'Today's Best Portfolio' Concept - A Look At Best Reward-Risk Tradeoff

by: Peter F. Way, CFA

Rewards measured by upside price change forecasts (from Market-Maker hedging actions).

Risks measured by actual price drawdowns following prior MM forecasts with today’s upside to downside proportions.

Shown both by direct ratios and in a visual map of upside and downside co-ordinates.

Comparisons of the same for market-index ETF SPY, and the average of ~2500 other stocks and ETFs from which this dozen was drawn.

Figure 1

Source: blockdesk.com

Over 2400 stocks and ETFs were screened to rank the best 12 of those with at least two years (of 252 market days each) daily forecasts, and samples of at least 10 of those with upside to downside balances like what is seen today. The best quality sample here is UUP, with many prior forecasts of similar up-to-down balance, across the span of 5 years.

Column (14) above calculates the ratio of column (5) to column (6) to drive the ranking. In turn, (5) measures the percent High Forecast (2) is above Price Now's (4). These are expectations.

Column 6 looks at the relevant samples in history following prior similar forecasts, to average the worst price drawdown experiences among each of them during the periods they were held (of no more than 3 months). These are actual outcome experiences.

The reward prospects offered by the ranked forecasts are nearly double those of the large population of such forecasts, and nearly triple of the market index ETF, SPY.

At the same time, the ranked group's average worst case interim price drawdown risks were only one half of the forecast population's and less than the market Index ETF's experiences.

Figure 2

(used with permission)

In this map, good is down and to the right. The diagonal is equality of risk and reward, with uncertainty increasing as it rises. The ranking selection creates the extremely favorable array of positions pictured.

We have learned to be cautious with any location up against an exterior boundary like [10] and [11]. They may be the product of a weak or flawed sample, or a possible data error. The rational actions of many investors continually considering alternative investment choices tend to make extreme opportunities rare.

Risk and reward, while of prime concern, are not the only considerations driving capital investment commitments. The distance of SPY at [9] from the rest suggests that there may be some valid opportunities among this set of less well-known securities which could be rewarding.

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, blockdesk.com has further information.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.