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

Edward Croft 2nd Jan 1 of 71

PS - for those looking for a SNAPS update - I'll add the stats to the charts once I'm back in the office next week.

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covkid 2nd Jan 2 of 71

Thanks Ed - i find the NAPS strategy very interesting as i don't have the time or experience to research companies but want to be able to operate something that works. Biggest surprise to me is how few companies from last year have made it into this years...............

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edwinlefever 2nd Jan 3 of 71

Great article. My naps last year were slightly different, but the results were similar. Although it was a loss, I am pleased with the performance and will be sticking with this approach to stock picking for a large part of my investments. To spend just a few hours once or twice a year and then forget about your portfolio is liberating. Many thanks.

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PhilH 2nd Jan 4 of 71

Bon chance Ed. As ever your rigour is to be admired.

Happy New Year!

Professional Services: Sunflower Counselling
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ACounsell 2nd Jan 5 of 71

In reply to post #431558

Hi Ed,

Have monitored your NAPs and SNAPs over the year. Largely agree with your performance analysis though estimate a dividend yield of 4.4% for your NAPs which improve the total return. Looking forward to your SNAPS update which I have as a loss of 11.1% (we probably have slightly different starting prices both in NAPS and SNAPs) though this includes the rebalancing transaction costs and profit/(loss) on positions exited. The real negatives in the 2H were Keller (LON:KLR) and Royal Mail (LON:RMG) (a balanced stock at time of SNAPS selection!) though there were again a high number of negative performers vs. previous years. Again dividends help a little representing a yield on original cost of 3.3%. Happy New Year and enjoy the rest of your holiday!

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Nick Ray 2nd Jan 6 of 71

NAPS came through a very interesting test last year. In theory, anyone can get a return better than the index in a bull market by simply using leverage. Hence why "risk-adjusted returns" are an important metric.

However in the face of a negatively drifting market in the last six months NAPS has performed the same or better than the index which suggests that it is doing more than just picking more highly leveraged stocks.

It would be very useful if you could create an admin Fantasy Fund to track the 2019 NAPS the way that you track the guru screens.

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prem14 2nd Jan 7 of 71

Having made around 30% loss in 2018, NAPS provides some comfort. Look forward to your HATS trick when you have it up and running. Maybe stocko will provide live data for its stock reports by that time?
Happy New Year!

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Zoiberg 2nd Jan 8 of 71

The 2018 NAPS alerted me to Griffin Mining, a miner whose primary product is zinc. The price of zinc rose during the early part of the year and as with all miners that increase mostly goes to the bottom line. The share price did not absorb that information immediately and I was able to make a tidy profit when the price of zinc eventually turned. Many thanks for the tip! I was never a "fire and forget" investor.

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mmarkkj777 2nd Jan 9 of 71

Hi Ed, I'm seriously considering mirroring the Naps selection with a proportion of my capital (I'm about 85% in cash at the moment, waiting for the market to steady/bargains to appear). However, I've had an interest in factor investing for a while and am comfortable with the risk of getting back in immediately by another 10% or so. The only problem I have is a psychological one. I normally use stop-losses as a safety net (which mainly took me out of the market between early and end October).

I could, I suppose, use the Naps selections with a generic stop set at a certain level and trail them), but the portfolio could then slowly diverge from the Naps regardless of whether I replace the stocks stopped out on, or just have a reduced diversification.

Anyway, I'll have a think. My motive for doing the Naps for 2019 is to establish if the time and effort I spend in selecting shares is actually a productive and worthwhile use of my time (I spend around 15 hours per week on my investing: more if I include reading about investing from the masters. Thanks to Ben H and some subscribers for reading suggestions). I have to admit it does have entertainment value as I enjoy it, but my main reason for risking my capital is to make a profit!

In the last 4 years averaged 17.25% pa (including all costs and including all divs). This was obviously effected by a bad 2018. Even though I did get stopped out of most of my holdings in Oct, the pre-stop fall and the ones I still held, fell enough to give me a poor year. So, I guess I have had a similar performance to the Naps, but with a lot of time spent (however, this could improve now I use Stocko :-) ). I've been a subscriber since April.

If I mirror the Naps but use stop losses, I would have to have a reserve list of stocks to buy in their place to stay with the 20 stock diversification level. Does anyone else do this?

Thanks again for the Naps and this thread. Here's to a great 2019, both for Stockopedia and market returns.

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Raphael Battu 2nd Jan 10 of 71

Super !! Thank you Ed.

NAPS is the best solution (for the moment ??), I look forward to reading the HATS.

I run "my" (biases....) NAPS (international) for 3 years now and results are good ;) (in fact, the quantity of work is really good and it's maybe more important than the yield).

For 2019, I decrease my investments to 12 stocks (20 before) with aprox 90% of your NAPS "laws" 2015-2018 (a bit more of value / Graham biase/like + deletion of some standard as bad Beneish + around 60% of the portfolio invested in 10bn or more Cies - Market Cap...).

I think that the max volatility can not be significantly stronger than with 20 stocks (and I don't care about vol). => less work. More entrepreneur style. The question is will it provide a better result ?

I also will rebalance every six months (too much good studies about it - as the one you mentionned from Ben) and occasionally with rules on the stocks and on the portfolio. Not in order to stop losses but in order to buy cheap.

About 2018, as you write : it is a "normal" year over a long run - still painful :) but a maximum of good opportunities right now !

Thank you again for your job and for your articles.

Thank you also to the Stockopedia's team.

I love to run Stockopedia - only (and unfortunately) few times a year because of NAPS ;)

Bonnes vacances et bonne année !

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iwright7 3rd Jan 11 of 71

Ed,    Another 10/10 article although I am a little surprised that having made an excellent case for Conservative low volatility stocks that the are only 3 in the portfolio. 

I have dummy mirrored the 2019 HATS portfolio and see that in addition to its component companies scoring well for their combined Q+V+M (Stockrank) scores, that most also score well for QV, VM and QM combinations. Of the 3 combinations (and my preferred stock pick style) perhaps QM is the best fit within the green, tend to outperform segment:

2019 HATS Portfolio vs. QM 


The current correction and nervous sellers have "Reshuffled the Pack" in terms of sub-optimal company valuations, so do think that there is a good chance of the HATS approach working well again in the coming year.

I have this morning though looked through the financial metrics and outlook of each company in the 2019 HATS portfolio and stock picked the one I like most. It is Character (LON:CCT) which not entirely coincidentally has a QM score of 99.  I will buy an initial stake today.  I also venture a possible acronym for your new alternative portfolio method:  PICS - Picked Investment Criteria System.

With New Year greetings and many thanks again to all of you at Stockopedia for providing such a wonderfully clear resource of financial metrics and informed investment comment.  Ian

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