Sector Model
|
XLB
|
2.05%
|
|
Large Portfolio
|
Date
|
Return
|
Days
|
BBRY
|
7/16/2012
|
115.59%
|
292
|
SEAC
|
9/25/2012
|
34.27%
|
221
|
CAJ
|
9/25/2012
|
4.01%
|
221
|
BOKF
|
2/4/2013
|
13.33%
|
89
|
SWM
|
2/12/2013
|
12.85%
|
81
|
MWW
|
4/11/2013
|
9.60%
|
23
|
ABX
|
4/11/2013
|
-18.23%
|
23
|
TPX
|
4/22/2013
|
0.35%
|
12
|
NYCB
|
4/24/2013
|
-0.08%
|
10
|
OKE
|
5/2/2013
|
-1.61%
|
2
|
S&P
|
Annualized
|
9.93%
|
|
Sector Model
|
Annualized
|
25.48%
|
|
Large Portfolio
|
Annualized
|
33.13%
|
***Annualized numbers are from the date the model was
launched: 5/31/2011.
Rotation: selling OKE; buying TTM.
I know, I know… yo-yo trading between those two.
The model continues to struggle with the most recent picks,
and I had the opportunity to do a thorough review of the fundamental selection
parameters on Thursday (between numerous spit ups from a sick baby I was taking
care of…).
I was able to find an error.
When I corrected it I found an even bigger error. When I corrected THAT I ended up with about
the same results I had started with.
Turns out the first error was correcting the second one. Two wrongs DO make a right on occasion.
I was also able to measure the sector model against fixed
holding periods, and hypothetical selections from the model as if they were
held for 18 months instead of rotated on schedule.
What I found was that the original Greenblatt filter did
better than the Graham filter, and the Graham filter did better than my
Adaptive filter – IF held for 18 months instead of rotated. My model is progressively improving
its short term performance by picking short term stocks.
In other words, these stocks shouldn’t be held long term.
Right now I have the rotation periods and fundamental
selections set to continually evolve.
But that evolution is close to breaking apart into two models. I’ve talked about this before, but it’s worth
reviewing:
The goal is not to GET the most profit.
The goal is to KEEP the most profit – after taxes.
An IRA account would do best rotating one stock a week.
A taxable account would do better holding each stock well
beyond a year. The model has been
running for almost two years and has not yet found the sell point for a taxable
account. I’m estimating a likely target
of three years, but won’t know for sure until after 5/31/2014.
In any case, the reason for the difference is the annualized
tax burden as a stock is held over longer periods of time:
In this chart, the reward / time ratio tops off at about 4
years. But performance on even the best
stocks tends to taper off by 5 years.
The action of both stock mean reversion and tax benefit is giving me a
likely holding target of 3 years:
Note that this last graph is just a forecast (hence the
slightly different percentages from the first graph). We won’t know until we get there.
Three years is a long time in the investing world, thanks to
the Bush tax rates. But now that we’ve
increased those rates the current average hold of 6 months will eventually
stretch to 2 – 3 years, as it was in previous periods of high capital gains taxes. Remember, the average holding period is
calculated per dollar, rather than per investor. Even if no one changes their investing
behavior, the short term dollars will be taxed away and the bulk of the money
will be left with long term investors.
I gave an example of how this works on a previous post:
Can the technical configuration of the model be adjusted for
these longer time periods?
No.
Not even close. No
technical measure of breadth, volume, or price can have any meaningful effect
beyond two years, and my model has a much shorter time horizon than that.
So is all hope lost?
Of course not!
Once you start counting in years instead of months,
you’re in a purely fundamental time frame.
So let’s look at the FUNDAMENTAL differences between short
term selections and long term selections.
I mentioned some weeks ago that the logic for the present
fundamental filter is long term / short term.
The model is looking for stocks that are currently doing worse than
usual.
So, if a short term trade looks for long term clues, what
the heck does a long term trade look at?
Cash Flow Growth 10-Year
|
Sales Growth 10-Year
|
Total Return 10-Year
|
Book Value Growth 10-Year
|
Dividend Growth 10-Year
|
This is pretty simple stuff.
The longer your time horizon, the less you have to work. Long term investing is not some kind of
esoteric science. There’s no need for a
scalpel. A sledgehammer will do just
fine.
Right?
Well…
Actually…
No.
Those, uh, fundamentals up there are not supposed to be “High”,
but “Low.”
Remember, we DON’T want growth stocks. We want VALUE stocks. Value stocks are stocks that are beaten to a
pulp, and if you want to invest long term, then you have to find stocks that
have been beaten for a very long time.
Proj 3-5 Yr Relative P/E
|
Return on Common Equity
|
Return on Shareholders Equity
|
Proj Dividend Growth Rate
|
ROE Latest Qtr
|
Again, low, low, low, low, and low. You want stocks that have been beaten down so
badly that investors are sick out of their minds at them and don’t want to
touch them with a ten foot pole. Heck,
even the 3 to 5 year prospects are
bad, with a projected P/E that’s supposed to stay low years into the future.
Avg Trading Volume Last 6 Months
Again, low. This
stock is a sleeper. People have even
stopped trading it!
So, what the heck is GOOD about it?
It’s not good enough to find stocks with a bad decade. They might have another bad decade to go.
Remember that old long term / short term thing for the short
term trading horizon? If you’re only
holding a couple of months, you want a stock that NORMALLY does better than it
is currently doing. To hold short, look
long.
But now even the long term view is bad!
This is where it gets really weird:
Est % EPS Chg 2 Qtrs Out
|
Total Return 13-Week
|
EPS Latest Qtr
|
Est % EPS Chg Fiscal Year
|
Intangibles
|
All of these are high. You have a stock that has started to move in
price, but with almost no volume behind it.
The tell isn’t technical (i.e. volume).
The tell is fundamental – earnings.
The earnings are rising faster than the price or the
volume. And they are doing better than they’ve done for the past decade.
Those of you who’ve read Peter Lynch will recognize this
pattern. It’s one that hasn’t worked since
the 1990s. But it’s working now.
Lynch made his reputation in the 1980s, when a secular bull
market was pulling us out of a decade and a half of sickening stagflation. Companies that did horrible for the previous
secular market were suddenly taking off faster than investors could keep up,
and Lynch could ride some of these stocks to ten-fold increases.
I’m not saying we are in a new secular bull market. And maybe this is an aberration. But those who do catch the turn (IF this is a
true turn of the tide), will do extremely well.
So, to invest long term, you don’t want something that
usually does well but is having an off year.
You want something that’s had a horrible DECADE, and is now picking up
in earnings, with a small price gain on low volume – a sleeper.
To invest for months,
look at years.
To invest for years,
look at decades.
All of this bears further study, but it looks like I’ll have
plenty of time…
Tim
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