Naked Trading: A Robbie Burns Inspired Quant Investing Screen

In Brief

This is a mixed-criteria GARP screen inspired by the enjoyable best-seller by Robbie Burns, "The Naked Trader: How Anyone Can Make Money Trading Shares". His approach combines a focus on fundamentals:

"My investment strategy has always been quite simple: find excellent companies and hold them until the value comes out".

While he does appear to use a fair amount of technical analysis in order to time the entry, he appears sceptical about pure TA:

"I strongly believe charts are very important to look at.. but I also believe it’s simply crazy to buy and sell shares on the basis of looking at a chart and nothing else at all".

 In the book, Robbie seems to ally himself most closely to the investor type that he calls the Medium Term Trader, i.e. an investor that buys and holds shares for:

"anything between 3 months and 2 years, does some careful research, sticks to stop losses, takes profits when it’s sensible to do so... & prefers smaller companies (with growth prospects) to FTSE 100 ones".

Background 

Robbie Burns is a journalist and writer. Formerly working with BSkyB, ITV, Channel 4, he left full-time work in 2001 to trade and run his own businesses. While at BSkyB, Robbie broadcast a diary of his share trades which became his website, www.nakedtrader.co.uk. He published the first edition of the Naked Trader in 2005, following up with the third edition in September 2011. As Alistair Blair of the Investors Chronicle notes, "The Naked Trader by Robbie Burns sounds awfully like one of those 'How anyone can make money trading shares' books that wouldn't get a mention in this column. It really does say exactly that on the cover. But hey - to ignore the fact that this promise sells books would be very naive. It's what's inside that counts".

The book does cover a lot of very useful material, including an excellent chapter discussing the top 20 mistakes that investors make, backed with real-life examples (these range from not using stop losses, to buying lots of penny shares and/or tipped shares). He also lists in the book 20 "proven" investing  techniques which range from fairly trivial examples like "Find something cheap", to the more interesting ideas such as buying shares that have recently done a share split (he gives the example of Greggs for this) or which are moving from AIM to Main Market ("whenever you see an announcement that an AIM share is planning to move to the main market, it’s... probably one of the best buy signals there is!"). The Naked Trader is unfortunately devoid of any systematic backtesting type analysis so the only evidence for some of these ideas is frankly Robbie's say-so but that's not to say that they aren't sensible ideas.

While the Naked Trader book lacks the kind of analytical rigour of, say, David Dreman's "Contrarian Investment Strategies", that's also part of its appeal. It's written much more as a candid expose of the lessons learnt from practical trading, without any pretensions to be an academic work. As one Amazon reviewer puts it, it's "free from the usual financial mumbo-jumbo jargon found in most stuffy financial books". Given the unashamedly populist/laddish tone, it's also a book that might be read by a larger audience than most investing texts - hopefully, that will go some way to correcting the awful national obsession with speculating on residential property, that most unproductive asset class beloved by seemingly all Brits!

Does "Naked Investing" work?

Between 2002 and 2005, Robbie Burns wrote a column for the Sunday Times, 'My DIY Pension', featuring share buys and sells made in his pension, and apparently doubled the money from £40,000 to £80,000 over this period. By mid-2011 he had turned this into £250,000. Robbie is said to have made a tax-free gain of well over £1,000,000 from trading shares since 1999, making a profit every year, even during market downturns. His public trades - detailed on his website - have made to date £978,286 (split between Share Buys: £815,731, Spread Shorts: £155,594 & Big Brother Bets: £6,961). Without knowing for certain the initial investment amount, it's hard to know the exact compound annual return he's achieved but turning, say, 50,000 into 1 million over 12 years amounts to a CAGR of 27.8% which isn't too shabby. It is worth pointing out that this is a portfolio return, which may or may not be matched by a simplified quantitative "Naked Trader screen", especially given that there a number of qualitative criteria involved in his system that can't really be modelled (as discussed below).

Investing Criteria

Burns declares himself against strict rules - "I'm not really one for rules. I've always hated authority, so rules and me don't often get along". While he does list some 30 rules of thumb in an appendix, they are mostly qualitative ones, such as "Understand as fully as you can everything about a company before you buy it". Having said that, on page 130 of the 3rd edition, he lists a number of stock selection criteria, with the most quantitative being:

a) Dividends, profits and turnover are rising

b) It has a full listing - "I tend to favour shares that have a market cap of between £50m and £900m because they have a lot more room for growth than, say, a FTSE 100 share".

c) It is liquid - "A spread of 3% is about as much as I’ll allow. 4% max".

d) It is priced at under 15x profits to market cap. He also says it must look cheap, using slightly wider PE based criteria - "Personally, I quite like lower P/E ratios (provided all the other signs on a share are good)... in the region of 12–20". For simplicity, we specify that PE must be less than 20x but sort in PE order ascending. 

f) The chart looks positive and is in an upward trend - the measure here seems to be 1 year absolute strength (although he also talks about the three year profile too). He is keen on shares trending upwards and breaking new highs. "Don’t buy shares trending downwards and breaking new lows".

g) Debt is under three times its full-year profits: "My rule of thumb is not to buy anything with net debt more than three times the full-year pre tax profit, or what the likely pre-tax profit might be next year".

Let us know in the comments below if you think we've missed anything from a quant perspective. 

Qualitative criteria

In addition, he lists a range of other more qualitative criteria, which can't be filtered quantitatively and could only be assessed based on a detailed analysis of the company, e.g. "there are no question marks, I understand what the company does, demand for its products is likely to grow". One other criterion - there is still growth to come - could potentially be quantified by referring to analyst forecasts, although given the poor forecasting record by analysts, company growth prospects are probably better assessed on a case by case basis. He also does a quick and dirty textual analysis of the annual report to see how frequently it uses words like "challenging" or "difficult" as opposed to "exceeding expectations" or "positive" .

How can I apply these screen criteria?

Although Robbie's approach isn't ideally suited to quantitative screening, we've done our best to replicate the key filtering criteria in order to create a Naked Trader-eque Screen. We'll be tracking its performance shortly on Stockopedia Premium. It's worth recognising that Burns seems sceptical about the value-added of systematic investing - "If only stock market investing was that easy! Don’t waste time on magic formulas and systems... You’re better off doing your own research and developing your own investing style". It will be interesting to see how this simplified Naked Trader-eseque quant screen compares over time with his own declared returns on the website.

From the Source:

The third edition of Robbie Burns' Naked Trader is now available on Amazon. It is a quick read, packed full of ideas (some quite introductory, others far less so) and - once you get past the tone which sometimes grates - it is very very entertaining and educational.

Further Reading

• Naked Trader website
• Investors Chronicle review of Naked Trader
• Sharescope discussion of Naked Trader criteria. There's also an active Naked Trader discussion thread on Advfn.