New Year NAPS - Top Stocks For 2019 And The Symmetry Of Risk | Edward Croft

2nd Jan '19 by Edward Croft

71 comments 40855 reads

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:

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.
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.
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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jamiebowden

3rd Jan '19

Great work Ed, but you're on holiday! Put your feet up, crack open a tinnie, put a prawn on the barbie and enjoy the Aussie sun. Despite a wobbly 2018, I suspect most Stockopedia subscribers, like me are still grateful for the insights and research published by you and your team throughout the year.

Star8

Ed

As always a great article: informative, original, honest and well written.

Rusty2

NAPS so far works better in odd years, the even years it has not performed well, so 2019 maybe a good year? I’m not buying much at the moment will wait to see what happens with Brexit.

timarr

NAPS so far works better in odd years, the even years it has not performed well, so 2019 maybe a good year?

Do you think that's statistically significant?

Wilhock00

Great article Ed.

fourayes

Ed, what a thoughtful and interesting piece.

During the four years you have been doing these, you have often referred to short periods of recession or backwards movement, as you have lived through them week by week. Until recently, my view has been that we were stuck in a prolonged bullish period, and I would say that as a summary of all the time Stockopedia has been running.

You have yet, with Stockopedia up and running live been near a recession until perhaps this Autumn past, and will have quite different considerations once you do. This is just a different point of perspective of the same markets.

Most of your subscribers do two things with most of their shares; they buy, then they sell. My background is entirely the other side of the coin to you; TA rather than fundamental analysis, although I do understand a bit about both, and they also have a massive overlap. My one request for your stock report layout is that you add a simple Compound Annual Growth Rate of PRICE, over say 5 and 10 years, for the longer term share holder. I produce these for myself, and they are a brilliant guide to actually achieved gains.

They might inform you, for instance that GSK, much discussed lately, has grown by only 1% compound over 10 years which might surprise some.

Thanks again for getting back to thé writing and thinking.

Simon

davidelliott52

Great article. I am currently sat on the sideline waiting to see what happens re brexit but I really like what you’ve done here. How do you think performance would be affected if you took these 20 stocks didn’t particulay focus on timing of the buy but put an automatic 12% stop loss on each one?

Well it could be. See: https://www.stockopedia.com/content/given-100-years-of-history-what-are-the-odds-of-a-stock-market-rally-in-2019-430293/

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?

mmarkkj777

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.

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 ...

Breyten

4th Jan '19

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.

Edward Croft

@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.

Gromley

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'?

skinner66

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,

lightningtiger

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.

5th Jan '19

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).

Mohammed Malik

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!!

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.

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

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

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Edward Croft

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