Semi-Year SNAPS 2019 - how many stocks are enough?

Thursday, Jul 04 2019 by

So the first half of 2019 has been a bit of a shocker for the NAPS (my 'no-admin-portfolio-system'). While the major market indices have bounced from the end of year lows, the NAPS portfolio has languished. The NAPS year to date have generated a -0.1% capital return against a FTSE All Share return of +10.4%.

As a headline figure that's very poor, especially as the 90+ StockRank set of shares from which the NAPS are selected have returned 11.3% slightly ahead of the market. This puzzling show has drained some of the outperformance from the long term results. Nonetheless, excluding dividends, the NAPS have generated a return of 90% over the last 4.5 years versus only 14% for the FTSE All Share. Given the lion's share of the outperformance has all been generated in years 1-3 the question that will be on everyone's lips is - have the NAPS stopped working?

Performance Review

As you can see in the chart below, the NAPS (in blue) has significantly lagged the FTSE All Share (in grey) year to date.


Although the picture is far healthier since inception in January 2015.5d1c709398b2aImage_2019-07-01_at_8.53.17

The SNAPS Portfolio, which is the semi-year rebalanced version of the NAPS, is lagging a bit further behind... with an 82% return since inception. You can see the overall numbers, year to date and since inception in the chart below.


Winners & Losers year to date

The top winners year to date have been D4T4 Solutions, Evraz and Emis, but they've been offset by a larger than usual mix of losers. The big loser for the year is Plus500. Down by 58%. After gaining 53% in 2018 this is of course disappointing. A gain of 53% followed by a loss of 58% should equate to an overall 36% loss of the starting capital invested in Plus, but the magic of rebalancing has actually brought the total loss on Plus 500 to only 0.2% over the 18 month period.


Plus 500 can only explain 3% of the underperformance year to date - but the whole portfolio has dragged. As you can see above the portfolio has generated 12 winners and 8 losers. That's a 60% hit rate of selecting winners - which is ok, but I've a…

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36 Comments on this Article show/hide all

pka 4th Jul 17 of 36

Gromley wrote: "What would be interesting however, and something I aim my sights on, would be to see if there are any common factors amongst superstocks that fail to shine."

I suggest excluding any overseas-domiciled stocks from a NAPS portfolio, unless they are domiciled in countries in which one has a lot of confidence. That might cause one to miss some profitable opportunities but would also probably save one from investing in some stocks that turn out later to have had fraudulent accounts.

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dfs12 4th Jul 18 of 36

Thanks for the review Ed. I find it strangely reassuring to see that even the best strategies will have periods of underperformance. Gives hope for us mere mortals. Like Gromley, I wonder why you are considering a move away from Value. Although it has certainly not been a good strategy over the last 6 or more years is it really time to retire it altogether (even if only in NAPS)? Jack has published an article in the last couple of days highlighting the guru screens that have worked best in the last 6 months and bizarrely the bargain/value ones have outperformed. Although they are mostly rammed with stocks I wouldn't consider, it may be an indication that things are turning back towards value? On a slightly separate issue I would be keen to see a Fantasy fund set up to mirror the NAPS and SNAPS portfolios. And finally I would love to see a Fantasy fund/performance rating system for the guru screens that recognises both bid offer spread and dividends. You've mentioned dividend automation is one of the earlier enhancements on the new system - so perhaps this might be possible?

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Martin Verlaine 4th Jul 19 of 36

I notice that Citywire are also boosting REI. I had a look the website and viewed their properties ( very helpfully  shown). Having lived in  the Midlands for many years  I know a number of these and have reservations on the quality of several. I also see a lot of retail and short leases. So to  me the two combined are something of a red flag. I think you could easily attribute a 20% decline in retail values so this is a clear avoid. Would think discount to ‘ stated ‘ NAV needs to be closer to 30% 

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laurie 4th Jul 20 of 36

Dear Ed,
I like to add a debt filter to my selections. It picks up cash flow issues, provides a margin of safety, etc. If you had, for example, total debt must be less than 3xs op profit, the three biggest winners would still be included, but 5 of the 7 biggest losers would have been excluded. Britvic was the only company excluded by the suggested filter that beat the All Share.

