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Fred Piard
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Author of 'The Lazy Fundamental Analyst' and 'Quantitative Investing' (5 stars on Amazon). PhD in computer science, civil engineer, ex-software architect and consultant, I have worked 20 years in 6 sectors, 4 countries and 3 languages before becoming an independent quant analyst and investor. My... More
My company:
YPAFI.COM
My book:
2 Books With Real Alpha Inside
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  • Performance In May For Global Household Index Premium Service

    GHI holds permanently 20 S&P 500 stocks, 5 were changed during last month (2 also changed on 6/1). Updates are published in the week-end. Holdings and performance can be verified by subscribers in the history of weekly updates.

    Assumptions:

    Trades are executed at closing price the first trading day of the week with a 0.1% cost (commission is 0.05% at IBKR).

    Results:

    Return is 3.77% (50% annualized compounded). Alpha is 3.5% (46% annualized compounded). Volatility is almost equal to SPY. Max drawdown is smoother. This is a very short period. Backtests shows an annualized return about 20% over 16 years (alpha about 15%). Past performance, real or simulated, is not a guarantee for future returns.

    Subscribe now: seekingalpha.com/author/fred-piard

    Data and chart: portfolio123

    (click to enlarge)

    Jun 01 12:00 PM | Link | Comment!
  • The Maximum Number Of Subscribers For A Blog Or Newsletter
    • An investing blog or newsletter can distort prices and its own performance.
    • How to calculate the maximum number of subscribers from the past picks or stock universe.
    • Example of calculation with the author's Premium Service.

    The quality of investing information services depends inherently on the number of subscribers. Liquidity is not infinite. If the number of followers duplicating the trades grows beyond a certain limit … the tail may start wagging the dog, resulting in serious price distortion. If the price has an abnormal move of 1% when a post goes out, it may harm seriously the portfolio annual return depending on the number of trades per year. What is the limit to trade without moving the price? It's a complex question. Nowadays, high frequency traders can provide dynamically more liquidity with a small gain for them, and some brokers provide algo-based order types to limit the impact on price. However, we can reasonably claim that a trader, or a group of traders, representing 3% or less of the volume has little risk to distort the price. At 10%, the risk is much higher.

    What does it mean for my service Global Household Index (hereafter named GHI)? Stocks are picked in a universe where the median value of the 60-day average daily volume of a single stock represents $190 million, 90% of stocks are traded over $85 million/day, and all are traded over $39 million/day. I will take the minimum of $39 million/day for my calculation. GHI team members can trade 3% of this with no risk of moving the price, which is $1.17 million. As there are 20 stocks in the portfolio, it means that GHI team members can trade a total portfolio value of $23.4 million without moving the price. GHI is updated weekly. However, backtests show that it may be better to ignore 1 update out of 2. The performance is the same and the turnover is lower. Applying this, the distortion-proof portfolio value may be doubled at $46.8 million.

    Here is a table of the average portfolio balance by age category at a famous broker (in 2013):

    Age

    Average Balance

    Under 25

    $3,865

    25-34

    $21,524

    35-44

    $54,054

    45-54

    $103,269

    55-64

    $154,421

    65+

    $176,696

    My guess is that most subscribers will be individual investors with at least 3 compartments of similar sizes allocated to different strategies with various rationales, GHI possibly being one of them. If I consider an average allocation of $50k, it gives a number of 936 subscribers with no risk of price distortion and a wide safety margin. My expectations are closer to a few dozens. This is a calculation with very conservative assumptions: if we consider that moving 6% of the volume is still reasonable, we can double it. If we consider that subscribers trade in a 48h period after the signal and not all the same day, we can double it again. If we take the limit of the lowest decile in liquidity instead of the minimum, we can double a third time. It means over 7000 subscribers or a total AUM over $350 million before the tail really wags the dog. It is possible to do the same calculation with any blog or newsletter if the author has a filter on liquidity, or using the average daily volumes in dollar of past picks.

