New Year NAPS - top stocks for 2016 and a few revelations

Tuesday, Jan 05 2016 by
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New Year NAPS  top stocks for 2016 and a few revelations

My 11 year old son turned to me a few days ago and asked the most wonderful question… “Dad, have you got any New Year’s Revelations ?” Aside from the sheer pleasure of the phrase, his comment really has got me thinking. What indeed did 2015 reveal ? And what should we resolve to take forwards through 2016 ?

For those who are new to the Stockopedia site, we’ve been on something of a journey in the last 12 months. Back on January 1st 2015 I selected the two highest ranking stocks in each sector according to their StockRank. This set of 20 stocks we titled the “New Year Naps” for reasons you can read up on in the original article. It was essentially my way of using a rules-based process to select some high expected return stocks without relying on any subjective decision making.

Amazing as it may seem, this very much mechanically selected set of stocks returned 43.4% in a year in which the major stock market indices sagged. As we’ve followed the strategy in various posts, the interest in the process has grown, which nudged me to run an hour long webinar last month reviewing the results, and the impact of diversification and rebalancing. You can catch up with the video here, transcript & performance results here and community discussion here.

So I now find myself in the rather precarious position of having set a precedent and I feel a duty to publish a similar set of 2016 NAPS. But before I do I’d like to invite readers to spend some time pondering with me about the nature of performance, process, skill and luck.

A brief 2015 performance review

Let’s put the 43% NAPS performance in perspective. The FTSE Small Cap index returned 5.8%, while the top 10% highest rated UK shares by StockRank returned 22%. Our selections have beaten the small cap benchmark and the general high StockRank peer group by a substantial margin.

As to individual stock performances, the following chart shows that two of the stocks more than doubled - International Greetings (LON:IGR) and Dart (LON:DTG) ; 4 others returned more than 50% - Adept Telecom (LON:ADT) ,

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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161 Comments on this Article show/hide all

jjis 7th Jan '16 42 of 161
1

In reply to Edward Croft, post #39

Hi Ed thanks for the updated Naps. In the article you mentioned that you had set up an An example NAPS stock screen but the link just goes to last years article - I wonder did you still have a link for that.

The other observation is that on paper like this you can just start a whole new list, whereas in a real portfolio you'd have to turnover a large % to get to your new portfolio with all the inherent costs, but with 40%+ gains in the bank I guess that wouldn't hurt so much.

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herbie47 7th Jan '16 43 of 161

In reply to Edward Croft, post #41

Thanks I see. It seems quite an interesting share, I read your post in Jan 2014, it seems to have a history over last 2 years of share price shooting up 20% and then drifting back down. I see Paul does not like the balance sheet. For me I think as its just gone up 20% I will leave for now.

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QuaysideCapital 7th Jan '16 44 of 161
1

Hi Ed,

As always a very interesting read - I've been trying to convince my dad about the merits of a more scientific, objective approach to investing and your articles seem to be slowly winning him over (if only I could be so convincing myself).

Anyway, I have one key question about this - are you planning on having another set of 2016 NAPS but using the 2015 rules?

If not, how can you be sure that the change you would see year-to-year would be down to your change in approach and not just the way the market has moved in different 52-week periods?

The way I see it, you can only compare approaches with like-for-like market conditions, something you wouldn't get if you looked at the 2015 NAPS against the 2016.

RT

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Edward Croft 7th Jan '16 45 of 161
2

In reply to QuaysideCapital, post #44

Are you planning on having another set of 2016 NAPS but using the 2015 rules?

No - I'm committed to publishing 1 portfolio. 1 portfolio matters, multiple portfolios is hedging bets.   We may though publish European and US comparables, but no more than 1 NAPS in each region.

I'm sure I'll blog on the difference between the approaches later in the year.  If the market crashes maybe I'll have been wise to vacate the sub £50m region.  If it doesn't maybe I won't have been. 

Why would we compare the 2015 NAPS versus the 2016 NAPS?   2015 is gone.  2016 is now. Life is full of uncertainty and change.  I am certain that my new rules would have done worse last year.  I'm certain that this year's results will be very different.  

Blog: Follow @edcroft on Twitter
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Novice Investor 7th Jan '16 46 of 161
1

If you keep changing the parameters each year, then what are readers supposed to take from the exercise?

I get that you are nervous and feel the same selection criteria will do worse this year, and you want to increase the chances of a better return (or a less bad one) after an incredible year, but I thought the idea was that you were going to use the same criteria which was a hands off, no thought portfolio.

Intuitively I would have done the same as you have, but that's not the point...is it?

This is a genuine question Ed.

