Some things that just happen from time to time

1st May '18 by Mechanical Bull

19 comments 5761 reads

I have been using StockRanks for almost five years with a fair amount of success. However, I seem to have hit a bit of a rough patch. My portfolio has barely recovered from market lows in March. Indeed, it has underperformed the FTSE 100 for 5 weeks in a row. In April the FTSE was up 6.8% but I was only up 1.8%. This bull is feeling like a bear with a sore head.

I decided to do something to constructive and review and reflect on what is happening. Maybe I can learn something.

The first thing was to look at how high StockRanks are doing overall. The basket of 90-plus is up about 5.8% in April so actually that has also underperformed the FTSE but only by a bit. I guess this just happens from time to time.

Now let’s look at some of the stocks that are in (or for the most part were in) my portfolio. On the morning of 23 March there was some news about Indivior (LON:INDV) losing a court case. There was a massive downward spike and I ended up getting stopped out at 15% below my stop loss. This was infuriating for two reasons – one is that I hardly ever use hard stops and the second is that the stock has since gone on to new highs. I don’t think I did anything wrong here. This was just really bad luck.

I had two long term holdings, Zytronic (LON:ZYT) and XLMedia (LON:XLM), that had done well but then started drifted down. My system was telling me to sell but I ignored the signals. I think I was just holding because I had them so long and had got attached to them. That was mostly definitely a mistake.

Other holdings that have dropped recently including Ferrexpo (LON:FXPO), Central Asia Metals (LON:CAML), Evraz (LON:EVR) and Covestro (LON:ETR). They have all done pretty well since I bought them but as you may have noticed, they are all mining companies. Perhaps I should have been a bit more diversified and/or rebalanced a bit more effectively. These are now all gone apart from Evraz for which I still retain a small stake.

On the 20 April, Record (LON:REC) had a disappointing update and dropped 14% while on 26 April, Philips Lighting (AMS:LIGHT) had a profit…

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stock

VL1YR

Beta

INDV.L

49.2

1.56

ZYT.L

35.1

0.88

XLM.L

42.8

1.13

FXPO.L

44.4

2.44

EVR.L

1.68

CAML.L

32.2

0.15

REC.L

35.5

-0.31

NAPS 2018

stock

VL1YR

Beta

FORT.L

24.7

GFM.L

42.7

1.16

RPC.L

25.5

0.6

BMY.L

25.3

0.65

SCS.L

29.4

0.69

TW.L

20.5

0.67

STCK.L

36.4

0.18

TATE.L

19.8

0.7

BP.L

16.9

1.19

LSL.L

33.2

0.99

PLUS.L

48.6

-0.012

VLE.L

31.8

-0.01

INDV.L

49.2

1.56

MGNS.L

0.39

OCN.L

15.2

0.57

STHR.L

26.1

0.65

SND.L

34.7

-0.077

VTC.L

22.3

0.45

VOD.L

18.2

1.27

JEL.L

11.2

-0.14

Highly leveraged portfolios are great in a bull market because they easily beat the index. But by the same token of course they drop faster in a bear market.

With some of your choices (ZYT and REC for instance) I think the high volatility is hiding a fairly lacklustre underlying performance. Whenever the 1y Volatility is greater than the 1y price change there is an element of luck in the returns you are likely to see.

pjk15

1st May '18

That was a very interesting read.
I find the psychology behind investing and the range of emotions fascinating. I hope the coin lands on heads for you soon. (Doubled headed coin anyone?)

I'm not sure i have enough experience to contribute anything constructive here but you've identified where you went wrong and why in terms of not selling, emotional attachment and diversification....That's got to be the positive you can take away from this?

Mechanical Bull

pjk

Thanks for good wishes. The main lesson is to stop worrying about the things you can't control and focus on things you can do to improve you performance,

MB

WarrantStar

Hi Mechanicalbull. I have been waiting for your post.
My comments are:
1) It's a period of mild under performance which will happen from time to time. I am also suffering a similar period of mild underperformance.
2) If one has taken the trouble to develop rules, then one should stick to them.
3) It's worth being diversified. In your case maybe it's about sector and industry diversification. In my case the problem is with style diversity. I have too many "high flyers" with associated low value ranks.
4) The best way forward is to keep improving our processes.
Good luck.

