inclusion in my NAPs portfolio and today. (some of the SR's are slightly out of kilter with the commentary above as they are constantly moving). These are Inland Homes (LON:INL) Novae (LON:NVA) Exillon Energy (LON:EXI) SCISYS (LON:SSY) and Pan African Resources (LON:PAF) respectively.

The table above shows the current SR, V, Q and M scores and the equivalent figures at the time that the stocks were included in the portfolio. To see if there are any discernible trends, I have then calculated a simple % change in each of the variables between the two dates ((New Value - Original Value) / Original Value) which is in the right hand side of the table.

Only a small sample so imprudent to try and draw too many conclusions. All of them see a marked drop in aggregate Stock Rank. The pronounced drop in the M value is also common to all with Q showing a similar trend but perhaps withe less rapid rate of change. As you might expect, V tends to move in the opposite direction to M to an extent (it seems intuitively consistent that as share prices fall M goes down but V goes up, although I accept this is a very simplistic observation). Where it gets more interesting is to consider the chain of causality - for example is the sharp drop in M triggered by an initial drop in Q (for example given by a set of poor results or piece of bad news). Potentially this could be a useful leading indicator, i.e. sell immediately on bad news (lower Q) before is kicks into lower share price (much lower M) etc.. This inference is consistent with the much more detailed analysis done previously on Stocko looking at the impact of profit warnings and the lessons for investors.

Gus.

Mark Charles

2nd Oct '17

Ian
Jest a note of thanks, I always cringe a bit with the statement of DYOR , I'm not an IFA or an accountant, I don't have Paul Or Graham's experience or knowledge, if two people with great insight can view the same information and come to different conclusions ( great example was the recent cast on Purplebricks (LON:PURP) by PS ) what hope does the average invester have ?
A good highly ranked & well diversified Portfolio has transformed my investing.
Your openness with this series on your own 20k portfolio from the start has to be commended and is a fantastic place for people to gain some information on what a real time SR portfolio can return.
Thumbs up.

ambrosia

i'm interested to see how well this strategy will do in a downturn, i suspect it might do okay

3rd Oct '17

Thanks mark for the kind words.

I always think about the mindset of new investors who need help in getting started successfully. There is far too much information out there and some of the (fantastic) detailed analysis from Paul, Graham, Phil Oakley, Richard Beddard etc but may be too complex for beginners. I do think StockRanks is a great way to start and I am already implementing the system into my normal stock picks too.

best wishes Ian

JamesS

Hi Grindertrader,
Congratulations on the results and a good article too.
I just wanted to clarify, with regards to the use of stock ranks do you (and other users if they want to chip in) use them as a sell indicator ie if it goes below 90 you sell automatically, or is it a case if they are below 90 at the point of rebalancing?

Regards,
James

4th Oct '17

hi James,
I sell when they go below 90 and point of rebalancing. i.e. once a year. My only exception to this rule is something extra-ordinary happened for instance a company accused of fraud or suspect accounts.

thanks Ian

Dear all
I have now rebalanced the portfolio. I'll start the new post and hopefully release this week.
Thanks for all the responses and comments on this year 3 results. as always its appreciated to know so many are finding the portfolio useful. At times I have thought about closing the portfolio and integrating into my main accounts. But I get satisfaction to keep it going by many people encouraging me.

best wishes
Ian

VegPatch

I am considering a L/S portfolio using high stock ranks for the Longs and teh reverse for the shorts. This would essentially make the fund "market neutral". Depending on the results one could then use some leverage to increase the gross. eg deposit £100 with IG and go long £150 of shares and short £150 of shares
Gross exposure would be £300, but net exposure 0
Obviously over time the net 'should' grow if the longs go up and shorts fall or go up less.

anyway, I wonder if anyone had tried this ?

pka

5th Oct '17

I seem to remember reading in some of Ed Croft's old posts that he invests his own money using a long and short portfolio, which is based on high and low StockRanks respectively.

It's an appealing strategy but beware the small cap, low ranking, Sucker Stock, multi-bagger. They are few and far between but a lot of the very low ranking shares are small cap penny stocks and occasionally they do suddenly wake up and multi bag. (Think the likes of Frontera Resources (LON:FRR) in the past few weeks).

Depending on how many positions you run in your portfolio just one of these "accidents" could wipe you out. Likewise - although possibly less of an issue if you are using spread bets rather than real shares - beware of the effect of a short squeeze on illiquid penny shares that suddenly take off which could compound the effect. Probably 5 times out of 6 you'll be perfectly fine and make a nice return. Just like Russian Roulette!

Gus.

The Third Man

Each to their own but, reading numerous posts (not just this thread), I do not understand why so many do their own thing with a highly complex approach when Ed has published a considerable number of studies showing the value of Stock Ranks.

I suppose it depends on what level of increase in value we each aspire to. Having toyed with a Stock Ranks Portfolio in 2016 ( I only "toyed" with it then because it seemed too good to be true) I now have all of my holdings in a Stock Rank portfolio. This year, to date, the portfolio (which is substantial) has increased by just over 25% which is plenty good enough for me.

The effort I have put in has been minimal. A rebalance in January and another in July followed by a cursory glance every weekend to check stop losses I have set. I like to do that as it enables me to keep in touch with share movements. The only real difference I have adopted to that which Ed advocates is to sell based on the stop losses I have set not on a fall in Stock Rank as such.

GrahamF

As you say "each to their own".

I think that it is worthwhile recognising that the weighting given to the Value Rank may mean that a fair number of the high growth smaller stocks are never included if you stick 100% to only picking high stock rank stocks. (i.e. the fast growing small companies trade at high prices relative to their earnings and so are expensive by the Stockrank methods). So, you potentially miss out on some of the best gains, conversely you also probably avoid some of the risk of being in these sort of shares.

So, if you take a look at the AIM 100 companies with the highest share price growth over 1 year what you find on the Oct 2nd 2016 Stockreports is

Frontier Developments SR 28
Falcon Oil & Gas 9
IQE 95
UK Oil & Gas 17
WanDISCO 25
Blueprism 47
Keywords Studios 66
Taptica 98
Purplebricks 8
Burford Capital 69

So, in general terms I use the Stockranks but with some high conviction small growth stocks as added spice. So, if you had decided that to only pick shares with a SR of greater than 80 you would have potentially missed out on some of those. So, I think there is a case for considering some lower ranking shares as special situations as they can produce some of the best returns.

But yes, those that want to make their own magic formula without the means to back test it to see if it out performs Stockranks seem a bit strange.

Lawman

14th Dec '17

Thank you, GT, for an informative clearly written article.

Apart from illustrating the consequences of your chosen method, it confirms the importance of having "A" method, setting rules, and not breaking them (but adapting them with experience).

I do not (yet) know sufficient about Stock Charts etc, but two thoughts:

(1) Stop Loss: you say you use a "hard" stop loss: consider a trailing stop loss set at a fixed multiple of the Average Trading Range;

(2) to time your purchase - as opposed to selecting a share - you could use chart analysis e.g. to identify a break out point. However, you may feel that is an unnecessary complication.

Please keep us posted as to future progress.

My Stockopedia £20k StockRanks portfolio 3 years on (part 1)

Introduction

My Farming Rules

Exit Plan

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GrindertraderUK

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