NI

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herbie47 7th Jan '16 47 of 161
1

In reply to QuaysideCapital, post #44

I suggest you set up your own NAPS under the folios that is if you are a subscriber to Stockopedia then you can track it all the time, I have set up Ed's 2016 Naps.

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QuaysideCapital 7th Jan '16 48 of 161

In reply to Edward Croft, post #45

I ask the question as, given that you're changing the selection criteria as well as using a new 52-week period of market data, you've got 2 variables that are changing. How are you supposed to know which has had the effect in this situation?

If for example, you use the same approach from 2015 to 2016 (and presumably continue on year after year) with consistently high returns, you know the approach is sound.
If on the other hand, you use different approaches but on the same set of market data (i.e. the same year) you can distinguish the differing positive and negative effects of each strategy/approach from one another.

As a developer, how would you go about diagnosing the cause of software bugs. Do you change a load of parameters at the same time and hope something (of many things) you've done has fixed the issue? Or do you change one by one so you're able to diagnose the root cause of the issue?

Maybe I'm going way into the detail, but trying to take a more scientific approach to stock picking without employing a fundamental principle of scientific method seems to be leaving something out in my mind.

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QuaysideCapital 7th Jan '16 49 of 161

In reply to herbie47, post #47

A fair suggestion certainly. I'm merely interested as to how one approach performs against the other in the same year. That way one can effectively weed out which is the better strategy with a like-for-like data set.

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herbie47 7th Jan '16 50 of 161

In reply to QuaysideCapital, post #49

Yes I think many also do. Thats why if you set up different sorts of selections you can see which works best, however every year is different so not sure how much can be gauged from past performance. Im not doing a NAPS myself, as I don't think the time is right to invest a large amount in the markets at the moment, I have picked up a few that appear on the NAPS though and sold off some that did not perform well last year and taken some profits on some of the high flyers. I'm also going a bit more defensive, buying larger caps. The dummy Naps I did in June 2015 is only up 1.5% which is sharp contrast with ones that were done about 1 year ago or more.

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gus 1065 7th Jan '16 51 of 161
3

It would take about 10 minutes to set up a Naps portfolio using the 2015 selection criteria as these were, I believe, pretty mechanical and consciously set up to take out objective thought and decision making. If you look through Ed's Naps 2015 discussion threads I recall these parameters were quite explicitly set out. Screen the stocks for max spread (500bps) and minimum market cap(£20m). Run a QVM screen and pick the top 2 stocks in each industry sector based on Maximum Stock Ranking. "Buy" each stock into a sample portfolio in an amount of say, £2,000 per stock with assumed costs of say £10 per trade plus stamp duty if main LSE listed and mark to market from bid to offer.

Personally, I like the thinking behind the 2016 Naps; we all "learn by doing" and surely it's a good thing to identify how things can be done more effectively (in this case with a lower risk approach) and try to improve the previous methodology. It is after all, still essentially the same Stock Ranking based approach but with a bit more subjective input and learned wisdom from possible issues identified the last time around. An evolution rather than a revolution.

Gus.

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QuaysideCapital 7th Jan '16 52 of 161

In reply to herbie47, post #50

I wholeheartedly agree with you on the timing front. I was thinking purely on a virtual portfolio basis to be honest - more of an extended experiment than anything else. Then dependent on outcome, I may commit more to the concept.

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Noodle Hat 7th Jan '16 53 of 161
7

In reply to Novice Investor, post #46

I think the point is Ed + Stockopedia in general, are providing a real time demonstration of their own thoughts on investing (based on academic research) and showing the evolution of their implementation of this. I don't really think Ed has any duty to rinse and repeat previous years rules, in fact i'm astonished at the level of details and honesty he provides in these posts, putting himself out there for all to see and judge. Most other professionals refine "their system" and then only publish when its a proven success! Quietly dropping or forgetting what doesn't work!

Year on year they are reviewing this process, identifying what they can improve upon (in their mind) and acting accordingly. These rules changes are clearly spelt out in the above post as Ed's attempt to further manage and reduce risk, possibly sacrificing superior returns for a more comfortable level of risk and diversification to average out returns.

Why shouldn't the Stockranks approach, which is only a couple (?) of years old, not be subject to reflection on previous years and identify what additional measures can be taken to mitigate risk. They have never claimed the SR is perfect, just statistcally better probability of above average returns.

I think what we as readers can take from it is that there is no "perfect" system, any belief there is is deluding ourselves.

Ed himself has gone to great lengths to caveat past and future performance and why he has set the NAPS up in the first place. As readers if we want to run our own naps based on last years rules then thats very easy to do to check ongoing performance of the original criteria.