Rusty2

Most sectors go in cycles, I think the FTSE is up mainly because of oil price going up and £ has fallen a bit. Yes miners are down, not sure why, I did sell Central Asia Metals (LON:CAML) but still hold Ferrexpo (LON:FXPO), I’m going through a similar period although I have struggled for the last 8 months. Many guru screens are similar. One minor point Covestro is a chemical company. But if you look at Stockopedia it has similar patterns, steep rise then flat for almost a year. I would not worry it’s too short a period.

drainbolt

4th May '18

Many thanks for your post, MB. Like you, and those above responding to it, I too have been going through a period of mild underperformance, so all the above comments are reassuring, if nothing else. My PF started losing ground to the FTSE100 in mid-March. It is down about 0.3% since then while the FTSE is up around 5%. I tell myself that I should not expect enhanced performance really, because last summer I started a process of buying some international ETFs and Investment Trusts to give my portfolio some cushion against a poor post-Brexit UK perfomance. Currently 25% of my PF is in ETFs and ITs, while 22% is in cash, so I am operating a capital preservation policy at present. However, when you see yourself losing ground it is only natural to get worried. So, the above posts do help to assuage my concerns. Thank you!

JamesrWilson1989

Hi MB,

Great read - thanks.

I've wrote recently an article on Stockopedia about investors needing to understand emotional intelligent to become better investors.

Warren Buffet is well regarded investor and if you look at the latest annual report (http://www.berkshirehathaway.com/2017ar/2017ar.pdf) you'll see he often has years where he under performs the market. Even during his under-performing years, you wouldn't question his capabilities for delivering long term returns.

I think its also true with stock-rankings. By definition, if you employ a rule-based strategy, you won't beat the market every, day, week or year. If you think of it logically - if it did, then everyone would do it, and therefore if everyone did it, then that becomes the market.

So to conclude, why is Warren Buffet a great investor? It's because he believes in himself, and that if the market disagrees with him, then he's ok with that, because he believes in his strategy longer term. I would suggest looking at your rules & strategy and if your still fine with them, don't change. If you see something your uncomfortable with, change it and learn from the mistake. Both scenarios will be good for your own mindset and emotions.

5th May '18

Hi MB
From your recent post on another thread it is clear your returns over the last 4 years, and maybe longer, have been very, very, good, so maybe there is not too much to worry about just yet. I was wondering whether your approach for stock picking has changed much in more recent times, and if so whether any change might be responsible for your current period in the doldrums.
In your Mechanical Bull blog (http://bullmechanic.blogspot.co.uk/2015/) you picked your stocks on the basis of its Stockrank (90% or above) plus an additional score based on the number of guru screens a stock is picked up by. In your last blog post in May 2015 you talk about maybe ditching the Screen of Screens element and perhaps replacing it with a PEG ranking. Would you be willing to share your current selection method and indicate how you have changed it if at all in recent times? Or do you think the reviewing period (quarterly?) and the sell rules are as or even more important?

Nick Ray

I think in addition to your mild lack of diversification, you also have a highly leveraged portfolio.

Compare the volatility and beta of the stocks you mentioned with the NAPS 2018 portfolio:

Mech Bull

stock	VL1YR	Beta
INDV.L	49.2	1.56
ZYT.L	35.1	0.88
XLM.L	42.8	1.13
FXPO.L	44.4	2.44
EVR.L	70	1.68
CAML.L	32.2	0.15
REC.L	35.5	-0.31

stock	VL1YR	Beta
FORT.L	24.7	0
GFM.L	42.7	1.16
RPC.L	25.5	0.6
BMY.L	25.3	0.65
SCS.L	29.4	0.69
TW.L	20.5	0.67
STCK.L	36.4	0.18
TATE.L	19.8	0.7
BP.L	16.9	1.19
LSL.L	33.2	0.99
PLUS.L	48.6	-0.012
VLE.L	31.8	-0.01
INDV.L	49.2	1.56
MGNS.L	28	0.39
OCN.L	15.2	0.57
STHR.L	26.1	0.65
SND.L	34.7	-0.077
VTC.L	22.3	0.45
VOD.L	18.2	1.27
JEL.L	11.2	-0.14

7th May '18

Hi Drainbolt,

My basic approach is the same but there are a few additional ingredients. I start with the 200 highest StockRanks. Of course I want my selections weighted to the highest ranks. But I want to be weighted towards smaller caps and also to stocks with lower spreads. These are strongy inversely correlated, but I want to give those stocks that have a good combination of both an increased chance of selection. I do this by ranking each of these "factors" separately and create an over "size rank". I also create a ranking system to weight towards low PEG as some back testing I've done suggests that this slightly improves results. Each of these factors has a weighting of 0.2 and are combined with the high StockRanks and the Screen of screens which has a weighting of 0.6. The screen of screens factor probably doesn't make much of a difference but I don't think it does any harm.

