Semi-Final SNAPS - World Cup Fever takes over the NAPS Portfolio

Monday, Jul 09 2018 by
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SemiFinal SNAPS  World Cup Fever takes over the NAPS Portfolio

England are through to the semis and the nation is dreaming. This time it seems we really do have a chance. I still remember precisely where I was the last time we made it this far. 14 years old, Waddle & Pearce missing penalties, Gazza’s tears… damn. My sons are the same age now as I was then and these moments don’t come around often, so it would have been criminal not to watch ridiculous amounts of the football together in the last few weeks. So yes, I’m writing this article a week late… but for good reason. It’s coming home.

Before I get onto the NAPS Portfolios, I must share my completely failed attempt to win the “Stockopedia World Cup Sweepstake”. To cut a long story short, we each had to pick 6 teams with varying payoffs depending on 1) how bad those teams were and 2) how deep they would go into the tournament. For an office like ours, it’s a great excuse to go down the rabbit hole developing quant models. My own selections, based on ELO Ratings, have completely failed me. Not only are all my teams out… but I had a bet on Colombia rather than England, which led to my younger son violently punching me when they equalized in extra time. I am forever indebted to Jordan Pickford’s fine penalty saves as in an alternate universe Colombia win the Cup, my son never speaks to me again and everyone in the office quits due to my smugness.

For those of you that hate football, aren’t English, and are furious that I’ve even mentioned it, humour me. There are far worse things to theme a NAPS article about… erm… Love Island?

Tournament Performance Record

Just to recap… the NAPS Portfolio was last discussed at New Year where it was bacronymed as the No Admin Portfolio System. It’s a fully mechanical 20 stock portfolio of the highest ranked stocks by StockRank, equally diversified across 10 sectors, rebalanced annually. This simple and rather idle investment approach has dramatically outperformed the market in the last three and a half years.

Every July I compare the SNAPS Portfolio, which is the same approach but rebalanced 6 monthly rather than annually. As you can see in the charts below… the NAPS currently has the edge on the SNAPS from a performance perspective.

Year to…

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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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25 Comments on this Article show/hide all

iwright7 9th Jul 6 of 25
4

Ed,

Another excellent article - It did make me think; "What would have happened to the return had a -15% Stop Loss (from purchase price), been in place".  This would be my risk minimisation tactic, but I do recognise that it doesn't lend itself to a No Admin approach.  Ian

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ratioinvestor 9th Jul 7 of 25
1

In reply to post #380589

Well I think FTSE 100 is roughly above £4.5bn or probably £5bn to qualify. The largest FTSE 250 stock is £4.7bn currently. I think the NAPS only had two stocks in the FTSE 100: Vodafone and BP. So about 10% of the NAPS portfolio. However, the FTSE 100 dominates the All-share index. I can't remember exactly but I think it is over 70% of the All-share market value.

I agree a bespoke benchmark weighted to the stock indices that the NAPS stocks are in would be ideal. However, in the absence of this I would personally view the FTSE 250 as the best benchmark possibly along with the Small Cap index and maybe the AIM index. However, the FTSE 250 is generally the index to beat so if I had to choose one I would go for that as the benchmark.

To use the devil's advocate argument, some fund managers use the All-share as a benchmark when they are nearly exclusively in FTSE 250 stocks. That is like saying I pick mid cap stocks and these have outperformed bluechip stocks. Is that manager selection or the fact they have picked mid-cap stocks?

Just throwing that out there. Benchmarking is not an exact science but if there is one benchmark I would use a tracker to invest in in the UK it is the FTSE 250. It has performed best over the long-term. So I always rank people agains that benchmark. The FTSE 100 has a lot of mature and low quality companies i.e. banks, big pharma, retail etc. I therefore think it has more credibility if someone has beaten the FTSE 250 rather than the All-share or the FTSE 100.

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Nick Ray 9th Jul 8 of 25
1

Looks like Belvoir Lettings (LON:BLV) sneaked in under the wire with a MCAP of £37M compared with the cutoff of £50M.

I see that Telecoms did not manage to make the grade with any stocks although I am not too surprised. The selection in Telecoms is a bit weak at the moment. Although I might have chosen Gamma Communications (LON:GAMA) in preference to James Latham (LON:LTHM) which looks quite weak with the lowest "RS 1y" of the bunch and is one of three Basic Materials choices.

