New Year NAPS - Top Stocks for 2019 and the Symmetry of Risk

Wednesday, Jan 02 2019 by
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New Year NAPS  Top Stocks for 2019 and the Symmetry of Risk

Well it had to happen eventually didn't it? After a barnstorming 43% return in 2017, the No-Admin-Portfolio-System (NAPS) hit a wall in 2018. My musings on the benefits of ignorance last January led to nearly 100,000 reads over the year but, if private investor sentiment is anything to go by, I've a feeling that this year's more sober reflection may not prove as popular. I think this would be a shame, as it's in the harder times that the best investment insights are learned.

As usual, this is an extensive piece, ruminating on the sources of risk and return since the inception of the NAPS, reviewing the portfolio selection criteria and culminating in the list of 20 stocks for the year.

Yes, these are the "top stocks for 2019" according to my current NAPS criteria, but I have absolutely no crystal ball as to where each stock will go. Up, down, sideways, in circles - I have no idea. I know this is a controversial thought to traditional stock pickers, but the individual stocks don't matter to me. I wouldn’t bet my home on a single one of them. What matters to me is how the stocks have been selected, what traits they bring, and how they synthesise into a portfolio. The NAPS seeks the perfect portfolio, not the perfect stock.

What is the NAPS?

(Long term readers can skip this section.) The NAPS is a process that can be used once or twice per year to generate a stock market portfolio with a good chance of market beating returns. It's based upon a few fundamental principles:

  1. Behavioural Investing. Many stock market investors (myself included) are plagued by behavioural biases that can lead to investment mistakes. A disciplined, rule-based approach to stock selection helps counter these biases.
  2. Factor Investing. Market beating stocks are regularly driven by a common set of factors or traits (such as quality, value & momentum). We can screen the market for stocks with these traits to select potentially, market beating portfolios.
  3. Diversification. It's the only free lunch in investing. Since most investors either don't diversify or don't know how to, rigorous diversification helps avoid the risk of ruin and maximises the potential of profiting from factors.

In practice, it's a simple, rule based approach that generates a portfolio of 20 high ranking stocks from different market sectors. It's…

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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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ScS Group plc is engaged in the provision of upholstered furniture and flooring, trading under the brand name, ScS. The Company specializes in fabric and leather sofas, and sells a range of branded and ScS branded products sold under registered trademarks, including Endurance and SiSi Italia. The Company also offers a range of third-party brands, including La-Z-Boy, G Plan and Parker Knoll. The Company operates from approximately 100 stores nationwide along with an online sales and also has approximately 10 distribution centers across the United Kingdom. The Company has operations in retail park locations and in House of Fraser stores across the country-as far north as Aberdeen and as far south as Plymouth, offering a range of upholstered furniture and floorcoverings. The Company also runs a made-to-order sofas, furniture and flooring concession within House of Fraser. The concession operates from approximately 30 House of Fraser stores across the United Kingdom and online. more »

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221.5p
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-0.7%
Mkt Cap (£m)
88.6
P/E (fwd)
8.7
Yield (fwd)
7.5

Plus500 Ltd is an Israel-based online provider of Contracts for Difference (CFDs). The Company develops and operates an online trading platform for retail customers to trade CFDs internationally over more than 2,200 different underlying global financial instruments comprising equities, indices, commodities, options, exchange-traded funds (ETFs) and foreign exchange. The Company enables retail customers to trade CFDs in more than 50 countries and in over 30 languages. The Company's trading platform is accessible from multiple operating systems, such as Windows, smartphones (iOS, Android and Windows Phone), tablets (iOS, Android and Surface), Apple Watch and web browsers. The Company conducts operations in the European Economic Area (EEA), Gibraltar, Australia and certain other jurisdictions across Asia, the Middle East and elsewhere. Its subsidiaries include Plus500UK, Plus500AU, Plus500CY and Plus500IL. more »

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1475p
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-0.3%
Mkt Cap (£m)
1,677
P/E (fwd)
8.1
Yield (fwd)
10.2

EVRAZ plc is a steel, mining and vanadium business with operations in the Russian Federation, Ukraine, the United States, Canada, the Czech Republic, Italy, Kazakhstan and South Africa. The Company's principal activities include manufacturing steel and steel products; iron ore mining and enrichment; coal mining; manufacturing vanadium products, and trading operations and logistics. Its segments include Steel; Steel, North America; Coal, and Other Operations. The Steel segment is engaged in the production of steel and related products at all mills except for those located in North America. The Steel, North America segment is engaged in the production of steel and related products in the United States and Canada. The Coal segment includes coal mining and enrichment. Other Operations include energy-generating companies, shipping and railway transportation companies. more »

LSE Price
477.1p
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-1.5%
Mkt Cap (£m)
6,886
P/E (fwd)
6.4
Yield (fwd)
9.5



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39 Comments on this Article show/hide all

timarr 3rd Jan 20 of 39
1

In reply to post #432148

Sorry, which part of that article are you directing my attention to? It doesn't appear to mention anywhere that the annual performance of a NAPS portfolio is causally correlated to the parity of the last digit of the year, or explain the underlying mechanism.

