VectorVest Views 12/02/05
THE BEST HIGH VST STRATEGY.
After writing last week's essay, I felt that there was still a lot more I'd like to know about the performance of high VST stocks. Sure, the 2,176 tests I wrote about last week confirmed my faith in the efficacy of the VectorVest system of analyzing and ranking stocks, but they didn't tell me all I wanted to know. For example, they showed me that a typical portfolio of top VST stocks continued to appreciate in value as the holding period increased, but it did not tell me which holding period gave the best results. So we had more work to do.
We conducted a series of tests in which we looked at holding periods of 4 weeks, 8 weeks, 13 weeks, 26 weeks, 52 weeks, 104 weeks, 156 weeks and 208 weeks for portfolios containing the top 5, 10, 15 and 20 VST stocks. In all, we ran 15,160 tests. The results were very interesting. In every case, the percentage of winning runs and the average annual rate of return were favorable. The distribution of results was a smooth, bell shaped pattern, biased to the side of the longer holding period. The poorest results were shown by the five stock portfolios with four week holding periods. They gave an average annual rate of return of 12.16% with 51.83% winning trades and 55.08% winning runs. The best results were shown by the 15 stock portfolios with 52 week holding periods. They produced an average annual rate of return of 19.91% with 60.12% winning trades and 78.90% winning runs. Not bad. Not bad at all. (A lot of money managers would kill for results like these.)
Given this information, my next task is to learn how to apply it in developing a practical investment strategy. I'll do this by seeing what happens when we rebalance the various sized portfolios as a function of holding period. As described in my essay of July 10, 1998, I did a bit of this work many years ago. It wasn't an elaborate study, but it still took a lot of time and effort. Yes, I ran a top 20 VST stock portfolio test with a 52 week holding period last week just for the fun of it. I started on June 02, 1995 and rebalanced once a year. I got the wonderful result of a 421% gain in 10.5 years. Is this the best we can do? I don't think so, and I'm going to find out. If you don't think that running 15,160 tests like we did last week wasn't a lot of work, this next stage of testing will take far more effort. But I don't care. I'm determined to find The Best High VST Strategy.
REBALANCING STUDIES.
VectorVest Views 12/09/05
Last week I said I was determined to find "The Best High VST Strategy." The bad news is that this takes a tremendous amount of work. The good news is that I've gotten off to a reasonably good start.
I also said last week that I would start this work by "seeing what happens when we rebalance the various sized portfolios as a function of holding period." This sounded like an onerous task, until I realized that our previous work, reported last week, had already shown how to save a lot of time. You may recall that we got the best results with portfolios of 15 stocks using holding periods of 52 weeks. Why not start there?
To broaden our study, we ran tests using portfolios having 10, 15 and 20 of the top VST stocks in which we rebalanced every 52 weeks. By "rebalancing" I mean that we bought a new portfolio of stocks at the beginning of each holding period and sold it at the end of the holding period. The first test of each series began on June 2, 1995 with additional tests starting on each subsequent week. In all, we ran about 1,375 tests.
Once again, the 15 stock portfolios performed better than the 10 and 20 stock portfolios. The average gain for each 15 stock portfolio was 173.02% with an average annual rate of return of 30.8%, winning trades of 58.67% and winning runs of 96.88%. The results with the 10 and 20 stock portfolios were also quite good, but not as good as those reported above. For example, the average annualized gains for the 10 stock and 20 stock portfolios were 24.6% and 26.6%, respectively.
These results make it awful easy to say, "What the heck, I'll just buy the top 15 high VST-Vector stocks, hold them for a year and be done with it." Ah, but life is never that easy. There is a 3.12% chance of losing money and a fifty percent chance you'll get a result that is less than the average 30.8% ARR. There's also a 68% chance of achieving an ARR between 11.9% and 49.7%. So how would one improve their chances of getting a winning portfolio?
A cursory analysis of the data suggests that your chances of making higher returns improve when you begin investing at the end of a major downturn, 03/21/03, for example, and resist going into the market after a major upturn, 03/10/00, for example. In other words, it still pays to try to buy low and sell high even with a solid strategy such as that illustrated here. This week's Strategy of the Week makes this point.
Easy as it may sound, I don't know if I could handle a strategy of rebalancing every 52 weeks. I'm just too much of a control freak. So I have begun to work on various management techniques to satisfy my overwhelming urge to dump losers and stick with the winners. It hasn't been easy so far, but I've got the Simulator and a great new tool to help me see if I can beat the Rebalancing Results.