To achieve a consistent 10% return above the S&P 500 over many years is every fund manager's dream. To double one's investment above the S&P500 return is amazing, while tripling it is unheard of. I beat the S&P500 by 1,200% in my recent portfolio and I can detail the history of all my transactions and my broker's statements are available to SA editors.
Many analysts show their average yearly returns and/or their returns of their top 10 stocks this time of the year. The market is closed early today on Christmas Eve, so I have the time to check out my recent performance. As a trader with many trades, it would be far too complicated for me to do the same for the entire year. I selected all the stocks I purchased in the last 90 days. Most of them are deeply-valued stocks. Let's check how I perform so far on these stocks.
Stocks bought and their returns as of 12/25/12
Key Tronic (NASDAQ:KTCC)
Questcor Pharmaceuticals (QCOR)
The Active Network (NYSE:ACTV)
Nacco Industries (NYSE:NC)
Velti Plc (VELT)
Alpha Natural Resources (NYSE:ANR)
Deckers Outdoor (NYSE:DECK)
Alcatel-Lucent, S.A. (NYSE:ALU)
Dollar Tree (NASDAQ:DLTR)
Boston Scientific (NYSE:BSX)
Beat SPY (in %) = (11%-.82%)/.82% = 1,248% or 12 times
How the returns are calculated
Using BARN to illustrate how the return and SPY return are calculated:
BARN was bought on 12/07/12 (17 days from 12/24/12) at 27.93 and it was at 30.43 on 12/24/12.
Rate of Return = (30.43 - 27.93) / 27.93 = 3%
SPY was at 142.53 on 12/07/12 and at 142.35 on 12/24/12.
Rate of Return = (142.35-142.53) / 142.53 = -.13%
Interpreting the performance result
The quantity of each stock bought is not important as I am comparing the return of the stock. However, a few stocks have been listed twice as I bought two times usually on separate dates. If I chose them as one purchase instead of two, my return would appear even better. The purchases are real, so the amount of each stock is not identical to each other.
I'm not too excited yet. This phenomenal return could be just this one time only. 90 days is a short period. Consistency could be achieved with an improved stock picking technique, plain luck or a combination. I do believe I will never achieve the return of 12 times better than the S&P 500 consistently. By any measure, it is an extremely decent return.
My best return is from 2009 in my largest taxable account. It is over 80% beating SPY by about 3 times. 2003 is another good year for profit. These two years are defined by me as the Early Recovery stage in a market cycle and the market in this phase provides the best profit opportunity.
The four losers are MSFT (-8%), ACTV (-5%), KTCC (-1%) and IAG (-1%). The best winners are: VELT (64%), ALU (38%), ANR (33%) and QCOR (19%). The following are in 14% to 16% range: DECK, NC and BSX (2 purchases.
Cheating the results
I could 'cheat' for better results by doing the following (but I did not):
- Exclude stocks only purchased in the last 20 days (instead of 15).
- If my purchases of CSCO were included, the result would be even better. CSCO has been bought three times on 7/24/12 and it has gained 31% as of 12/25/12. I still have Cisco, but it is not included due to my 90 day requirement.
- I could include those stocks in my buy orders that had not been executed due to their fast appreciation.
Hence, there are many ways to cheat, and you should read others' results carefully.
What stocks were included
There are 20 purchases. I bought some stocks twice and counted as two purchases. None of the stocks have been sold as of 12/25/12.
I have excluded the stocks that I bought in the last 15 days (too early for meaningful performance results) and the stocks that I am testing a strategy by trading them every month and most are in a separate account that I do not have to pay commissions.
This strategy so far looks promising with good gains and requiring almost no effort on my part. I will write another article, if it proves itself to be consistently profitable. It is based on common stocks of two subscription services both seeking momentum stocks.
How the stocks were picked
The majority of the stocks were screened by my selected screens that have proven profitable in the last 3 to 6 months. Most investors and fund managers have their own favorable screens to pick stocks using specific tools. Most do not display the details.
My advice is: Test our screens to see whether they still work. I also analyzed most of the screened stocks and assigned a score (15 and higher is a buy) based on the metrics that had reliable predication recently. I do not stick with the scoring system 100%, but most stocks I purchased twice do have high scores.
My screens and the scoring system are beyond the scope of this article. I may write articles to describe some basic concepts if there is enough interest from the readers.
The poor performers were scored as: MSFT: 13, ACTV: 16, KTCC: 27 and IAG: 23. The scoring system is OK. MSFT should not be bought, solely judging from its low score. The other three are the latest purchases in this portfolio and they may perform better in a longer period.
The winners were scored as: VELT: 34, ALU: not scored, ANR: not scored and QCOR: 30. The scoring system is great for this group. ALU and ANR were selected from two Seeking Alpha articles and their selections were not based on scores. I read several Wall Street Journal articles on ALU and CSCO to convince me to buy both.
The average winners were scored as: DECK: 9, NC: 26 and BSX: not scored. DECK was selected based on an article from Seeking Alpha, and it seemed DECK was experiencing the same short squeeze as CROX once did. BSX was selected from a Sunday paper article.
1. I notice that most big winners have a stock price less than $10.
2. I did not double-bet on VELT and ALU, which both turn out to be my best performers. VELT scored high in my analysis. ALU was very convincing but it seemed to be risky. 'Nothing risked, nothing gained' applies here. I did triple bet on CSCO, which is a large company with good fundamentals that were not 'discovered' by the market.
Both AAPL and DECK gained more than 25% and then lost most of their gains during my short holding period. I should have sold AAPL, as many of my fellow investors sold the winners, expecting higher capital gain taxes next year.
3. During this period, I had several buy orders not executed due to their stock prices skyrocketing. Market orders could be the solution. It is another example of "penny smart and pound foolish"?
4. It will be interesting to check the results again in 6 and 12 months. Except ALU, all are in my taxable accounts and I usually keep them for a year to qualify for the lower tax rates for capital gains. I expect they will not beat S&P 500 by this margin again in 12 months.
5. Reading stock articles on sites such as Seeking Alpha is beneficial. However, you need to do your own analysis.
6. The market has been up by 0.8% in last 90 days and this portfolio increased by 12%. If my portfolio amplifies the market, I wonder whether it will be down by the same rate in a down market.
7. I have never achieved such an amazing return. I'm emotionally detached to big wins and big losses. It could be plain luck. Even the best strategy will have its "black swan" moment eventually.
My three steps of making stock purchase are: 1. Market timing, 2. Screening stocks and 3. Stock Analysis. Market timing and strategy do not always work, but they will be better with using them than without.
I am the living proof against the Efficiency Theory and the claims that stock picking does not work. It may not work from time to time, but in the long run it works.
In this period, I have been accumulating cash expecting a big dip in the first quarter of 2013. As of 12/12, this prediction has not happened (at least not so far), as market timing does not always work.
Disclosure: I am long KTCC, QCOR, ACTV, IAG, NC, VELT, ANR, AAPL, C, DECK, MSFT, ALU, DLTR, CAT, BSX, CSCO, BANR and IDES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.