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Gromley 9th Jul 9 of 25
10

In reply to post #380599

Another excellent article - It did make me think; "What would have happened to the return had a -15% Stop Loss (from purchase price), been in place".  This would be my risk minimisation tactic, but I do recognise that it doesn't lend itself to a No Admin approach.  Ian

I am struggling to precisely marry up to Ed's start and finish price data, but based on my figures (Start price = market  close price on 29-Dec-17 & Finish price = market close on 29-Jun-18) I believe a 15% stop loss on opening price would have closed out 6 of the positions, summarised below. (With the stop price being the closing price on the date the stop was triggered - closing prices only)



# Stock Open Price Stopped Stop price Loss Subsequent All Share
1 Morgan Sindall 1428 02-Feb 1162 -18.6% 23.8% 2.8%
2 Tate & Lyle 703 09-Feb 582 -17.2% 11.1% 7.7%
3 Vodafone 235 14-Feb 199.74 -15.0% -8.0% 6.0%
4 LSL Property Services 279.75 15-Mar 234 -16.4% 14.1% 6.5%
5 RPC 881.5 11-Jun 697.4 -20.9% 7.3% -1.5%
6 Stock Spirits 268.75 19-Jun 226.5 -15.7% 0.7% 0.0%
Average 8.2% 3.6%

So in 5 out of 6 of the cases the share price subsequently recovered above the stop price.

On average (including the Vodafone which went down further) prices recovered by 8.2%, whereas had you reinvested the proceeds of each sale in the All-Share at the prevailing price you would have had a post-stop return of only 3.6%, once again in 5 out of the 6 cases the individual share outperformed the All-Share subsequent to the stop loss event.

This is obviously only one case, but as I noted recently on another thread, I find this pattern all too often when looking a both "original price stops" and "trailing stops" almost regardless of what percentage threshold is used.

I should stress that others report much better effects from using stop losses.

I'm my experience, however, whilst I would agree stop losses can be useful for risk minimisation (they should stop you out of the really bad positions before the bottom)  they also often take you out at a low point.





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ratioinvestor 9th Jul 10 of 25
1

In reply to post #380609

I guess what I meant to put it another way is why not benchmark yourself against the best alternative passive benchmark that investors can buy? For me personally that is the FTSE 250 index. This may seem like a hindsight judgement but I don't see it like that. The FTSE 100 in this country is full of mature companies with many in decline. The FTSE 250 is more diversified and has lots of quality and growing companies. So for me the next best alternative from investing with an active fund or myself is to invest in a FTSE 250 index tracker. So I personally ask the question of whether I can beat a FTSE 250 index tracker.

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Edward Croft 9th Jul 11 of 25
2

In reply to post #380689

Re. FTSE 250 as the benchmark.

It really doesn’t make much difference. Since the inception of the naps, the FTSE 250 is up 29% versus 125% for the naps portfolio. Year-to-date the FTSE 250 Is flat. So the choice of benchmark to date has been largely irrelevant.

I also question whether cherry picking a preferred benchmark that one perceives as high-quality due to its historic high-performance makes sense? That’s really down to hindsight bias.

I think the best benchmark for private investors is an equal weighted index of the entire available UK universe. Why? Because most private investors use equal weighted portfolios, and select from across the entire market. And an approximate proxy for this would be the middle ranking deciles on the stock ranks performance charts. I’m on my mobile so I don’t have that data handy, but it certainly above the allshare.

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ACounsell 9th Jul 12 of 25
1

In reply to post #380674

Bromley,

I agree with your analysis re NAPs and stop losses. I would add Computacenter (LON:CCC) to your list on which I had a 15% automated trailing (calculated as trading platform didn’t have trailing facility) as the Stockopedia metrics risk rating considered it a Balanced stock. This stopped out due to an intraday slump back in March only for the share to rise 40%+ from the stop loss price which would have significantly improved my NAPs YTD performance (even though excluded Plus500 (LON:PLUS) for reasons discussed in previous comments!). This led to ditching the automated stop loss methodology and a manual (behavioural view!) if a share hit the Stock Alert set on a trailing stop loss basis. I also increased the trailing stop loss to 20% on RPC (LON:RPC) (Attenborough’s created plastic panic) & 30% on Tate & Lyle (LON:TATE) (anti sugar campaign) to cope with pathetic and ill informed media coverage spooking private investors. (Note: Tate & Lyle (LON:TATE) sold its sugar business and brand a few year ago & RPC (LON:RPC) is active in developing fully recyclable plastics and packaging).

