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

Gromley 6th Jan 32 of 71

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 71

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.



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Gromley 7th Jan 34 of 71

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 71

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 71

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 :


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 71

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 11th Jan 38 of 71

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.


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Johns54 13th Jan 39 of 71

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

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tom_chappell 17th Jan 40 of 71

Hi Ed - Thanks for another good article. I've decided to have to try running a NAPS portfolio this year. I tried replicating your selection process myself (i.e. applying the rules you've set out to define a list of stocks) and came up with a different (albeit overlapping) list. I'd be very interested in a guide / video to show how you use Stockopedia to apply the NAPS rules and come up with your list in practice. I have watched the NAPS Portfolio webinar where you demonstrate the "two by two" methodology, but I can see you've modified this approach now. I'd welcome seeing how the approach is applied in practice. 

A related query - How is the order of stocks within same Stockrank number determined (i.e. why are some Stockrank 99 stocks higher up the list / more highly ranked than others with the a score of 99)? I noticed that when I copy the top Stockranks across to a portfolio for the purposes of whittling down to a NAPS list, they seem to come up in a different order from how they appear in the Stockranks section, which made me reluctant to trust the new ranking order.

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Gromley 17th Jan 41 of 71

Hi tom,

I don't think there is a definitive prescription, nor probably need there be.
There are two factors though that would have given you a different list.

1. The date, StockRanks do change over time as new information (or just share price changes) come in. Therefore even if you a NAPs portfolio on today's SRs it will likely be different (in one or two selections at least) from one run even on yesterday's SRs. Ed constructed his NAPS in late December so it's no surprise that one run later will be different.

2. The point you allude to. How you sub sort stocks that have the same StockRank. As far as I understand there is no decimal point component to the StockRanks, so two stocks both rated 98 are considered exactly the same. This can make a difference as to which stock gets the last berth in a particular diversification bucket.
I don't know if Ed applies a secondary sort on his selections or whether it is luck of the draw as to which pops out of the machine first.
Personally I don't think it really matters and there's no real reason to believe that at that level any one portfolio option over another should be any better.

It's more in my mind about the high level purpose of the methodology.
1. Start with a high probability group of shares (those with high SRs)
2. Pick a diversified subset of them to broaden exposure and limit risk from cyclical factors.

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mmarkkj777 17th Jan 42 of 71

I don't know if anyone is tracking NAPS this year (Gromley, do you know?), but here is a screenshot of my Naps portfolio. Same stock selection as Ed's, but some bought a few days later.

So far its up about 0.5% with a few notable gainers, namely Mondi, Redrow and, you guessed it, Plus500.


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purpleski 17th Jan 43 of 71

In reply to post #435568


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purpleski 17th Jan 44 of 71


As a follow up to my previous comment, as someone who trys to buy and hold for a longer period than a year of time and therefore the idea of selecting shares that I know I may have to sell in 365 days is a bit of an anathema, I thought I would look at Ed's NAPS from 2015.

Of the 10 NAPS as of today (16/1/2019) 5 are ahead, 4 are under water and 1 was sold back in Feb 2017 at 49% above the 1st Jan 2015 price. The portfolio as of today would be showing a 38.5% gain (assuming Dee held as cash) over 4 years excluding divis. About 8.5% per annum, which is not too bad (to calculate the divis and calculate the total return would be too time consuming but the current prospective yield of the 9 stocks is 2.36%). So by my calculations well ahead of FTSE100, FTSE All Share and the AIM but well behind Fundsmith.

By my calculations based on the chart above £10,000 invested in 2015 sold at the end of the year and reinvested in the new NAPS and so on would be worth £19,100. I think it is fascinating that this is almost exactly the same as the return Fundsmith has achieved and it is certainly an impressive performance.

Maybe this is just of academic interest but I post anyway.

Thank you for you column and unlike some I much appreciate the time and effort that goes into producing these.

Happy Investing for 2019


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mmarkkj777 17th Jan 45 of 71

In reply to post #437523

Hi Michael,

Yes that is a good comparison, especially as the Naps is re-balanced annually and Fundsmith is actively managed. Dealing costs would be lower with the fund. For your comparison, did you include divs in the Naps result?

By the way, Nick Train has done better than Terry Smith over the last few years, with lower costs, and is ahead since Dec too.

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purpleski 18th Jan 46 of 71

In reply to post #437573

Hi mmarkkj777

No I did not include divis. I don't have the energy or resources to dig those out and add them in but might guess them being worth another 2.5% per annum?

