Top Stocks For 2020 - On Doubling Your Money In Five Years

2nd Jan '20 by Edward Croft

98 comments 34416 reads

[This is a fairly long piece. If you do want to print and read offline I have prepared a PDF version that is linked to at the bottom of this piece]

Introduction

It's quite surprising that it's already been 5 years since the start of the NAPS Portfolio. I remember being in Australia at the time of its inception and, as ever, feeling really anxious that markets were a bit hairy and had already had a good run. Well now, 5 years later, they've continued to have a good run and I'm still feeling anxious. I guess anxiety is a good thing - bull markets are built on walls of worry after all.

Well I'm delighted to report that the NAPS Portfolio has doubled over this time period - a 102% return at the close, which is 15% annualised. To be fair, I haven't factored in transaction costs, but the average dividend yield over this period has been about 3.5% which more than covers stamp duty (<0.5%), bid-ask spreads (<2%) and platform & dealing fees.

It's been a bit of a bumpy ride over the last couple of years, and I'll go into this in a bit more detail shortly, but you can see the five year performance of the NAPS (in blue) versus the FTSE All Share Index (in grey) which managed only 20% over the same time period.

The NAPS have quintupled the return of the FTSE All Share in only an hour's work per year.

Explainer

What are the NAPS?

For anyone new to the site you may not be familiar with the NAPS. As I only have the time to write rarely these days, I feel a brief explainer is due.

The NAPS is a "No-Admin-Portfolio-System". It selects the top 2 highest StockRank stocks from each of 10 sectors in the stock market, holds them for a year, then rebalances and does it all over again.

That's the essence. It's pretty simple and takes only a short period of time to put together. Over the years I got a bit carried away and made the process more complicated, but these tweaks have been to no added gain. At its heart this is a systematic process that's designed to remove any personal bias around share selection, and thus help reduce emotional attachment.

The NAPS piggy-backs a non-obvious phenomenon in the stock…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Rusty2

9th Jan '20

My point about Jd Sports Fashion (LON:JD.) And Ashtead (LON:AHT) is they had a lot of momentum not just thevshare price but then they fell about 35% over the next 6 months before momentum changed again. It is something I will have to look into more.

Re QM and QV, I’m getting different figures if you look at the top stockranks: https://www.stockopedia.com/sc...

Yes different markets are very different just look at the US, completely different.

It will be interesting to see how these naps do over a year, from earlier articles momentum seems strong over 3-6 months.

dingers

14th Jan '20

Liked your approach on this.

Got carried away on the rating .

pka

Finebone wrote:

"Outperforming the FTSE-A by over 80% over 5 years is a fabulous result and the overall performance of the 90+ QVM stocks in 2019 suggests that the NAPS sample was simply unlucky. As in poker, bad runs often happen even if you continue to play correctly but bad luck evens out in the end and skill shows a profit."

I agree. This recent memo from Howard Marks of Oaktree Capital explains the similarities between poker and investing:

https://www.oaktreecapital.com/docs/default-source/memos/you-bet.pdf

I think there is quite a bit of luck involved. It is a good result, but several Guru screens outperform it, they are up about 140% in 5 years, I like the Canslim one myself and have about half of those in my portfolio. I joined near the start of NAPS in 2015, which was very impressive in the first year, the last 2 years have not been so good, is that down to luck or a change in the rules? That is a problem to me the rules change every year so it's not consistent. The more defensive approach recently did not seem to work. This year going for Momentum, we will have see how that pans out, there is a lot of optimism but I'm not convinced, last year there was loads of doom and gloom, markets often seem to do the opposite that you might expect. I must say the selection this year is a lot more attractive than previous years and I do hold a few of those shares. I avoid ones with high debt.

Robert Scoggins

Hello .

l wonder what the Nap Portfolio results would look like if put through the wringer of an equal - weighted allocation through its history ?

Best wishes , Robert .

WarrantStar

pka Thanks for your link to the Howard Marks memo which is both interesting & useful.

