New Year NAPS - Top Stocks for 2018 and the Benefits of Ignorance

Tuesday, Jan 02 2018 by
197

2017 has been a good year for stock market investors, but it’s been a great one for NAPS investors. Over the course of 2017 this remarkably effortless stock selection system (that I’m now calling the “no-admin-portfolio-system”) returned over 45% after dividends, beating the performance of 99.8% of 3295 professionally managed funds in the UK.

What’s more this was achieved in less than an hour’s work at the beginning of the year, with absolutely no research into any of the individual stocks in question.

So, I’m going to start the year with a review of the NAPS performance over the last 12 months before considering the difference between ignorance and stupidity.

Once I’ve convinced myself (again) that it’s absolutely fine to know almost nothing about the individual stocks I’m selecting, I’ll then publish the 20 stocks that have made it into the 2018 NAPS Portfolio.

And then I’ll sleep on it for another year.

2017 Performance in Context

I’ve been running the NAPS portfolio since the end of 2014, and the performance has been, you might say, more than satisfactory. The portfolio has more than doubled (+115% before dividends) in these three years, with an average 29% annualised return.

Over this time period, the FTSE All Share has returned about 18.8% before dividends - at an average annualised return of 5.9%. So the NAPS has devoured the performance of FTSE index tracker funds by more than 20% per year since inception, and it’s done this at considerably lower volatility.

NAPS_-_Performance_Charts_MASTER_-_All_Y

2017 has been the best year of the three years so far with 42.5% growth before dividends. The chart above contains three lines which are clearly labelled:

  • The dark green line is the 20 stock NAPS Portfolio (top two stocks by StockRank from each sector rebalanced annually).
  • The light green line is the performance of the top 20 stocks by StockRank (no diversification, rebalanced annually).
  • The orange line is the FTSE All Share.

Although it’s a small sample, I do believe the above charts provide validation of the core ideas behind the NAPS - namely:

  1. Factor investing can beat the market. (The green lines, based upon the StockRanks, dominate the market index).
  2. Diversification across sectors can further improve returns, and reduce risk. (The dark green line beats the light green line).

The NAPS…

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way

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.


Do you like this Post?
Yes
No
199 thumbs up
2 thumbs down
Share this post with friends



Bloomsbury Publishing Plc is a global publisher. The Company is involved in the publication of books and other related services. The Company operates through four publishing divisions: Adult, Children's & Educational, Academic & Professional, and Information. These divisions derive their revenue from book publishing, sale of publishing and distribution rights, management and other publishing services. It specializes in the humanities and social sciences, and publishes over 1,000 books and digital services each year. The Company's digital products include Berg Fashion Library, Bloomsbury Collections, Bloomsbury Fashion Central, Churchill Archive and Drama Online. The Company's subsidiaries include A & C Black Limited, Bloomsbury Publishing Inc, Bloomsbury Information Limited, Bloomsbury Professional Limited, Bloomsbury Australia PTY Limited, The Continuum International Publishing Group Limited and Osprey Publishing Limited, among others. more »

LSE Price
188.5p
Change
0.3%
Mkt Cap (£m)
141.6
P/E (fwd)
14.4
Yield (fwd)
3.9

BP p.l.c. is an integrated oil and gas company. The Company owns an interest in OJSC Oil Company Rosneft (Rosneft), an oil and gas company. The Company's segments include Upstream, Downstream, Rosneft, and Other businesses and corporate. The Upstream segment is engaged in oil and natural gas exploration, field development and production, as well as midstream transportation, storage and processing. The Downstream segment has global manufacturing and marketing operations. The Rosneft segment has a resource base of hydrocarbons onshore and offshore. The Other businesses and corporate segment comprises the biofuels and wind businesses, shipping and treasury functions, and corporate activities around the world. The Company provides its customers with fuel for transportation, energy for heat and light, lubricants to keep engines moving and the petrochemicals products used to make everyday items as diverse as paints, clothes and packaging. more »

LSE Price
516.3p
Change
-0.4%
Mkt Cap (£m)
102,924
P/E (fwd)
17.1
Yield (fwd)
5.5