    Global Household Index is a new Seeking Alpha premium service aiming at beating Consumer Staples and Healthcare indices, which have beaten the S&P 500 for at least 15 years and 2 market cycles. I explain here why I think that these sectors should continue to provide an alpha, and how I designed GHI to create an alpha over this alpha.

    May 07 1:08 PM | Link | Comment!
  • GHI Premium Service: Questions And Answers With First Subscribers

    Global Household Index (named GHI hereafter) is a 20-stock defensive portfolio based on predictable demographic trends and fundamental metrics. Simulations widely outperform the static and dynamic ETFs in the same sectors: XLP,XLV,FXG,FXH.

    Presentation and subscription here: seekingalpha.com/article/3048446-global-...

    Questions and Answers

    On entering the service, is it anticipated that I would invest the same dollar amount in each of the recommended equities?

    I am not a RIA so I am not allowed to give you investing advice, I can just tell you how GHI works. I can also tell you what I would do for me in a specific situation. If I had to create a portfolio based on GHI now, I would buy the same dollar amount in each selected stock, but probably not with all the allocated capital. I would prefer to "cost-average" the strategy and absorb some short-term market moves by entering in several steps along a few weeks or months.

    I assume that dividends are included in the simulation. Is this the case?

    Absolutely

    If I am mirroring the portfolio, shall I direct my broker to reinvest dividends?

    Whatever the strategy, if you choose to reinvest dividends and if your broker can do that for you at a lower transaction cost, use this possibility.

    I would like to sell out of the money call options to take advantage of premium harvesting.

    If you want to keep your short calls covered until expiration, you may need to keep a stock that has gone out of GHI. On average, about 2 stocks out of 20 are replaced in a weekly or bi-weekly update. The portfolio still works well in 4-week rebalancing, so you may want to ignore 3 updates out of 4 (for stocks, not for market timing), and plan a strategy writing calls with an expiration date at 4 weeks just after buying a stock . You could write new calls every 4 weeks as long as the stock stays in the portfolio.

    When would you advise that the portfolio be hedged?

    My post #3 gives examples of hedging tactics. The timing indicators necessary to implement them are published every week with the portfolio update. If you have another trusted timing technique, feel free to use it.

    I will not invest in tobacco companies.

    In the weekly update there are 4 wild card tickers in each sector to replace companies that you don't like for any reason.

    I find the question of rebalancing somewhat confusing.

    Read my post#3 again. Keep it simple. What I do for me with any equal-weighted portfolio: when the difference between the smallest and largest position is less than 15%, I don't rebalance existing positions to avoid useless transaction costs.

    I see that hedging is "off". Should I move money from the cash to SPXU when the hedging signal goes on?

    That is what I would do in this situation. You can use other hedging instruments and other timing indicators if you are experienced with them.

    Will you be sending an update on hedging from time to time, or will the recommendation simply appear every two weeks or so, as the portfolio is rebalanced?

    Updates of stocks and timing indicators is weekly, usually sent on Saturday or Sunday. For me, I would ignore 1 update out of 2 for stocks, but follow every week the timing/hedging signal.

    Since I have to provide for enough liquidity to hedge with SPXU to the tune of $100 for every $300 invested in shares, in what liquid security would you keep it in other than cash?

    The answer depends on the risk/reward you want. Here are some ideas, from less volatile to the most volatile:
    - short term bonds (SHY...)
    - low volatility indices (USMV, SPLV...)
    - volatility-hedged indices (PHDG, VQT...)
    - standard indices (DIA, SPY, MDY,...)
    - hedged managed ETFs (ALFA,...)
    By the way, cash is sometimes a good place to be. It's possible to mix a couple of them. I suggest you research among these to make the best choice for you (for your information I have a "passive portfolio" with ALFA and PHDG among other holdings).

    Apr 04 6:53 PM | Link | Comment!
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