In fact the article appears to say the opposite:

The stock market is a random distribution of returns. It can go on runs… multiple years up on the trot, and multiple years down.

But perhaps I'm missing something?

timarr

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mmarkkj777 3rd Jan 21 of 39

In reply to post #432148

Also, lots of people think the summer vs winter months is statistically significant.

Not sure about alternate years for Naps though, mainly because the share selection seems quite different year-on-year. Not sure what the correlation would be. Any thoughts Herbie47.

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timarr 3rd Jan 22 of 39
1

In reply to post #432173

Also, lots of people think the summer vs winter months is statistically significant.

Oddly enough, it is. It's the Halloween Effect. No one quite knows why, but buy in November, sell in March is robust - although there are still a few years where it doesn't work. Lot's of suggestions about the causal mechanism but my preferred one is that sensible people prefer to go out in the spring and summer and enjoy themselves :)

However there's obviously no correlation between NAPS results and the parity of the year - I'd assumed herbie was making a joke, given the fact that the entire article is about statistical correlation ...

timarr

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breyten 4th Jan 23 of 39
1

Thank you for the article - I really enjoyed following last year's NAPS and how the comments keep updating as the year progresses and stocks move up and down. I bought into the idea later on in the year and this was one of the articles I was looking forward to.

In your rule about diversification, you indicated to have no more than 1 in any industry group.
The 2019 portfolio has both Jersey Electric and OPG Power Ventures, very different companies, yet both classified as Electric Utilities & IPPs as industry.

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Edward Croft 4th Jan 24 of 39
2

In reply to post #432348

@breyten - yes I should have clarified this point. Telecoms and Utilities are very sparsely populated in terms of industry groups, so the hard industry group rule is not upheld there. As you can see, the system has a fair amount of discretion even if the stocks that qualify don't.

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Gromley 4th Jan 25 of 39

In reply to post #432813

@breyten - yes I should have clarified this point. Telecoms and Utilities are very sparsely populated in terms of industry groups, so the hard industry group rule is not upheld there. As you can see, the system has a fair amount of discretion even if the stocks that qualify don't.

It's fascinating to see the developing tweaks and refinements you are making to diversification Ed (my thinking has slightly diverged on this, but I've not quite got around to collecting my thoughts into a useful narrative on the subject).

I might be misremembering, but wasn't part of the reason for moving from only two stocks in each sector to a maximum of three driven by a view that Telecoms and Utilities were not favourable sectors?  (I might have imagined that as I cannot now find the comment I thought you made on the subject).

Now there is a rule tweak that 'favours' them.

I'm curious (assuming that I havn't just misremembered) as to whether this is just tweaking and refinement or whether you are consciously or unconsciously adopting a modest degree of 'sector rotation'?

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skinner66 4th Jan 26 of 39

thank you ed for which is hard work you put in and also great to meet you and other stocko peeps all great to see at stock slam events.. just couple questions, do you put same cash into each share ie 5k,,as portfolio 100k, and is list of 20 from most fancied share or just random,

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lightningtiger 4th Jan 27 of 39

Another great article Ed, thank you. Enjoy Australia with the kangaroo steaks, sunshine and scenery.
In the first few days into 2019 the portfolio is up 0.43% with Plus 500 showing the highest return of 7.19% so far. It is also in 2nd position in the bubble chart, with CCT in top position.
Plus 500 is also the most undervalued share with a valuation of 2440p according to Vectorvest, where it is in 4th position in the UK market.
It is thanks to Stockopedia that my portfolio produced a dividend income of over 15k last year (£15,167.84 to be exact ) which is the most income that I have ever received. That is around 11.3% , all inside my tax free ISA in case any tax inspectors are thinking of checking. It is all OK.
Thanks again Ed for Stockopedia.

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mmarkkj777 5th Jan 28 of 39
1

I have gone with the Naps for 2019. Bought yesterday (well 19 of the 20, because couldn't get a quote on D4T4 with my broker, HL). Will try again Monday.

So far, because of the dealing cost, around half of the 19 are in profit. Still have not decided whether to use stop losses, or stick with selection until end of the term.

Mondi are also doing quite well so far (early days).

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Mohammed Malik 5th Jan 29 of 39

In reply to post #432853

Well done - indeed a good day for the markets.
Looking at the top 2 on the Stockranks - EVRAZ & SCS - both went up 6%

Did you buy all 19 today - interesting strategy!!