Forterra plc is a producer of manufactured masonry products. The Company is also a manufacturer of building products for the United Kingdom construction industry. The Company's segments include Bricks, Blocks and Bespoke Products. The Company's product range consists of clay bricks, Thermalite blocks, aggregate blocks, Red Bank chimney, roofing and flue systems, precast concrete and flooring products, and Formpave permeable block paving. It is a manufacturer of bricks in Great Britain and a manufacturer of Fletton brick, which is sold under the London Brick brand. It is a manufacturer of aircrete blocks in Great Britain sold under its Thermalite brand. It also manufactures aggregate blocks. Its bespoke products range consists of precast concrete, concrete block paving, chimney and roofing solutions, and structural wall insulation. It operates from approximately 20 facilities in total and is focused on the United Kingdom building and construction market. more »

LSE Price
290p
Change
0.4%
Mkt Cap (£m)
579.3
P/E (fwd)
11.0
Yield (fwd)
3.6



  Is Bloomsbury Publishing fundamentally strong or weak? Find out More »


126 Comments on this Article show/hide all

ratioinvestor Thu 12:34pm 107 of 126

In reply to Edward Croft, post #102

Ed - thanks and very interesting points. Unfortunately I am a bit of a devil's advocate on things so tend to disagree with everything. I agree that we need to judge whether we can personally add value. Some people can and some people can't. I also agree that we are prone to these biases. Someone last year might have said, for example, that Wizz is an airline and I don't want to own that. But it has done very well and is a good company.

James Montier - A colourful character but in my view he overcomplicates things. Most investors overcomplicate things. I am a big fan of the basic approach of buy good companies at a good price i.e keep it simple.

Human intervention in systematic stock systems - Understand the reasoning here but what is human intervention and what is a human learning from data/systematic results. For example, certain investment sectors deliver good returns over the long-run and others don't. This has been highlighted by long-term data. If a human intervenes in a stock screen to cut out certain sectors are they using their judgement (biases) or data from the real world to add value. Not sure if I have made this argument well. The point is that not all human intervention is the result of biases. It can be the result of humans learning from data and thus systematic in nature.

| Link | Share | 2 replies
shanklin100 Thu 12:38pm 108 of 126
1

Hi Ed

Would you please consider updating your article to show the mid-price (or offer price) on the day you made your selections? I have already come back to your article several times, and expect to do so going forward, but it would be good to know the starting position.

Obviously at the moment, for each company one can get an idea of the starting prices by comparing the current Mkt Cap to the Mkt Cap you quote but this seems less than ideal especially if any of the companies raises money through placings.

Best Regards, Martin

| Link | Share | 1 reply
nbeeny Thu 1:25pm 109 of 126

In reply to ratioinvestor, post #107

I am another following both this method and this thread with interest.

It is very difficult to not think that we can add value, and I am sure that there are cases when this might be so.

But I feel that you have contradicted yourself and probably disproved your point.

You say that someone might not want to own an airline and therefore not pick Wizz.

They have, to paraphrase your words "intervened to cut out certain sectors using their judgement..."

But by doing so they would have missed out on the gains that Wizz added to the portfolio.

We don't know which stock they might have picked instead, but in your example they have intervened using their judgement and not added value.

| Link | Share | 1 reply
ratioinvestor Thu 1:36pm 110 of 126

In reply to nbeeny, post #109

nbeeny - I thought someone would pick up on that so thanks for doing so. The example I gave they incorrectly discarded Wizz Air. However, I think the low cost airline is actually generally ok so I would of left it in.

So there really isn't a contradiction. What I am saying is that human judgement can be informed by experience and statistical data. This means that human judgement isn't necessarily just driven by psychological biases.

So a statistical screen will throw up potentially poor sectors. We can choose to ignore some of the stocks thrown up. In the case of Wizz Air the sub-sector of budget airlines is actually ok. The broader legacy airlines are fairly poor.

The stock challenge NAPS thing is over a relatively short time period and subject to rebalancing. I guess I am saying that if it throw up banks and weak sectors a long-term investor would do well to ignore them. Of course any one bank can rally well in an individual year.

This is all a question of judgement. If you look at the book "What Works on Wall Street" you can see that different sectors have varying performance levels and risk levels. I guess I am saying that a sector overlay can help. It is essentially informed by the statistical data. This is what most prominent investors have done. Woodford, Buffet, Smith. They have had a sector overlay on their investment decisions and screens and it has worked very well.

| Link | Share
James RH Thu 1:43pm 111 of 126

In reply to shanklin100, post #108

Martin,

I don't know if it will help but I took the December 29 closing price (being the last trading day of the year) from each share's graph and used that as a basis to create a portfolio of NAPS for the beginning of the year. It's a rough estimate but good enough for my purposes.