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ACounsell 9th Jul 13 of 25
1

Apologies - Internal System malfunction (my brain!) - Computacenter (LON:CCC) was in my version of the NAPS but not in Ed's. However, it is in the SNAPs and it's elimination from my NAPs due to hitting a stop loss and subsequent recovery still supports Gromley's analysis!

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Techno Trousers 9th Jul 14 of 25
5

Great article as always from Ed and his support team crunching the numbers and the NAPS picks. However, I would just like to comment on the stop losses that seems to be gaining some traction within the community.

Now, I do not claim to be any expert of stop losses, and indeed, have found myself to be stopped out by sharp spikes down only for the price to then reverse. As a result I now never use automated stops, as the outcomes are often too painful, needing to buy back in at a higher price. However, unless I have missed something, no-one ever seems to mention setting a stop loss relative to the volatility of the share? Now, if there is a share that is not particularly volatile and it starts to drift downwards, then I am likely to be much less forgiving, and may sell at a much lower % decline than another share which yo-yo back and forth. So, IMHO, to set a standard stop loss of say, 15 - 20%, and which seem to be the most popular levels, is not conducive to maximising your gains. So, for example, I may even accept a 30% decline from a volatile small cap, but perhaps only 7% or so from a docile large cap. I think nothing will work 100% of the time, and I try ever so hard these days not to sell just at the point of the reversal, so maybe a little bit of chart and volume understanding may come in useful at these points too?
Anyway, just my tuppence to throw into the ring on this issue, and which appears to cause many conundrums with fellow investors. Remember, not to sell is also a decision, and often I have found this to be the best one I have made.

TT

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ratioinvestor 9th Jul 15 of 25
2

In reply to post #380699

Thanks. Fair points. I think you are technically right on the preference for an equal weighted benchmark. However, I don't think there is a tracker for that. There is a tracker for the FTSE 250 and it is a relatively low cost tracker. For me the FTSE 250 tracker is the alternative to active investing i.e. because it is the next best passive alternative I can easily invest in.

I am sure you are right that the choice of benchmark makes little difference to the outperformance of the NAPS (I didn't mean to imply that). So congratulations on the strong results. The choice of benchmark is largely a technical argument and I didn't mean for it to take away from the success of the NAPS! Personally I prefer the FTSE 250 as my benchmark in the UK for the reasons outlined.

If we look at since AIM started on 25 March 1996 the FTSE 250 is up 414% versus 105% for the FTSE 100 (both excluding dividends). I think this largely reflects the lower quality companies in the FTSE 100. I agree this could change and in the US the S&P 500 is actually quite high quality due to the large tech companies. However, the FTSE 100 is likely to be dominated by lower quality companies for sometime to come.

The portfolios of most private investors tends to be dominated by mid-cap and small cap companies. So I think the FTSE 250 works well as a benchmark. If anyone asks me the next best alternative in the UK to investing myself or using an active fund I also suggest (not advice!) looking at a FTSE 250 tracker.

Bottom line is talk is cheap and the NAPS have done very well. It certainly highlights the potential success of a systematic approach. Possible to marry the two. I know Mark Slater uses a systematic approach to find stocks and then assesses them qualitatively. However, I know some people aren't a fan of this due to the human judgement element.

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ddinksdadd 10th Jul 16 of 25
1

In reply to post #380744

Hi TT,

I have been interested in the whole issue of the 'optimal stop' for sometime. effectively every stock will have an optimised stop margin based on its volatility as you say. I have read somewhere that one of the charting metrics ATR (average true range) can be useful in working out an optimised stop.
The figure I tend to use is 2 X ATR to give a decent margin of error. I have not seen or heard of any research as to whether this is an effective strategy however it 'feels' like it should be. maybe the brains here could crunch some numbers to if the idea has merit?

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Howard Adams 10th Jul 17 of 25
1

In reply to post #380794

Hi

THe site called Tradestops works exactly on the principle of an optimal stop based on the volatility quotient of each share.

It's guiding principle is to help investors to appreciate the volatility ranges of each stock and thus action stops appropriately. Extra tools help investors to assess the overall volatility quotient (VQ) of their portfolio(s) and the respective VQ ratings of their holding sizes.

It is a subscription service so quite cheap to explore to see if it adds support to your investing activities.

I use it to be another indicator to help with my buy/add/slice/exit decisions.