Does anyone remember a reported experiment in Sweden in which a selection of stocks were chosen on the basis a chimpanzee having thrown darts at a newspaper spread of stocks to form a portfolio which was then compared to portfolio chosen by a panel of human " experts " ?

'Does anyone remember a reported experiment in Sweden in which a selection of stocks were chosen on the basis a chimpanzee having thrown darts at a newspaper spread of stocks to form a portfolio which was then compared to portfolio chosen by a panel of human " experts " ?'

The reported results of that sort of experiment usually say the monkey beat the human expert. There are three possible reasons for that:

(1) Fraudulent reporting.

(2) Correct but selective reporting of the results - there's no incentive to publicise the results of an experiment if the human expert wins, because that's what everyone expects to happen and it doesn't make a good story.

(3) If one picks stocks at random from all the stocks in the market, which is essentially what the monkey is doing, there is likely to be a bias towards selecting smaller companies because there are always far more small companies than big ones. However, the human experts are more likely to pick big companies, because they usually measure their performance against the stock market index and that is dominated by a few big companies. If the experiment is done over a period when small companies are performing significantly better on average than big ones, then a portfolio containing mainly small companies is likely to perform better than one containing mainly big companies, unless the human experts have a great deal of skill in stock selection.

Edward Croft

Not sure why you'd say it was luck when it has pretty much performed the same as 90+ StockRank shares over the last 5 years. The luck (perhaps) is that QVM has performed so well in UK shares over this period.

Although - if a strategy that invests in good quality, reasonably valued, trending momentum shares does not beat the market - then the market will be efficient - and then what's the point in stock picking?

Well you did write after the first year "We need to recognise that a lot of this out-performance may have been driven by luck… and luck is unsustainable."

What I meant is if you run the selection on a different day ie the 1st January and the 2nd January you will probably get a very different set of shares, I have done this and was surprised how different they were. So there is some luck you are going to pick the big winners and miss the big losers. The first year there was so many winners and only 1 loser. There is very little difference in ranking between some of these top shares so they can change daily. Dart (LON:DTG) was only SR 97 in a sector that has many shares, it was 3rd in that sector, it was only in because you had 3 in that sector, if you had the original rule of only 2 per sector it would not have been selected, without it no doubt it would have been even worse.

Vader

17th Jan '20

If you want advice, you should speak to a financial advisor.

Yeah right! I've tried from cheap to highly recommended and super expensive only to learn that the only way is Stockopedia and doing it yourself.

These articles, the daily blogs of Paul and Graham, the SIF portfolio the ranks and screens are the only time I have ever got my pension performing.

My take is unless you are in the top 3% you won't get advice and service that will benefit you more than doing it yourself with the help of SO, good books and the RNS for the company updates.

iwright7

18th Jan '20

Ed,

I have just read an interesting Momentum article by O’Shaughnessy Asset Management (OSAM) published at the end of last year. They back tested their Momentum factor from 1964 and like you found a very significant difference in returns in the top and bottom Momentum deciles:

O’Shaughnessy suggest an advantage of linking Momentum with Value (VM), but don’t supply the back test numbers. They do though liken the success of a VM approach with the 1908-1911 Rubber boom, fuelled by the proliferation of Henry Ford’s motor cars.

During the rubber momentum boom they cite screening advice from the Rubber Plantations Investment Trust:

"These cultivated rubber estates must be properly capitalized, properly managed, properly organized in every shape and form, and then there is practically no [other] source in which money at the present moment can be employed so profitably.” Published in 1910

This wisdom from over a hundred years ago resonates with my own Quality and Momentum thinking, so I will be very interested to see how this year’s High QM (and VM) NAPS turn out?

For interest O’Shaughnessy’s %returns table below combines highest quintile Momentum with various quintile Quality factors over the last 50+ years.... Impressive numbers! Ian

Full article is here: https://osam.com/pdfs/research/The%20Factor%20Archives%20-%20Momentum%20(12.10.2019).pdf

finebone

20th Jan '20

Thanks for drawing my attention to this article which referred to Annie Duke. It led me to some very interesting lectures by her on YouTube to both investors and poker players on decision making under conditions of uncertainty.

