Working on Stockopedia's theory that a basket of shares with the highest QVM rankings will on average outperform the market I decided to see whether the opposite was true - whether a basket of shares with the lowest QVM would underperform. Indeed what i was hoping was that not only would they underperform but on average exhibit negative returns over a 12 month period. If this were the case going short on this basket (via spread bets) would generate a positive return. I had from time to time gone short on individual shares but it was the usual story – I picked the right candidates but the timing was often wrong and I would get stopped out. Hence I decided to try a portfolio approach of what I am referring to (hope this is OK Ed) as the NASPS portfolio (the extra S is of course for Short).

As well as potentially making a return in a market which may go sideways over the next 12-18 months, I hoped that it will also provide some protection for my long portfolio against any general market correction. I thought I would share my experience of setting up the portfolio and I will follow up in 6 months with a review.

So how did I select the portfolio and what is my approach to risk management?

The selection approach adopted was to a great extent the one of blissful ignorance that Ed adopts when he puts the NAPS portfolio together. I screened on the basis of QM below 30, high debt and relatively low spreads. However because I really wanted the lowest QVM picks I didnt diversify across industry. This I felt was justified because my losers would come through company specific issues (e.g. an exploration company hitting a gusher) rather than say industry factors (e.g the price of oil).

The biggest problem, as you would have guessed, was that less than a third of suitable candidates can be shorted mainly because there was no stock available for borrowing. I managed by tweaking the criteria a bit to come out with 16 UK stocks to which I added Tesla and a short on the Italian market to cover the current political uncertainty.

As it is a short portfolio stops are a must. I set these at a generous level to give the…

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