It's a particularly useful alert mechanism for monitoring existing portfolios, being alerted to when previously sold positions return to a re-buy status and of course to monitor watchlists.

Of particular use to me it has made it easy for me to 'watch' my mixed US/UK portfolio.

This is a link if you were interested.

https://tradestops.com/

It's in no way a replacement for Stocko though, simply an augmentation IMO.

Regards
Howard

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Richard Cook 10th Jul 18 of 25

I wonder how this would have done with U.S. stocks?

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Nick Ray 10th Jul 19 of 25
3

In reply to post #380794

I had a quick look at the performance of drawdown/volatility on the one-year future returns.

5b4528079454bdrawdownvolatility.png

The green 50% line is the median return with some selected other quantiles added. Note that the amount of separation between the top and bottom lines is a rough guide to the variance (future volatility) in the returns.

There is not a lot in it, but I'd say that setting a trailing stop-loss somewhere around 0.85*(1y volatility) is about right. However most people would find that much further away than they would like. When I look at the drawdown without normalising by volatility the trailing stop-loss comes in at about -40% which is again really quite high.

The problem is that the median drawdown is about -15%. So at -15% you are going to be wrong about 50% of the time. Even good stocks will retrace quite a long way and high volatility stocks will retrace even further.

However stops are not really in the spirit of NAPS. If you check you'll find that some NAPS stocks have low momentum at the time they are selected. If you put a stop-loss on them they will most likely be stopped out before they get a chance to perform.

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shine66 11th Jul 20 of 25

'Asymetric returns are typical across holdings in stock market portfolios'. 

Plus500 (LON:PLUS) has made a huge contribution to the performance, but in 'real-life' would you have trimmed all the way up to maintain a balanced portfolio?

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martinmullane 12th Jul 21 of 25
1

In reply to post #380884

Howard,
Appreciate your comments re "tradestop"
I also have a mixed US/UK Portfolio.

Which of the 3 tradestop packages do you use?

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ddinksdadd 14th Jul 22 of 25
1

In reply to post #380884

Hi Howard,

interesting site thanks for the heads up . I wonder if stockopedia could replicate something like this in one of their upgrades?

Regards

Jim

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rpannell 15th Jul 23 of 25
1
Plus500 (LON:PLUS) has made a huge contribution to the performance, but in 'real-life' would you have trimmed all the way up to maintain a balanced portfolio?

So a sell the winners whilst adding to the losers strategy - hmmm

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Howard Adams 15th Jul 24 of 25
2

In reply to post #381569

Hi Martin

Sorry for slow response but I did not get the usual email when someone had replied to a posting.

I took lifelong membership when Tradestops was first launched in the UK.

I admit I do not use it's functionality to any where near what it could offer.

Mostly because I'm such a Stocko fan but also because I'm very hands-on with my investing.

But what Tradestops is strong at, is that if you wanted to be/needed to be a little more hands-off it's strength is that it effective;y watches your investments for you and supports you buying into/maintaining a portfolio which is risk adjusted to a level of holdings volatility you are most comfortable with. So it helps with each equity assessment, portfolio risk assessment and tools to help you re-balance based on volatility quotients. Also, each volatility quotient is recalculated each week so you can see changes occuring.

Their educational material is also rather interesting as are their ideas about using the tool to monitor across indices or even ETFs to watch markets, sectors or even themes.

I'm not sure of the different package offerings now, but like all these things I'm sure you can start at a lower level then upgrade if you feel it offers value for your investing activities.

My Tradstops is not essential to my investing, but it's very useful and has certainly paid for itself several times over. But, you need to put some effort into exploring it.

Regards
Howard

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Stuart Bates Wed 9:32am 25 of 25

Great article as always Ed.

Love the football analogy.

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About Edward Croft

Edward Croft

CEO at Stockopedia where I weave code, prose and investing strategies to help investors beat the stock markets. I've a background in the City and asset management but now am more interested in building great stock selection tools for the use of investors online.   Traditionally investors online have had very poor access to the best statistics, analytics and strategies for the stock market and our aim is to set that straight.  High Quality fundamental information has been prohibitively expensive in the past and often annoyingly dull. People these days don't just want to know the PE Ratio and look at a balance sheet. They expect a layer of interpretation over data, signal from noise and the ability to know at a glance whether a stock is worth investigating or not. All this is possible using great design and the insights gleaned from quantitative research.  Stockopedia is where we try to make it happen ! more »

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