I just 'purchased' £1k in each stock at the Dec 29 closing price ignoring costs. That way I can monitor the progress easily and come back to the starting position throughout the year.

James

| Link | Share
shanklin100 Thu 1:59pm 112 of 126

Thank you James

It just seems a rather obvious omission from the original article.

Cheers, Martin

| Link | Share
Edward Croft Fri 10:00pm 113 of 126
8

In reply to ratioinvestor, post #107

 For example, certain investment sectors deliver good returns over the long-run and others don't. This has been highlighted by long-term data. If a human intervenes in a stock screen to cut out certain sectors are they using their judgement (biases) or data from the real world to add value.

If you look at the sector distribution of all the stocks in the UK market, you'll find only 23 Utilities but 443 Financials.  Does it make sense to equally weight these sectors in your own portfolio just because our classification segments them evenly into 2 of the 10 sectors?  My judgement bias says of course not.  So I'm happy to have less utilities. 

We all make judgement biases.  A stock selection system is a judgement bias.  The FTSE 100 is a judgement bias.  Everything we do is filled with our judgements. 

My own biases are best carried out at the top-down systematic level, not at the bottom-up discretionary level.  It works for me.  I'm so prone to believing in narratives that I have learned to avoid learning too much about individual stocks. My process leaves me prone to data-mining biases, rather than attachment bias or the narrative fallacy etc.

Choose your biases wisely I say.   It's about what works for one's own psychology - everybody is different. 


| Link | Share | 1 reply
ratioinvestor Sat 10:55pm 114 of 126
1

In reply to Edward Croft, post #113

Ed, Thanks a very useful reply. This is a very interesting debate and is one of those topics that will go on forever. As you suggest there isn't really a right or wrong answer it is what works for different people. The SCVR editors are very good at using newsflow combined with fundamentals to get into attractive stocks, for example. The debate essentially has the hallmarks of the Moneyball (Michael Lewis book and a film) type conundrum in baseball. Should scouts only go by data or trust their instincts? Or a combination of both?

I am a great fan of filters systems such as Stockopedia.  This is because the logical thing to do when trying to invest is to find the best investments.  Given the quantity of stocks out there we can't analyze all of them.  There has to be some way of filtering them down into a reasonable pile.  The alternative approach that investors have is to be "sold to."  So they choose what to invest in from a broker, a newspaper report etc.  They then conduct "research" to justify the decision.  

Jim Slater's excellent contribution was to highlight the importance of filter systems to find stocks.  The name of the game is not to assess one stock you come across it is to find the best stock to invest in.  At the same time it is worth reflecting that many of the stocks that the Slater system selected haven't withstood the test of time.  Although I am biased on this point, I would argue that qualitative analysis can add value to the Slater system I.e. what is the long-term franchise power and staying power of a business?

I am of the view that an investor can build up a good qualitative framework to assess stocks. But I still think a filtering system to find good stocks in the first place is also useful. So these aren't too contradictory schools of thought. I would say that a qualitative assessment framework wouldn't necessarily be considered to be "psychological biases." In qualitatively assessing a company you are trying to build a view based on analysis. This is as opposed to just going with what your gut initially feels. So you start with a blank sheet of paper and try and figure out a view.

I know this kind of school of thought has its detractors. However, there are very basic analytical tools you can use to help determine a company's prospects. These include competitive position, necessity of product, customer relationship, growth outlook for end market and exposure to critical risk factors. I have never seen the success or failure of company that cannot be explained by this kind of assessment after the event. It therefore follows that if we are reasonable at conducting this kind of analysis, and it has predictive power, then it may add value. But obviously I could be wrong.

However, to turn the argument around.  By only using a filter driven approach we are stating that we shouldn't consider the qualitative factors of a business.  If you look at Mark Slater he uses filters to find stocks and then meets them to discuss their future business outlook.  Or if you look at Fundsmith they use filters to identify stocks and ignore certain sectors.  They then make a qualitative assessment.  So for example, tobacco may look great financially but is prone to the risk of faster than expected decline.  So there is evidence for some investors that a filter than assessment approach appears to add value.