I tend to drip feed and buy across a range of say 5 days.

Good luck!!

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mmarkkj777 5th Jan 30 of 39

In reply to post #432863

Hi Mohammed,

I bought the 19 stocks on Thursday. Due to personal time constraints of not being able to watch the market for optimal buying times. But the market performance on Fri has probably helped reduce the negative of not timing my purchases.

I want to use stops, but if I do after a while it won’t be naps.

If I choose to use stops I need to decide what to do with the liquidated capital. Two thoughts are either:

choose an alternative stock from a reserve list
Buy more of the Naps stocks that are performing the best.

I’m favouring the second, as it keeps it somewhat still in the Naps fold.

Either way, it then becomes a managed portfolio and moves away from Ed’s intent of a no maintenance portfolio. But it could be an interesting test.

Note: I have not invested a high proportion of my capital to do this, but as I was mainly in cash (and want to start trickling back into the market) I thought I would have a go and it’s an interesting way to start further testing the water.

Thanks to Ed and the team for the research, and the excellent work, as ever.

Cheers. Mark.

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skinner66 5th Jan 31 of 39

just an add as looking at top 20 redrow after getting arse kicking from telford homes never do for at least 2 years house builders... d4t4 seems loads director dealings and shares not availble now,,go stockopedia no price,, nwf why such low volumn in shares ? i wont go on just hope more experts can answer this,, im sitting on convertec still wondering do i hang on or cut my loss

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Gromley 6th Jan 32 of 39
3

In reply to post #432903

Hi Mark,

Just a few thoughts about your stop or not musing.

1. I wouldn't worry too much about how "Naps" like your variations might be. NAPS is in my mind essentially a building block or philosophy (Ed uses the phrase ' a Jazz sheet to riff on'). Everyone has got their own requirements and foibles (quite a few I have noted would not dream of investing before doing some detailed research into the companies in question - this may well have saved them from Indivior (LON:INDV) this year, but also quite possibly £PLUS). At the end of the day if the additions or subtractions from Ed's basic framework make sense to you and you can have some confidence that they add value, then I don't see the problem.

2. That said, my testing on stop losses for NAPS (and similar portfolio approaches) has generally shown that there has not been a level to set the stops at that provides better performance than not having stops. (I haven't worked the numbers yet for 2018 - was planned for tomorrow, but I'm likely to have to defer that - and I suspect this might be different as stop losses would have protected against the worst of the falls for Indivior (LON:INDV) ) I found that stocks that rebound from just below (any) stop level tend to outweigh those that fall further. Nevertheless I do recognise that stops do give some psychological reassurance and the small performance drag that they present may therefore be worthwhile.

3. (And this is the main reason I chose to reply) In terms of where to recycled cash from stops - I don't agree that buying more of the best performing NAPS stock keeps you more "NAPS like at all" > NAPS I would say is not defined by its selections but rather by it's method. If you were to push more cash into the best performing stock, you are increasing your reliance on one single factor (momentum) and more importantly, I think, diluting the second most important element of the approach (2nd to the StockRanks themselves) which is diversification across Sectors, Industries, Size, Volatility/Risk. For my money, that is most un-NAPS like! Your selection also might no longer have a high SR, which doesn't necessarily make it a sell, but the figures do seem to show that historic SRs become less and less predictive as time passes.

The most NAPS-like answer I think is the one that Ed applies when a forced seller (eg a takeover) and that is to take the latest StockRanks and select the first stock that satisfies all of the diversification rules.

By the same token, there is nothing magical about the 1st of January. As you've only reinvested a part of your capital at this time there is no reason, if you wanted to be more exposed to the NAPS method, that you couldn't start a second parallel NAPS type portfolio (still with a 12 month holding time) in for example July (or even April). This may even given an extra layer of diversification - possibly across cyclical factors.


Nothing more than food for thought - as Ed has said, NAPS is not supposed to be a prescription.

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mmarkkj777 6th Jan 33 of 39

Hi Gromley,

Thanks for your take on this. All very good points.

I’ll take on board what you say about the value of stops, but in your back test did you assume your liquidated capital was not reinvested?

My natural tendency is to ride my winners and cut my losers, but within the scope of my Naps portfolio I don’t need to do this. So I may leave it to run the course.

Cheers,

Mark.

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Gromley 7th Jan 34 of 39
2

Hi Mark,

I’ll take on board what you say about the value of stops, but in your back test did you assume your liquidated capital was not reinvested?

I've generally run lots of scenarios to seek to find a level of stop (whether trailing or from original price) that would actually give positive results, that it was impractical to consider precisely what would have been bought with the returned cash.

However in Ed's half year review I did post a view based on a 15% trailing stop loss, comparing the subsequent performance of the stopped out shares with the FTAS performance from that point to the end of the period.