However, I have to admit I am applying a huge amount of additional discretion at the moment because of my bearish outlook on Brexit and the medium terms prospects of UK stocks. I will be mostly out of stocks with UK earnings at least until there is greater certainty about post-Brexit arrangements. Indeed, I am sitting a lot of cash at the moment. I think that markets are underestimating the economic risks of a disorderly hard Brexit. In six months we will know more and I will reassess.

So you may have a point - It is quite possible that my bias towards stocks with non-UK earnings has been a factor in my recent (under)performance. However, I think mostly likely this is just noise. Incidentally, my investments in Australian markets - where I apply the same system - has been outperforming recently after a long period of underperformance, so my strategy of market diversification seems to be paying off.

Cheers,

MB

Edward Croft

Great post @Mechanical Bull - I always appreciate reading your updates.

Nick Ray has noted the volatility of some of the holdings you mention - so the one thing I would add is to reflect on where to set stop losses for different volatilities of stocks.

The right depth of a stop loss depends enormously on a stock's volatility. A conservative share with an annualised volatility of 20% isn't likely to hit a 15% stop loss very often, but a highly speculative one with a volatility of 100% might hit it every month!

Indivior is currently classified as "Speculative" with an annualised volatility of 50.9%. So a 15% stop loss is pretty tight.

My rule of thumb is to set stop losses at half the annualised volatility - I find that works quite well - though I'm extremely unsystematic about applying them. It's the one area of my investing where I exercise quite a lot of judgement.

Hi Ed,

Thanks for your appreciation!

Just to clarify what happened with Indivor. My stop-loss was set at 363p and I got stopped out at 317 although at least one person fared even worse and got stopped out at 310! I assume this intraday volatility is highly unusual and different from annualised volatility although perhaps they are connnected?

However, i take your and Nick's general point about annualised volatility. That could be something to look into. Indeed, the stocks I mention would seem to have a higher volatility than the rest of my portfolio, so that maybe why I have ended up culling them.

The Third Man

8th May '18

I understand the concept of volatility can someone tell me where I find this. Ed writes of INDV having an annualised volatility of 50.9%. Is this on Stockopedia I can’t find it.

If the stock is in a folio you can add it as a column. (It is under "Price History" as "1y Volatility %".)

I don't think it is in the stock report, although the "risk rating" is based on the volatility.

Lordyjordy

9th May '18

@Mechanical bull

Interesting read. May I enquire how you track your performance? It's something I'm keen to do. Is this part of stockopedia's subscription?

DaviStoVest

That sort of extreme down spike is going to trigger a whole lot of stop-losses ... in many cases at prices way below individual stop limits.

It looks suspicious to me. That kind of drop and immediate recovery is going to shake a whole lot of holders out of the market and gift their shares to 'better-informed' buyers.

Looks bad ... smells more than a little.

10th May '18

Hi Lordy,

There is a basic portfolio valuation tool if you use the Stockopedia Folios, but I don't find it very useful (sorry Ed!). There must be better tools out there - I believe Sharescope is quite good for this kind of thing, but I do not use it.

I am a bit old school when in comes to tracking portfolio performance. Every weekend I add up the total value of all my various trading accounts and record it on a spreadsheet. I have done this every week since October 2013.

MB

TangoDoc

I see no reference to dividend income during the appraisal period, nor any consideration that several stocks are now XD. How would that change your overall results?

MB

Thanks for the reply. Interesting to know how you actually track them. If i can muster the discipline I might try this myself! I've looked everywhere for a useful tool to track total returns including dividens and can't believe with the technology today that no one can provide it.

Regards

Joe

Hi Nick Thanks for your reply. I don't seem to be using the reply function correctly as I sent an acknowledgement earlier but is has not appeared.

Some things that just happen from time to time

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Mechanical Bull

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Mech Bull

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