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Friday, September 16, 2016

Dart-Fin Experiment

"A great trader is like a great athlete. 
You have to have natural skills, but you have to train yourself how to use them."
- Martin "Buzzy" Schwartz, aka Pit Bull

Sometime during a smoldering summer of 2016 I noticed an abnormal number of financial stocks in Best List.

I remember seeing a group of technology stocks back during winter of 2015, when DART method was in testing. There were only 10-15 of them, which is not a lot, but that was more than half of Best List - a definitive watch list derived from scan of available database of fundamental information, looking for good business, priced at good value. I made a note in this post (link) and saved a group-chart. Go see what happened since the beginning of this year. I don't think its by chance...

When a new version of Dart strategy was published a month ago in this post (link), I pointed out an overwhelming number of financial stocks in a scan. It may be an anomaly, some industry-wide fluke that makes these stocks so attractive on paper. Or may be its the next fad. I don't pretend to know, but want to test this theory. This is exactly how I developed most of my methods - by trying and testing on paper.

This is a test! 
No real money is traded, but I will keep a virtual trading account with (near) real records. 

A scan of database with Dart-v2 settings returned 10 results in Financial sector: life and property insurance with some regional banks.
 FinViz link.
By relaxing and massaging some settings of this scan I enlarged ;-) this list to over 24 stocks, covering some obscure sectors of financial industry. Regional banks and insurance companies still dominate the list, but with healthy addition of REITs, broker, asset managers and more. I added Mid-Atlantic banks, although they don't qualify. These selections will change overtime, but if my hunch is correct, most will stick and go to new highs.

Current Dart-Fin List FinViz link.


I think there is a way to construct a diversified financial portfolio of about 10 stocks and have plenty of candidates for replacement.  I will use modified portfolio management strategy, based on Original Dart (post link). Minimum account size required is $35,000 for ten equal size Standard Positions (read 'How to Bet' post link), with cash reserve of about 5K. Position size is expected to change in a couple of months, according to performance.

Dart for Financial Stocks : Dart-Fin Portfolio
a. 10 financial stocks to be selected from expanded version of Dart-v2 scan.
b. One time per week, the worst loser will be sold and replaced with new candidate from the scan.
     b1. If there is no stock with loss from purchase price - sell biggest weekly loser.
     b2. If there are no weekly losers - sell biggest winner
     b3. If everything moving higher - wait and trail stops.
c. New positions can not be sold for 1 month, to avoid over-trading (except for initial allocation).
d. If stock is sold - it can not be repurchased for 1 month, to avoid wash-sales.
e. Sell and purchase don't have to be on a same day, but every effort has to be made to keep portfolio fully invested.

Dart-Fin Portfolio should to be as much diversified as possible within financial industry. Considering that majority of scan results at this time are regional banks and insurance, I will start with this allocation: 3 banks, 3 insurance, 2 reit's, 1 savings/loan, 1 broker/asset manager. This mix may shift in a future.

I set up a simulated account at Investopedia and bought all these shortly after open on September 15, 2016. 'Dart Fin' game will be accessible there for review and comparison. Note: they don't have an option to set-up a 35K account, so I took next one up ($50,000). Remember to always adjust it by 15K. I will keep my own records to make sure of that.

Dart-Fin experiment is designed to exploit a temporary attractiveness of certain financial stocks. A meaningful amount of money is to be invested in simulated environment in order to realize above-average return. If premise of this test is correct, Dart-Fin will run for a period of 6 months, or possibly for as long as 2 years. It is unclear (at this time) how to recognize a completion of the experiment.

I will return to this in a few months to show what develops, but it should not stop an adventurous investor from running independent simulation and hopefully share the experience in a comment section... No?

update: November 10, 2016. New simulator at MarketWatch:
almost same portfolio:

UPDATE 1/5/2017
FAF was sold on 12/22/16 on-stop, due to under-performance.  Replaced with CINF.
Position size raised to $3500.
Dart-FIN Portfolio is up about 10% since this simulation begun on Nov 10, 2016.
Original Investopedia simulator from September 2016 indicates possibility of 40% annualized profit, but can not be relied upon for record and comparison and has been abandoned since November.
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