For your interest, and assuming the historical information I have is correct, the following shares would have been excluded: Britvic, Dart, Carr's, OCN, BT, OPG, SBRY, U and I.

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Gromley 4th Jul 21 of 36
I like to add a debt filter to my selections. It picks up cash flow issues, provides a margin of safety, etc. If you had, for example, total debt must be less than 3xs op profit, the three biggest winners would still be included, but 5 of the 7 biggest losers would have been excluded. Britvic was the only company excluded by the suggested filter that beat the All Share.

For your interest, and assuming the historical information I have is correct, the following shares would have been excluded: Britvic, Dart, Carr's, OCN, BT, OPG, SBRY, U and I.

laurie - that is a fascinating and potentially very powerful stat if true (No disrespect intended by adding that rider, but it is not something I have personally validated and I always exercise scepticism until I have the evidence)

One would need to consider of course whether the same improvement would have been achieved on the earlier iterations of NAPS - a lot of hard work to test that of course, but if it could substantiate the case you make it would be work very well spent.

It would also be useful of course if one could find a clear link between the levels of debt and the price declines of the worst fallers in this years NAPS. I am not sufficiently up to speed on all of them to really be able to say for sure , but off the top of my head I'm don't think that debt levels have been a recent price affecting issue.

In fact I used to work for one of the companies cited and I can recall that the relative debt was much higher in the past, but at the time of peak market comment on the debt levels I was being told that there was so much investment capital available to the business that if I was strongly encouraged to bid for Capital to support growth capex or acquisitions. Stepping back from the situation although I would say that I am quite financially conservative, I have to say that the encouragement to invest was right (so far) despite the apparently high debt levels.

Anyway, "in other news" I started to look at the cadre of potential candidates for this years NAPS and I think I have to support Ed's view that 2019-NAPS were "unlucky".

I happen to have a sample of SR data from 23-Dec-18 and another for 14-Jun-19 which gives a close comparative to the NAPS review.

SR >=90 and Mcap >= £10m gave me 127 qualifers of which 76% were "winners" by mid June delivering an average return of 12% (not stellar in the context of the wider market, but okay).

However, there were 9 (out of 127 = 7%) of those stocks that fell by more 25%. Ed's unfortunate NAPS  folio managed to select FOUR of these (therefore 20% of the 20 stock folio).

I cannot immediately find any systemic failings in the NAPS selections so for the time being I'd still back Ed's view that NAPs' has just been unlucky in 2019.

Given though the NAPS namings relation to one of the earlier attempts to unify Europe, I cannot help but recall Napoleon's preference for "Lucky Generals" - just as well  that Ed I think has reached "Field Marshall" status by this stage.

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iwright7 5th Jul 22 of 36

Laurie and Gromley. The Debt filter of: Net Debt < 3 * Op Profit, is one of the Naked Trader Esque Guru rules for excluding companies with excessive debt. Robbie now uses uses Net Debt < 3 * Pretax Profit as the guideline,  but hey ho.

I don't know where Robbie derived his debt metric, (but I am pretty sure it was not from backtesting), but I have a hunch it was from one of Buffett's guidelines of 2-5 years earnings to remove debt, in order to build in a margin of safety during recession. 

High quality companies tend to not need to borrow heavily (because they have higher Return Ratios), so it makes a lot of sense to me not to invest in over-geared companies. By adding an additional debt max filter you are effectively pushing the mixed ratio Q + M + V score towards a selection of companies with a probability of higher Quality, (and probably away from Value).   Ian 

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herbie47 5th Jul 23 of 36

Talking of Robbie and number of shares, he seems to have about 50 different shares currently.

