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Wednesday, August 24, 2016

System 12. American MegaDozen. Introduction.

I developed System 12 in January 2013, but idea for it was my pet peeve long before that.

See, people are running around, looking for stock tips, trying to guess what companies are destined for greatness and ever expanding share price. It's been this way since forever and will be like this long after we are gone. If they stop screaming (extra Jim Cramer) and listen to the Mother Market, they just may learn that die is cast, the race is over and winners are announced. System 12 gives rational speculator an ability to bet on winners while the race is still on.

System 12 (S12), aka American MegaDozen, is a rule based, (almost) mechanical, statistical system designed to invest in 12 biggest and the best companies in USA by using multi-position dynamic strategy. With application of rules, filters and risk control measures, this method increases investor chances of buying and holding leading multinational corporations for months (even years) while their share prices increase and sidestep devastating once-in-100-years bear markets that seems to happen every couple of years (or so).

S12 companies are so big - they dwarf everything else by comparison. Their combined market cap stands at whooping 4.4 Trillion dollars, up from 'only' 3 trillion in 2013. Imagine, if Mega Dozen was a country - it would be 4th or 5th biggest economy in a World! Lest not forget that the biggest three of all - Apple (AAPL), Alphabet (GOOGL) and Microsoft (MSFT) - are actually larger than entire Russell 2000 small cap stocks index (RUT). All two thousands of them...

This remarkable size discrepancy is really not that unique.
The phenomenon of 'extreme' is thoroughly explained in books of Nassim Taleb, famous trader, writer and philosopher, who calls our world "The strange country of Extremistan" (link):
"In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate, or the total...   if we are in the domain of Extremistan, and we use analytical tools from Mediocristan for prediction, risk management, etc., we can face enormous surprises. Some of these surprises may be positive and some may be negative, but their impact will likely exceed what we are prepared for."
I strongly recommend his books "Black Swan" and "Fooled by Randomness" for anyone who wonders how this order of things came to be and what to do about it.

Clever Eddy Elfenbein observed in 2014 post(link): "Wall Street is comprised of a small number of stocks that are very, very large, and several thousand stocks that are tiny". Correct! Moreover, it's been this way throughout most of modern history and especially in 21st Century. Further, he notes:
"...market cap of the S&P 100 makes up about 62% of the market cap of the S&P 500...The S&P 500 makes up about 77% of the entire value of the Wilshire 5000. Despite its name, that index has 3,663 stocks... S&P 100 is about half of the Wilshire 5000. The remaining 3,563 make up the other half..."
This is the World we live in and this is the Market we are given. Don't blame me, I just work here...
Meanwhile we can exploit this peculiar circumstance with reasonable expectation of 'positive surprises'. This is what System 12 is designed to do.

System 12 completely disregards personal biases, gambling urges, economic forecasts and CNBC talking heads. What it offers is a superior stock selection tool and procedure for Stress Free Investing. Why worry about GDP doing this, or economy doing that? Why agonize over conflicting market predictions, or chase latest over-hyped IPO?
The Market already made its verdict and announced it loudly over these interwebs... Listen...

You can take it from here... or wait for next week article, where I will outline portfolio construction and trading rules.
.this is a first article in 'System 12' series
Read Part 2: System 12. Portfolio Construction and Rules 
Read Part 3: System 12. Trade Management 
Read Part 4: System 12. Performance and Risk
Read Part 5: System 12. Portfolio Initiation  

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