You'll find that here.

Five out of the six stocks went on to outperform, with the best being Morgan Sindall which recovered 23.8% compared with a 2.8% gain for the FTAS.

As I mentioned above, it seems likely to me that the second half of 2018 will show stop-losses in a more favourable light (although any reinvested cash would likely have gone down too). I'll try to do a proper review of that in the next few days.

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mmarkkj777 7th Jan 35 of 39
1

Hi Gromley,

Thanks for that. I didn't want you to go to any effort, just wondered if the stopped out cash was calculated reinvested or held as cash.

I managed to buy my allotment of D4T4 also today, so now I hold the full Naps compliment.

I think I'll go without stops for a few months and see how it goes. Normally, I use stops for 2 main reasons. 1. it automatically takes me out of a falling market (as in October). 2. I'm not good at selling falling share manually, always thinking it will recover. Setting the stop takes out this psychological element (weakness) and allows me to concentrate on stock selection and timing the buys. It works for me with profit targets at least 2x the stop level (but I guess none of this is required for Naps).

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Gromley 7th Jan 36 of 39
3

In reply to post #433463

No problem Mark,

Its a piece of work I am intending to anyway (not because I am sold on Stop Losses for a portfolio like this, but wondering if there is a case to do a "manual review" at a given stop level - manual reviews and personal decisions are definitely not NAPS of course.)

It struck me as I was on the way to an appointment this afternoon, that there is a very quick tweak to be made to the model I ran at the half year and here are the results.

Below is the result of a simulation based purely on closing prices and on the basis that : on the day stop loss is triggered you close out the position (at the day's closing price) and a buy a perfect FTAS tracker (again at the day's closing price).

The results then show at the Half Year (HY) and Full Year - the value of the "stop-lossed" portfolio vs the value of the "continue to hold" portfolio and the number of stocks triggered; based on both a "trailing " stop loss and a "starting price" stop loss

Here are the high level results :

5c339c6ba3f26NAPS18-FY-STOPLOSS1.JPG


So, as I mentioned earlier, at the half year  I could not find any stop level that would have been beneficial. As predicted,  by the full year the case for stop losses did look slightly more favourable, but even the notional 3% best case "improvement" would probably not cover the dealing and spread costs of the extra sells & buys.

I should stress this doesn't in any sense suggest that stop losses never work, but in all of the cases of "balanced"  portfolios that I have personally looked at I haven't found much variance to this (in fact these FY values are about the most positive light I have been able to shine on stop losses.)

Of course in this particular case, if you'd had the "sense" to get stopped out and then sit on the cash you would have been much better off. The problem there though would be when do you start buying back?



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mmarkkj777 7th Jan 37 of 39

In reply to post #433483

Hi Gromley.

Thanks, yes. I'm going to run it completely non-admin. as Ed intended.

I'll be interested to see how it pans out and compare to my usual methods, although finding a balanced comparison method is pretty difficult (impossible).

Thanks again.





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purpleski Fri 4:14pm 38 of 39
3

Hi Ed

I hesitated to post this because I wasn’t sure whether it seemed overly critical, so forgive me if it does, it is not meant to be.

What a brilliant column and the list throws up some interesting stocks. Thank you. As you say this one should get more views than last years rather than less. There is a great deal that can be learnt from it.

I still take issue with Stockopedia’s belief in diversification to the extent of owning 20 to 30 stocks (I own 8 to 12) but that is a discussion that can run and run.

However, I don’t think it is the “only (PI) free lunch in investing”. The other major “free lunches” (over the big guys) that Private Investors have are: i. Option to invest in small and micro caps, ii. The ability to take the long-term view (three to five + years). Certainly, if I ever decide to go the NAPS route I would place an upper market cap size on my screen. The other reason I don’t feel it is for me is that it is looking at performance over a one year view, when I think that so much out performance comes from holding for longer periods.

On the subject of bench-marking, yes I wouldn’t use the FTSE100 but anybody who takes issue with this can surely pick their own index and see how NAPS performed against that. I benchmark against an equal wait mix of S&P 500, AIM All Share, Fundsmith and Conbrio Buffettology. As if I found that I was no good at the stock picking melarchy, it is to those funds that I would deploy my money. It certainly wouldn’t be to a FTSE tracker!!

I was surprised at “....but it had done it at a lower volatility/risk.” Surely it is nowadays a given that volatility is not risk?

One question are you disappointed that the NAPS portfolio only “outperformed” the benchmark by 3%?

For the record I don’t run a NAPS and my four year record is 22%, 34%, 54%, -12%

Happy Investing in 2019.

Michael

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Johns54 Sun 12:27am 39 of 39
5

Is writing a couple of articles a year such a burden you poor soul

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