I would exclude companies with high debt and "foreign" companies, many of those seem to go wrong, there have been several Israeli companies, Chinese of course, Russian I would consider high risk.

Has Indivior (LON:INDV) appeared the most times in NAPs? It is still quite highly rated even though it has fallen almost 90% in just over a year, why is it so highly rated?

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monions 5th Jul 24 of 36

That's a good point Herbie on Indivior (LON:INDV). I think the QR and VR are skewed by old data. The incredibly high ROCE will push the QR. The value rank doesn't make sense to me - I think it is based on ultra low historic P/E, which isn't the case going forward. So I would say those two ranks are misleading for Indivior (LON:INDV).

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Nick Ray 5th Jul 25 of 36
Has Indivior (LON:INDV) appeared the most times in NAPs? It is still quite highly rated even though it has fallen almost 90% in just over a year, why is it so highly rated?

Yes it has. There have been five NAPS so far and INDV is one of a handful which have appeared three times.

For the curious here's a table of the number of appearances for each stock in NAPS to date.

Stock# Appearances
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daverawc 5th Jul 26 of 36

If you operate a 10% stop loss limit and reinvest the remainder in the top performing stock and continue the process by investing the residual from the next loser in the 2nd best performing stock and so on down to the 5th best performer then start again at number 1, this would have improved performance significantly for last year and i suspect for all previous years.
I accept this would produce a more concentrated portfolio, but at least it would be concentrated in winners.

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purpleski 7th Jul 27 of 36


“I like to add a debt filter to my selections. It picks up cash flow issues, provides a margin of safety, etc. If you had, for example, total debt must be less than 3xs op profit, the three biggest winners would still be included, but 5 of the 7 biggest losers would have been excluded. Britvic was the only company excluded by the suggested filter that beat the All Share.”

I read Robbie’s (Naked Trader) a long time a go and his 3 x profits rule just chimed with me (having been in a lot of debt in my 20’s I am debt adverse myself) and his 3 x debt rule is my starting criteria in any screen and the first thing I look at when a stock comes on my radar.

So if I was to construct a NAPS the first rule would be a 3 x profit debt rule.

I have followed Ed’s NAPS articles since inception but have not implemented a strategy like it for two reasons, both of which could be erroneous:

- So far (five years) I have out performed the market and the NAPS and am happy to put the time in. I am retired after all, so I have got to something with my time!!

- If it was that easy (over the long term 10 years +) then we would all be doing it and there would be an awful lot of people out of a job.

We will see and I do hope that if Ed moves on to writing about other stuff, somebody at Stockopedia takes over the NAPS column.

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Gromley 7th Jul 28 of 36

Hi purpleski & ian (& indeed laurie) - [the 'reply' button is not appearing on my screen at the moment - it seems to go AWOL sometimes is that just me - so just to be clear I'm answering on the debt question.]

I haven't had the chance to drill down much further yet (but am minded to look for patterns amongst high SR stocks that fail generically whether in NAPs or not).

One point of note though is that whereas the Robbie Burns rule that ian refered to was net debt : profit (of whichever flavour).

However Laurie referred to total (ie gross) debt - certainly most of the 'fails' would have passed the net debt test.

For example J Sainsbury (LON:SBRY) in FY 18

(Maybe not the best example as I suspect debt didn't really have much to do with the price declines of the last few months).

Gross Debt : £2.5 Bn

Net Debt : £0.6 Bn

With Operating profits of  £0.5 Bn

The net debt ratio was a comfortable 1.2 x

Whereas the Gross debt ratio was a more worrisome 5x.

Which begs the question, should we pay more attention to Gross or Net debt? Most investors seem to focus on net debt, but the puzzle for me is always : If the company has debt and a significant cash-pile, then does it in fact imply that the cash is actually encumbered (ie already promised to someone else - particularly if the company 'window dresses' their balance sheet as most I believe do).