However, going back to the changes to the NAPS portfolio this year, the best evidence on this site on UK factor investing are the charts of performance of the Stockopedia StockRanks since their launch in 2013.

These confirm that QVM has indeed performed best, although not far ahead of VM and QM eg

> 10M market cap, rebalanced quarterly, to week from 13/1/20:

Stocks with QVM of 90-100: + 176.75%
Stocks with VM of 90-100: + 169.76%
Stocks with QM of 90-100: + 167.79%

Moreover, with a few minor exceptions, in all these cases, the worse the decile score the worse the performance.

However, stocks with QV of 90-100 have “only” risen 86.10% over this almost 7 year period. Moreover, this was beaten by stocks with QV of 70-80 (+93.94%) and stocks with QV of 30-40 did rather better than the score would suggest.

This is reflected in the scores for the individual factors since, although the best performing Value stocks have scores of 90-100 (+65.67%), the second best are those with scores of only 30-40 followed by several others which seem out of place eg 70-80 is in 6th place!

For comparison, stocks with Q alone of 90-100 gained 126.76% and stocks with M alone gained 166.02% and the usual pattern of worse scoring stocks usually performing worse is re-established.

Hope you are still with me but before I pose a question, I will give the top decile figures more representative of the NAPS portfolio ie > 50M market cap, rebalanced yearly:

QVM +144.63%

QV + 94.26%
VM +129.28%
QM +141.75%

V + 77.54%
Q +111.38%
M +132.83%

In all these cases, the best decile contains the stocks with scores of 90-100, although again there are some anomalies with QV and V stocks. Third best performing decile for QV stocks is 40-50 and 80-90 scoring stocks are 5th. Second best performing decile of V stocks is 30-40 and 80-90 scoring stocks are 7th!

All this makes me wonder if there is some error in the Value data, or the Value algorithm is not accurately enough reflecting value and this is having a knock on effect on the QV and QVM scores.
Or have we just been in unusual market conditions for value? Not sure why it does not seem to be affecting VM though. Over to you, Ed!

PS This is a question, not a criticism, QVM still best performing and comfortably beating the FTSE-A (as are QV and V) over almost 7 years. Thanks for all the wonderful information!

Collector

12th Feb '20

There is obviously a fourth possibility.

That the chimpanzee was a genius and an expert darts player.

rcottee

29th Mar '20

Today (29th April 2020), we are in the midst of the Corona Virus pandemic and associated market crash. It would be great now to be able to look back (not necessarily backtest) and screen say at the market top (around 20th February 2020). Screening stocks, for example for Momentum then at the top would be meaningful. Screening stocks for 'Momentum' now in the midst of this downturn is really meaningless.

Lucky Trader

13th Apr '20

Good morning all, do we know which stocks were bought and sold as part of the quarterly rebalancing?

tiswas

28th Apr '20

Am I in the right place for a progress report as to how the 2020 Naps are performing ytd or do I need to be elsewhere?

Bluesky Ventura

15th Jul '20

Hi Ed

I have been Stockopedia member since 2012 and greatly benefited from the services it provides, actually found it truly life-transforming.

Over the past 7 years, I have gained growing faith in Stockopedia’s value, quality, and momentum systemic diverse portfolio management mantra, and become more skeptical of the opinions of the market and stock commentators and bloggers.

I have run a systematic process similar to NAPS, with some future modeling which has survived the crash very well.

Would love to know how NAPS fair against the crash.

Kind regards,

BSV

MichaelFBS

20th Jul '20

Will you be carrying out a mid-year review as you did last year?

Thank you.

Kind regards

Michael

gregatr0n

21st Jul '20

I sent Ed the same request via Twitter and he replied "Yes - I'm very overdue on the SNAPS. Data is done but I'm on holiday with the kids at the mo. Should be this weekend."

Looking forward to the update

Top Stocks for 2020 - on doubling your money in five years

Introduction

Explainer

What are the NAPS?

Unlock the rest of this article with a 14 day trial

About the Author

Edward Croft

98 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...