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<< Click here for part 2<<

As outlined in my first article, my methodology identifies the best performing portfolio on a given date, and the alpha of the portfolio is very close to linear. However, this does not last and the portfolio subsequently tends to index returns.

What does happen is that a new portfolio can be formed which continues to outperform as shown in the following graphs. The bifurcation is quite pronounced. The newer portfolio may retain some of the stocks of the previous portfolio, but adds upward movers and drops laggards. The upward movers are usually near neighbours on my risk/reward metric, so there is consistency in the methodology.

The latest portfolio has outperformed significantly over the past two weeks, due to the gold sector stocks, which appear to be reacting to the gold price, and specialty chemicals sector which have great run ups from time to time. Interestingly, another China stock appears.

The absolute return for portfolios formed as at 2 Sept and 26 August are shown below. It is interesting that even in this market, it is possible to find stocks with positive returns. Stock picking is not dead yet. Each portfolio is labelled by date of formation to avoid confusion.

[Click all images to enlarge]

I have also prepared two graphs showing active return. The top graph shows the active return for the usual 3 month period and the second covers the past two weeks. Bifurcation of returns is easier to identify in the later graph.

As to the stocks which comprise these portfolios, the portfolio formed as at 2 September portfolio contains the following:

CSR

China Security

Business Support Services

RGR

Sturm Ruger

Defense

GRO

Agria Corp

Farming & Fishing

AUY

Yamana Gold

Gold Mining

BVN

Buenaventura Mining

Gold Mining

NEM

Newmont Mining

Gold Mining

ABX

Barrick Gold Corp

Gold Mining

KCI

Kinetic Concepts

Medical Equipment

MDS

Midas Group

Specialized Consumer Services

VHI

Valhi Inc

Specialty Chemicals

POT

Potash Corp

Specialty Chemicals

MTZ

Mas Tec

Telecommunications Equipment

SWM

Schweitzer Mauduit

Tobacco

KNM

Konami Corp

Toys

NLC

Nalco Holdings

Waste & Disposal Services

For reference, the 26 August portfolio was composed of the following:

RGR

Sturm Ruger

Defence

CSR

China Security

Business Support Services

AUY

Yamana Gold

Gold Mining

AEA

Advance America Cash

Consumer Finance

KNM

Konami Corp

Toys

BTH

Blyth Inc

Nondurable Household Products

ZNH

China Sthn Airlines

Airlines

NLC

Nalco Holdings

Waste & Disposal Services

BVN

Buenaventura Mining

Gold Mining

MLI

Mueller Industries

Industrial Machinery

KCI

Kinetic Concepts

Medical Equipment

SLW

Silver Wheaton

Platinum & Precious Metals

COG

Cabot O&G

O&G Exploration & Production

ABX

Barrick Gold Corp

Gold Mining

AN

AutoNation Inv

Specialty Retailers

My experience is that stocks at this end of the risk reward spectrum might have limited time for out performance, usually two to three weeks, hence our title. This is a high turnover strategy.

Disclaimer: The content in this document is provided as general information only and should not be taken as investment advice. The contents in this explanatory paper shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author. The author may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis on this site is ultimately your responsibility.

Continue to Part 4 >>

Source: Building An Evolving Portfolio (Part 3)