The other slight problem with the NAPS system is that it assumes that it is held within a tax free wrapper. Obviously it depends on the size of the investment but but take 2017. If you started with £100k. At the end of the year you are at £143k but tax would take a big bite out of this.

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mmarkkj777 18th Jan 47 of 71

In reply to post #438088

Hi Michael,

That’s true about the tax free wrapper for Naps, but applies equally to any fund held.

With dividends I make that the Naps outperforms both Nick Train and Terry Smith. With dividends more than compensating for the Naps higher dealing costs.

I’ve got both now in my passive acct, so will see at year end which I feel is the best approach. Well for 2019 anyway.

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pka 19th Jan 48 of 71

In reply to post #438143

Purpleski wrote: "The other slight problem with the NAPS system is that it assumes that it is held within a tax free wrapper. Obviously it depends on the size of the investment but but take 2017. If you started with £100k. At the end of the year you are at £143k but tax would take a big bite out of this."

mmarkkj777 replied: "That’s true about the tax free wrapper for Naps, but applies equally to any fund held."

Actually, that isn't the case mathematically. Let us assume that the NAPS portfolio and the fund have identical growth rates before tax. If one has to pay some Capital Gains Tax on the profits from a rebalanced NAPS portfolio each year, that reduces the effective growth rate of the NAPS portfolio. When that reduced effective growth rate is compounded over a number of years, the overall effective growth is much less than if the original growth rate before CGT were allowed to compound over the same number of years in a fund and CGT is only paid once at the end of those years. The annual CGT allowance complicates this calculation, but it is possible to only sell sufficient units from the fund each year to make use of one's annual CGT allowance and reinvest the proceeds in another fund with the same growth rate (if one exists).

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mmarkkj777 19th Jan 49 of 71

In reply to post #438198

Thanks PKA for that clarification.

appreciate it.

It’s ok in my case, but I can see it could make a difference over multiple years outside of a tax wrapper.

Mark. .

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Nick Ray 28th Jan 50 of 71

Just when Ed says he might be moving on from NAPS, I find I am getting increasingly intrigued by how well NAPS performs. But partly because I am not sure exactly how it does as well as it does!

For example, here is a comparison of the top quintile/decile/vigintile's performance in 2014-2018 taken from the Stocko performance charts (QVM, annual rebalance, mcap>£50M) but turned into a bar chart as per Ed's remarks about seeing a clearer picture. (NB: I have deliberately used overlapping groups here to try to see how changing the rule SR > x would affect the return of a 'typical' portfolio built by sampling from that range of SRs.)

What is interesting is that NAPS has out-performed all of the top percentile grouping in three out of the four years. If it was just "sampling" from those top bands then we would not expect such a clear performance difference. And it seems unlikely that it is because NAPS is fishing from an even tighter percentile band (such as SR>97) because we know that in fact it does choose stocks with SR over a reasonably wide range due to the diversification rules.

Having said that, its poor showing in 2016 might be related to the fact that the 95-100 band completely flopped that year. (What happened guys?)

Conclusion: NAPS is about more than just picking the very highest SR stocks.

My own limited experiments suggest that there is a big benefit from the way that NAPS forms a "union" of stocks using slightly different criteria. (e.g. two from each sector, or a spread of market caps.) This union approach seems to work very well. I have found that you can choose almost any fundamental criteria to use for the union rules (e.g. a range of ROE) and get similar benefits.

I have even used random weights for a set of criteria with good results. Obviously it would be no good using random weights on useless metrics. But if you have a set of metrics which you believe are representative of "what makes a good stock" then randomly weighting them helps to "forgive" a stock which falls short on maybe one or two, and switches around what you care about enough to force a bit of variation in the types of stock your rules find.

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iwright7 28th Jan 51 of 71

In reply to post #441243


A very interesting observation. You mention e.g. a ROE union giving a simalar SR outpreformance outcome, but were these “Good” factors limited to Quality/Momentum ratios? I assume that Value was struggling over the same period?

My feeling is that factors started to fail about 6 months ago ( esp Q4) because the “Good Company” factors were sold off alongside the Rubbish, as investors took profits and moved to greater cash. My own portfolio has improve tremendously in the last 4 weeks as Quality factors appear to be making a comeback, which I assume is because investors now believe that these companies are oversold? Thoughts?    Ian

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