I could post my psychological biases on this year's NAPs but it might come across as somewhat negative so I will refrain from doing so!!!!!!!! Our first instinct as investors is typically to say I wouldn't buy that because of X or Y or Z. If we don't own or follow something we usually have a good reason or bias as to why it won't do well. If a stock has gone up a lot people who don't own it will typically say "I wouldn't own it because of Y reason" to justify their failure to own it to date.

In the timeframe of the NAPs very strict sector selection may not work. If we were taking a very long-term NAPs type approach, picking stocks for say 15 years without any turnover, I think adding a sector and analysis type framework would help a lot. If you define the investment problem the easiest and most robust solution is a sector driven one.  

This can be seen very clearly in the UK.  Just owning the largest branded consumer staples companies over the last 20 years would have led to massive outperformance.  I.e. Diageo, SAB Miller (now taken over), Unilever, Reckitt Benckiser, Imperial Brands and British American Tobacco.  Significant outperformance without considering valuations, economic outlooks, management, financial ratios etc etc.  If you looked for companies with similar characteristics you could of built up a reasonable portfolio.  I.e. Intertek, IHG, Smith & Nephew.  You could then add global companies with similar characteristics like Amadeus.

Good luck with the NAPs this year!!! I will have a look and see which I think are the most attractive stocks when I have time to go through them.

| Link | Share
belazela Sun 10:05am 115 of 126

Interesting. But I would only invest in solid performing companies whose products I like and that have good financial metrics. I would not recommend knowing little about any stock you intend to invest in. That's just plain stupid unless of course you have the luxury not to take calculated risks.

| Link | Share
PhilH Sun 11:09am 116 of 126
6

Hi belazela,

I have to strongly disagree with you. The stocks I select are picked as a result of screening fundamentals and timing purchases/sales based on technical analysis. I no next to nothing about the companies I invest in over and above the preview given by Stockopedia.

I'd argue that my risk taking is more calculated than many as I understand my limitations, i.e. I don't kid my self that i can 'understand' businesses  models/markets/personalities/products from a wide variety of industries/markets. I embrace my naivety and it enables me to not be seduced by a stock, a story, the charms of CEO's, bulletin boards, 'experts', etc.. If they fail to perform I cut them and move on. No hand wringing.

But to further emphasise the power of naivety the Guru Strategies tracked at Stockopedia also have no knowledge of the the companies that they select, yet several have very excellent track records with limited drawdown.

If you're not convinced by my words then please take a look at my fantasy fund which mirrors my personal investments apart from the fact that I didn't start with £1m.

Why not look for a Guru Screen that appeals to you, create a copy of it and setup a fantasy fund that follows that strategy. No filtering of the screen results, no using your 'knowledge' to deselect some candidates. Try it out and see what happens? You might be surprised.

Best of luck
Phil

Professional Services: Sunflower Counselling
| Link | Share | 1 reply
belazela Sun 11:22am 117 of 126

In reply to PhilH, post #116

Thank you very much, will do. I like the Guru screens, excellent filter.

| Link | Share
Johny Lazarus Mon 12:45pm 118 of 126
2

Hi Ed,
I am very. impressed with the site and I now have two NAPS portfolios. One is UK shares, similar to yours and the other one is World shares. The 2018 World shares portfolio is obviously more diverse than the 2018 UK one and is doing about 3 times better 2.73% for World NAPS vs. 0.87% for UK NAPS. I did cheat with the World NAPS by including Google which has a StockRank of 84 ie. < the 90 cut off.
My question relates to balancing. The article on your site, "When to sell" by O'Neill recommends selling assiduously when %Gain drops below 7 to 8%, also when %Gain rises above 20%. Yet you recommend balancing only once a year or at best quarterly. Plus 500, my worst share, has a %Gain of -8.96% which conforms to O'Neill's selling criterion. but should be kept if conforming to your balancing criterion. As a matter of principle, what should one do? I am not asking for advice but rather clarification of principle. Confused. Many thanks. John

| Link | Share | 2 replies
lucien2k Mon 6:48pm 119 of 126

I have done very well on the NAPS strategy as well. I chose to exclude utilities, financials, telecoms and and energy from my strategy when I set it up. I failed to rebalance last year and still did very well on the previous years companies.

