We are generally overconfident in our opinions and our impressions and judgments. - Daniel Kahneman
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| J P Morgan Bubbles. 1901 |
Methinks, I got a pretty good beat on things around market. Even with minimal to non exposure to news and commentaries on my part lately, the remarkable ability of some stocks and industries to continuously penetrate collective psyche is simply unbelievable. Sometimes I am almost sure - it's by design. Everybody piles up into same issues all at ones (I'm talking big money) with surprisingly random results. Aren't these people actually suppose to know something? Like certain inside information (legal, of course... ;-). Didn't some of them just spent handful of years (and dollars) in business school, learning every fundamental thingamabob known to men, analyzing balance sheets and shit...?
And what?
Still like throwing darts at a Barron's stocks table.
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By their very nature, heuristic shortcuts will produce biases, and that is true for both humans and artificial intelligence, but the heuristics of AI are not necessarily the human ones. - Daniel KahnemanIt is understood that fundamentals of a company can be made look like anything imaginable. Accounting can be stretched beyond any reason, but there are certain traits that are both hard to manipulate and signs of good business at the same time. My focus is on basic and broad characteristics, regardless of how big or small they appear, seeking only binary answer: YES (present) or NO (absent). Following is my hypothesis of what investable stock of prosperous company should look like:
1. Active, tradeable american stock, more than 5 years old. Price >$5; av volume >1M
2. Enterprise is profitable with sales, but not excessive valuations. P/E <50; P/S <10
3. Dividend is a further proof of positive cash flow and shareholder responsibility.
4. Price is above 200 day moving average.
5. Modest amount of debt is permitted.
6. Both earnings and sales exhibit growth over past 5 years.
Finviz scan (link) revealed only 36 such stocks on 12/24/2015 - call it Best List.
I suppose this is the best this market has to offer, but it is not possible to invest into that many with any reasonable amount of money, because this list will fluctuate and cause all kinds of portfolio mayhem.
Then I propose this DART Strategy Portfolio:
a. 10 random stocks will be selected from Best List. Equal position size.
b. At the end of the week the worst loser will be sold and replaced with random pick from new 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 there is not a sufficient number of results in a scan - #5 and #6 above can be relaxed somewhat.
b4. Average volume requirement may be reduced temporarily, to as low as 300K at times.
c. Sell and purchase will be placed on Monday open, or 1st trading day of the week.
d. Estimated commissions ~2.5% of first $35k invested, about same as effective dividends.
DART is an experiment designed to prove that by investing into sensible stocks of best companies, with rigorous risk management, absolute positive returns can be achieved regardless of personal opinion and market timing.
This is a test!
No real money will be traded, but I will keep a virtual trading account with (near) real records.
Programming note: this method is labeled 'DART'.
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I find it hard to believe this could work, but then again, I used to believe that KREM is the way to go. Originally I thought that "all my efforts need to be confined to this list" (post link), but later I realized that KREM is kind of a "picture of average, active, media driven, collectivist investor horde" (post link). In fact equally weighted KREM index not just lost money this year, it did it continuously with no respite and managed to underperform every index I follow including my own strategies.
GURU method (post link) did no better, as can be seen from namesake etf performance. My analysis of holdings in GURU etf, and also some endowments and big-big money managers portfolios, revealed huge turnover, wide range of opinions and forecasts and amazingly high level of risky speculations with futures and options. What it didn't show was any kind of substantial profits, just a few percent on both sides of 0 at best, with some noticeable cases of near catastrophic losses.
These suppose to be the brightest minds... oh boy...
Large portion of Best List are tech stocks, mostly semiconductor makers and equipment
http://stockcharts.com/freecharts/candleglance.html?INTC,TXN,BRCM,NVDA,ADP,CA,EMC,SNDK,CSCO,GLW,LRCX,TER|B|P5,3,3|0
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January 4, 2016 initial allocation for virtual account only!
http://stockcharts.com/freecharts/candleglance.html?CB,HRL,LRCX,NKE,SNDK,TER,VSH,NVDA,NDAQ,LUV|B|P5,3,3|0
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November 09, 2016. New simulator at MarketWatch
www.marketwatch.com/game/original-dart