I see these rules tweaks as the logical evolution how to implement stock ranks into a portfolio, learning what quirks occur because of how the SR's group the market. Perhaps at the end of this year it will be decided that such rules were detrimental and overruled the original ethos of SR's but only testing this will do so.


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PhilH 7th Jan '16 54 of 161
4

Blimey Ed can't win.

Publish several variants and he's accused of covering his arse, publish one and he's changing the playing field.

If you wan't a NAPS list based on last years criteria, can I suggest ... you do it yourself! It's hardly complex!

QuaysideCapital ... your analogy is not comparable because developers test changing software with the same test data. The test data for 2016 NAPS is not the same as 2015 NAPS.

Professional Services: Sunflower Counselling
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Edward Croft 7th Jan '16 55 of 161
1

@jjis - Yes transaction costs weren't modelled, but then neither were dividends.  There's at least a 2.7% yield on the original Naps and the average spread was  2%.  So it would have evened out.

@frop @gus1065 @herbie - here here !

Blog: Follow @edcroft on Twitter
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TangoDoc 7th Jan '16 56 of 161
1

I must say that I am much more interested in an investing philosophy that evolves with learning and would never be very impressed by any single formula that was supposed to hold for all seasons. You could even make a strong case for a semi-annual re-appraisal, the way the world changes these days.

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andrewchat 7th Jan '16 57 of 161
1

Fascinating article Ed and as ever really interesting to hear about the academic side. I'm a novice investor and am keen on stop losses and trailing stop losses. But, just wonder if you would use them with a NAPS approach. Normally I set the stop loss down say 10-15% from current price and if the price dips I take a small loss and hopefully buy back later or walk away if there is good reason but maybe with a NAPS approach it is best to loosen up on this a bit and only sell if the SR drops to say below 75? I know that there is a lot out there on stop losses but good to hear views on how they could be used with SR, if at all?

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pka 7th Jan '16 58 of 161
1

In reply to QuaysideCapital, post #49

QuaysideCapital wrote: "I'm merely interested as to how one approach performs against the other in the same year. That way one can effectively weed out which is the better strategy with a like-for-like data set."

I can see why you're interested in performing such an experiment. The problem is that doing a like-for-like comparison of two 20-stock NAP portfolios constructed using different rules in the same year would not give you any statistically meaningful results. The sample size and evaluation period of the experiment would be far too small, bearing in mind the huge variability in returns from individual stocks. Or to put it another way, the element of luck in the outcomes of the experiment would be far too large to be able to draw any sensible conclusions.

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QuaysideCapital 7th Jan '16 59 of 161

In reply to pka, post #58

Well that's really part of the overall question I suppose. It boils down to, "is the whole system (of stocks and shares) just a little bit too complex to apply that kind of approach and get out something that can be compared on a level playing field?" And I think quite honestly you've hit the nail on the head so fair play.

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QuaysideCapital 7th Jan '16 60 of 161

In reply to PhilH, post #54

If you take the rules for the 2015 NAPS and 2016 NAPS and apply them both to 2016 data, then you're using the same test data for both, so it is comparable.

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PhilH 7th Jan '16 61 of 161

In reply to QuaysideCapital, post #60

You seem to be attributing the relative success or failure of the either set to the rules as opposed to some other factors.

For example, mid way through the year I might decide to make an outrageous cash bid for the largest holding in one NAPS portfolio, thereby skewing the results of that portfolio. Does that mean that the rules are better or was there some freakish event? Whilst my suggestion is plainly ridiculous there are potentially other lucky/unlucky events that might occur that effect results, e.g. key CEO of a family run business getting killed.

If a pair of NAPS portfolios were constructed every monday throughout 2016 and the 52 portfolios were tracked then maybe rolling forwards then you'd be able to draw some more meaningful conclusions.

Anyone who saw the varied performance of randomised portfolios that Ed posted some time ago will realise that there can be significant variations in performance.

Enjoy
Phil

Professional Services: Sunflower Counselling
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About Edward Croft

Edward Croft

CEO at Stockopedia where I weave code, prose and investing strategies to help investors beat the stock markets. I've a background in the City and asset management but now am more interested in building great stock selection tools for the use of investors online.   Traditionally investors online have had very poor access to the best statistics, analytics and strategies for the stock market and our aim is to set that straight.  High Quality fundamental information has been prohibitively expensive in the past and often annoyingly dull. People these days don't just want to know the PE Ratio and look at a balance sheet. They expect a layer of interpretation over data, signal from noise and the ability to know at a glance whether a stock is worth investigating or not. All this is possible using great design and the insights gleaned from quantitative research.  Stockopedia is where we try to make it happen ! more »

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