The reason is that 3 of those industries are huge companies that are steady performers rather than outstanding stars, some of the stars are potentially boom and bust so I wanted to avoid. Telecoms is in long term decline as everything moves online (I figure the stars are in technology rather than telecoms).

I guess that may bite me one year, but so far it has worked out very well.

Maybe I need to do a more serious rebalance this year,

| Link | Share
Abe Tue 6:35am Moderated for Spamming
3
Abe Tue 6:41am 121 of 126
1

Furthermore your article is useful and should assist in using Stockopedia more gainfully.At tbe moment i am using another stock picking program but i plan to have another trial of Stockopedia if available.

| Link | Share
nbeeny Tue 10:30am 122 of 126

In reply to Johny Lazarus, post #118

I have been pondering something similar myself.

I think that Ed will be able to give you a more intelligent answer than me - and I am sure he will.

But, my thinking from the reading I have done, is that you need to set yourself a strategy or rules and abide by those rules.

So you need to decide if you are going to sell when the stock drops by a certain percentage or hold and rebalance periodically, or whatever other strategy you have formulated.

You decide and you stick by it. Unless, perhaps, if something really catastrophic happens - but of course you should have already decided what you will do if that ever happens.

| Link | Share
rjg Tue 10:57am 123 of 126
2

In reply to Johny Lazarus, post #118

Hi John

I believe that the original intention with the NAPS method was to buy and hold for a year (or six months in the case of SNAPS) and not sell anything until that time, regardless of price movement up or down. That said, each individual will have their own opinions on what is best to do and can vary their own NAPS rules accordingly.

Some food for thought...

I started a NAPS portfolio last August and decided to allow myself the option to sell stocks in the portfolio in the event of bad news or a drop in price of 15%-20%. I also decided to top slice shares if they rose by 30% or so in order to lock in profit. In other words, I gave myself permission to fiddle (which, of course, is the complete opposite of what NAPS is all about). Anyway, in the last five months, my 'fiddled with' portfolio is up 10%, which I am more than happy with however, if I had just left everything alone as it was on day one, the portfolio would be up by 13%.

Of course, five months is an incredibly short period of time over which to measure anything but the difference in performance to date is significant and illustrates the whole point of the NAPS, which is to set and forget.

As I said, everyone will have their own ideas about what works best but I am now keeping my fingers away from the buy/sell buttons and will review things in August (like I should have done in the first place!)

| Link | Share
Real81 Tue 1:19pm 124 of 126

A general comment here for those monitoring and considering this approach... And yes, it's one person's experience in isolation and not advice, caveat caveat caveat but -

I too was interested at the start of 2017, off the back of an email-shot about NAPS, so bought a year subscription to read the full article, sold about 20% of my portfolio (that I was prepared to) and trialled the approach by handpicking I think 6 or 8 stocks using the NAPS approach (some were already in my portfolio). I picked stocks that had best yield and div cover I think. At the end of the year, there were more up than down and those that were up, increased more than the losers decreased. Very happy.

I've now subscribed for 3 years and have increased the % of my portfolio that reflects NAPS approach. I'm probably still at only 40% of my portfolio operating this way and, as with all of these things, I'm sure some years will be worse than others.

I'm no expert compared with some but giving it a go with a % as a trial has been excellent for me.

| Link | Share
Johny Lazarus Tue 3:38pm 125 of 126

Nbeeny said that he thought that Ed will be able to give me a more intelligent answer than him - and I am sure he will. I would certainly appreciate that, Ed
Nbeeny also pointed out the need to set a strategy or rules and abide by those rules. As a recreational PPG pilot, I fully appreciate the need for a set of rules.
Since I am new to Stockopedia I am still in the process of formulating the rules for selling. O'Neill or Ed??
It seems to me that there are three things; 1. What to buy? Stockopedia answers this question. 2. When to buy and 3. WHEN TO SELL ??

| Link | Share
Johny Lazarus Tue 3:48pm 126 of 126

Hi RJG, I hear what you are saying, Thanks

| Link | Share

What's your view on this article? Log In to Comment Now

You can track all @StockoChat comments via Twitter

 Are Bloomsbury Publishing's fundamentals sound as an investment? Find out More »



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 »

Follow



Stock Picking Tutorial Centre



Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis