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

Wednesday, Jan 02 2019 by
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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71 Comments on this Article show/hide all

Nick Ray 28th Jan 52 of 71

In reply to post #441273

Valuation metrics are a whole story in themselves. Although it is "obvious" that you should not over-pay, it is not at all clear that Valuation metrics help with this. I have even experimented with selecting for low-V and compared it with similar rules but selecting for high-V and there is really not much difference in overall performance of the resulting portfolios. On the other hand, they don't seem to do any harm either if you combine them with rules selecting for Q and/or M.

2018 was a very odd year for Value metrics though. The NAPS portfolio started to droop from June onwards and that seems to be typical for portfolios built which include rules to select for high V. Portfolios based on QM which ignore V or select for low-V started to droop later - in September or October. But they all ended up at a similar point at the end of the year.

However I doubt whether this is a usable way to detect a market downward drift in the future. It may just be an oddity of 2018 in the same way that in 2016 the very-high Stock Ranks didn't do anything but the slightly lower ones performed very well.

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iwright7 29th Jan 53 of 71

In reply to post #441328

Thanks for the Valuation reply. Sometimes what should be obvious turns out not to be so!

I am away on holiday at the moment and during quiet moments have taken opportunity to listen (Audible book) again to Daniel Kahneman’s, Thinking Fast and Slow. He is of course famous for System 1 and System 2 decision making. One particular part got me thinking about the use of factor metrics in stock selection.

Kahneman recounted an early epiphany during his time in the Israeli army. He was assigned to a project to assess a recruit’s fitness for active service. Despite psychometric tests the Israeli army's interview and selection procedure at the time was; "almost useless for predicting the future success of recruits”.

Kahneman asked the army interviewers to ditch their existing approach and limit the interviews to a series of factual questions meant to generate a score on 6 separate personality traits. Within few months, it became clear that Kahneman's systematic approach was a vast improvement over gut decisions and was so effective that the Israeli army would use his exact method for decades to come.

What I found most interesting though was Kahneman’s observation that if the army interviewer having asked the same systematic questions was asked to “close their eyes” and to give a subjective interview score, that this “intuitive” scoring method was also found to be effective in predicting future recruit success to.

I do think that there is a case for substituting Kahneman’s systematic interview scores with individual ”good company” factors that go into each Stockrank score and the overall scores themselves. Then to close ones eyes (to engage more System 2 thinking) and to weigh up all the available information before coming to a buy decision. The above does also confirm my view that that a written pre-buy checklist will reduce investing mistakes. For those interested the book link is below. Ian

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Stuart Bates 30th Jan 54 of 71

Hi Ed,

Fantastic article.

NAPS is a great idea and glad to see it going so well.



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PJH123 17th Feb 55 of 71

Is their an easy way to follow NAPS as it progresses throughout 2019? Could it not be a Guru screen?

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Captain_Trader 21st Feb 56 of 71

I have a question, in an effort to remove the trading costs would it be possible to spread bet the NAPS folio with zero leverage? Example £10,000 account size over 20 stocks is £500 per stock ,imagine stock A is trading at 500p then you spread bet that stock at £1/point therefore requiring no leverage.Now the meat of the question, as you are not using leverage would you incur overnight charges? I understand you will miss dividend payments.

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skinner66 21st Feb 57 of 71

captain_trader i have my own portfolio on about 13 stocks but since dec 1 till now i have been playing spread bet on ftse, dax, wall street,, i put in 5k i do my own system is hard work and boring spend alot time , but i watch tv as doing so not really hard work on sofa lol.. so now my 5k is of tonight 8.3k.. so

made 3.3k in less than 3 months , what i like this is in my own hands shares are in the company   owners hands to run my profits, but this is a side line i tried, as you asked i tried went long on convatec monday banked £100 in 30 mins,, i could made more keeping, but id rather bank profits soon then maybe go in again if drops same day,, i do spend many hours aday selling and buying but i enjoy it,, i play chess for hours and computer takes hours at least this way i make money  also do  study shares you gunna spread on  or  its like playing fruit machine

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ISAallowance 21st Feb 58 of 71

In reply to post #450988

Yes, certainly on IG funding interest charge is charged on the entire value of the position, regardless of the amount of margin held against it.

However, you do receive dividend payments, on the ex-dividend day a dividend adjustment is made in the form of a payment to your funds.

For small positions, a non-leveraged spread bet might have cheaper trading costs than any real purchase, but this is not certain. I can't look up the actual spreads quoted on IG spreadbetting at the moment since markets are closed, but IIRC it was approx 0.5 percent each way greater than the market makers spread. So on a £500 position, an extra £2.50 each way. That is cheaper than any normal dealing charge, but you can normally deal within the MM spread with normal dealing. So on stocks with a wide spread you could soon start losing, say, 2% each way, which equates to a normal dealing charge.  And then you have to pay the funding interest, if you hold the NAPS for a year that's about £15/year on a £500 position, there are some normal platforms where you can deal cheaper than £7.50 each way so if you hold for a year you're behind with the interest even before considering the spread.  In summary, at £500 positions held for a year I think you'd probably be better off with a normal account.

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Captain_Trader 22nd Feb 59 of 71

In reply to post #451008

Thank you for your advice , probably best to look for a cheap platform then, I have seen some trading at £5/trade and stick with an annual re balance rather than quarterly

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dfs12 2nd Apr 60 of 71

Any ideas of how the 2019 NAPS portfolio has performed in the first quarter?

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Laughton 2nd Apr 61 of 71

In reply to post #464505

As of now (10.45am on April 2) overall I make it  UP 2.528% - that excludes dealing costs and any dividends.

If someone could explain how to import or copy and paste a Folio into this message I could give returns for each share but it takes too long for me to type in 20 company names and percentages.

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Laughton 2nd Apr 62 of 71

With thanks to Gormley - here is a list of the constitent stocks and their individual performance:

Sorry - I've used an edited Excel spreadsheet to get the width to fit but, as you can see, the resulting look is far from ideal. More tips and experimentation needed.

Ticker Name Gain % Stock Rank™
BVIC Britvic 17.5 86
BT.A Bt -5.91 96
CARR Carr's -8.33 97
CCT Character -3.11 99
D4T4 D4t4 Solutions 30.3 84
DTG Dart 1.08 93
EMIS Emis 19 89
EVR Evraz 35.8 99
SBRY J Sainsbury -11.4 71
JEL Jersey Electricity -0.22 87
MNDI Mondi 6.49 92
MCL Morses Club 5.92 95
NWF Nwf -15.1 96
OCN Ocean Wilsons Holdings -3.8 93
OPG Opg Power Ventures -1.75 96
PLUS Plus500 -45 88
RDW Redrow 23 99
SCS Scs 19.1 100
UAI U And I -9.77 78
WIN Wincanton -3.4 96

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Nick Ray 2nd Apr 63 of 71

In reply to post #464577

If someone could explain how to import or copy and paste a Folio into this message I could give returns for each share but it takes too long for me to type in 20 company names and percentages.

If you want to cut&paste from a spreadsheet, click on the "show text editor" button (top right above dialog box) and then just cut and paste directly from spreadsheet to this dialog box. It will appear as a table.

If you want to cut&paste from a web page, it doesn't seem to import as a table. However, you can cut&paste from the web page to a spreadsheet, and then from the spreadsheet to here!

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Laughton 2nd Apr 64 of 71

I think my education is becoming too long and probably boring for most. I tried that Nick but I end up with everything in a single column so it looks even worse. That was using an Excel spreadsheet with 5 columns.

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Nick Ray 2nd Apr 65 of 71

In reply to post #464696

Did you select "show text editor" first?

I get something like the below example (but I am using OpenOffice):

Ticker Name Bid
BVIC Britvic 949.5
BT.A Bt 223.9
CARR Carr's 133
CCT Character 520
D4T4 D4t4 Solutions 245

(This is from web to spreadsheet and then back here again!)

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dfs12 2nd Apr 66 of 71

In reply to post #464577

Many thanks for the info and your travails. I have had a similar experience with the text editor. You've got the results - that's the main thing. up 2.5% doesn't seem too bad. I thought it might have been worse than that.

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Sonia Danthy 4th Apr 67 of 71

Posting on behalf of @Laughton

Here is what the breakdown for individual stocks should look like.

NumberTickerName%     Stockrank
1VIC Britvic17.586
2BT.A BtBt-5.9196
3CARR Carr's-8.3397
4CCT Charachter-3.1199
5D4T4 D4t4 Solutions30.384
6DTG Dart 1.08 931.0893
7EMIS Emis1989
8EVR Evraz 35.899
9SBRY J Sainsbury -11.471
10JEL Jersey Electricity --0.2287
11MNDI Mondi6.4992
12MCL Morses5.9295
13NWF Nwf-15.196
14OCN Ocean Wilsons Holdings-3.893
15OPG Opg Power Ventures -1.7596
16PLUS Plus 500-4588
17RDW Redrow2399
18SCS Scs19.1100
19UAI U And I9.7778
20WIN Wincanton-3.496
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skinner66 4th Apr 68 of 71

naps as stated is one year,, so ride the waves,, maybe apart from plus 500,, but maybe now is cheap to get in,,

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skinner66 4th Apr 69 of 71

paul scott did say in last report wincanton not to good,,, maybe naps need adjusting bit sooner if others following,, brexit does play abit.. into this ,

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johread 7th Apr 70 of 71

In reply to post #465966

How would you advise switching shares in a current portfolio of say 15 or 40 shares into a NAPS portfolio? Having done that when would you recommend any holding should be sold, for example on the next annual NAPS review or only if a 'holding began to show good results?

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Laughton 8th Apr 71 of 71

In reply to post #466826

"or only if a 'holding began to show good results?" - is that a typo?

Otherwise I can't understand the logic. Why would you sell something that was beginning to show good resuluts?

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