If the gross debt was actually called in - could they really use this cash to repay some of it?

I don't know the answers there - just thinking out loud.

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GN100 22nd Jul 29 of 36

In reply to post #490311

daverawc, I have tried stop losses in a LTBH portfolio and found them very unrewarding. You often get taken out on a downspike - some of them are quite vicious - only to see the price recover in fairly short order. OK, 10% may allow for it but those spikes will still come along and take you out when you are around the 8-9% region. In reality you have to accept this if you are going to use a stop loss and not just use a warning price level followed by your own judgement which is even more difficult in practice.

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AWAnderson 23rd Jul 30 of 36

All the filters in place, and suggested, take us further away from the low input, automatic selection principle. So, would a 90-100 decile ETF be feasible?

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Funderstruck 6th Aug 31 of 36

Thanks for the article Ed, please keep them coming. I prefer the QM approach to that of SR but one needs to be wary of a market change to Value investing. I also use a limited version of Technical Analysis & moving stop losses which follows the price action....It works when i concentrate.... but that is not in line with your Naps objective.

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justinian 3rd Sep 32 of 36

To get around the issue of variability of outcomes from choosing a subset of stocks within any particular rank, it is really necessary to buy all stocks within than particular subset. But the costs and work for individual investors would be prohibitive.

It would be great if you could launch an ETF to do it all for us that contains e.g. the top 10% of stocks by Stockrank or whatever other selection as time goes on.

Mebane Faber did a similar thing with his 'solution'.

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pka 3rd Sep 33 of 36

The problem is that as soon as a company launches an ETF or a fund to exploit a factor that has worked very well in the past, that factor often stops working as well as it used to. The same thing might happen with an ETF based on StockRanks.

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herbie47 3rd Sep 34 of 36

In reply to post #490311

That is an interesting idea however stop losses would have taken you out of some big winners in previous years. Problem is if the market falls in January/February time you could lose quite a few shares, some of these will be the winners. Of top performing after a few months may well become a loser, it would be an interesting study to do. I know stop losses have taken me out of some that would have been huge winners, Ab Dynamics (LON:ABDP) went up x15 and IG Design (LON:IGR) x2 soon after I sold. This year Morses Club (LON:MCL), Plus500 (LON:PLUS), Mondi (LON:MNDI) were all early winners that turned a bit sour. In 2018 Indivior (LON:INDV) did quite well in the first 5 months up about 20% but then crashed. Griffin Mining (LON:GFM) was similar, MHP SE (LON:MHPC) went up 25% in the first month but then drifted down to finish the year about -15%. Premier Oil (LON:PMO) early winner up 25% but ended the year about 30% down and about 45% down from peak. So I'm not convinced that this will work with NAPS.

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Nick Ray 3rd Sep 35 of 36

It would be great if you could launch an ETF to do it all for us that contains e.g. the top 10% of stocks by Stockrank or whatever other selection as time goes on

Maybe there are already good ETF or IT products out there to get a similar benefit to the Stockopedia high stock rank performance.

I happened to notice that Scottish Mortgage Investment Trust (LON:SMT) for example seems to perform in a very similar way to high stock ranks, with possibly a slightly higher beta. That is still primarily an active fund though. So possibly find an existing "smart beta" ETF with exposure to the factors you care about, which is an approach I am considering. But I haven't found a UK equity multi-factor ETF so far.
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justinian 3rd Sep 36 of 36

In reply to post #509646

Good point. I can see the Stockopedia people saying, "well what we do is help investors do it for themselves....we're focused on self-directed investors". I think there is a group that possibly exists between just handing over to a black box fund manager and doing it all for oneself....the Stockranks info can give us reassurance about what is inside the black box and give such self directed investors an opportunity to achieve what they want with less effort AND more cost efficiently AND with reduced variability of outcomes by not selecting subsets of Stockranks.

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