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SockMarket (34.11)

Mechanical Trading: Thoughts and a Couple High Return Models

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May 03, 2010 – Comments (4)

After several arduous days working on trading models, putting in formulas in as many different combinations as imaginable pulling a couple gems out of a massive amount of waste (more on these later), I came to some conclusions:

1. If you are only willing to invest in big (ie market cap over 500M) companies about the best model you can build generates a return of  ~75% return a year.
2. If you want to deal with the dinky penny stocks of the world you can get between 150% and 400% annualized returns.
3. Most models performed horribly during the Great Recession—especially the dinky penny sock models. Even some of the best models I built only returned 10% or so over the past two years (granted the market lost 15%).
4. About the best model I could build returned 74% annualized over a 9-year period. The strongest model, one that outperformed consistently, even through the Great Recession returned 28% annualized over 9 years. The next best yours truly constructed returned 19.4% over the same period.  

One of the questions I asked myself through all of this is: can anything I write rival Anticitrade’s work?
The answer:
I have 3 models 1 which returned the aforementioned 74% (Mixed) and the 19.4% (Growth) and 28% (Value) models. Over a period during which Anticitrade returned 120% I returned:
Mixed – 90%
Growth – 118%
Value – 110%

So I would say, yes I can rival his growth—or a least get close. It is comparing Apples to Oranges a bit since my models usually turn out 3-10 specific stocks to buy, and tell you when to sell. His model tells you what returns are expected on different stocks and it doesn’t give any indication on when to take any action.

I won’t tell you the exact formulas, after all I have to keep this stuff proprietary  but I will tell you what stocks they have recommended.

My Mixed model recommends:
HealthSpring (HS)
Western Digital (WDC)
Corinthian Colleges (COCO)
Ingram Micro (IM)
Endo Pharma (ENDP)
Coventry Health (CVH)
NBTY (NTY)
Rio Tinto (RTP)
EZCORP (EZPW)
BP (BP)

Growth recommends:
Aeropostale (ARO)
Baidu.com (BIDU)
Ctrip.com (CTRP)
Cognizant Technology (CTSH)
Diamond Offshore (DO)
ITT Education (ESI)
Hanson Natural (HANS)
Research in Motion (RIMM)
Satyam (SAY)
Sohu.com (SOHU)
True Religion (TRLG)

(I own the companies listed in italics)
(I also own Infosys, which was recommended by the model about a month ago and have not sold, despite the recommendation to do so)

Value recommends:
Makita Corporation (MKTAY) This is a NASDAQ stock, it just has a long symbol
Tech Data Corp. (TECD)
Homex Development (HMX)

4 Comments – Post Your Own

#1) On May 04, 2010 at 10:36 AM, anticitrade (99.12) wrote:

I should start by saying, I am impressed with your work.  Particularly for someone fresh out of high school!  Whats your college plan? 

I read your post yesterday, but didn't get a chance to respond.  A lot of your recomendation match what I am seeing out of my model.  I am curious how you determine a time horizon for your investments, you must be incorporating some form of technical analysis....  It doesnt appear that your model incorporates the DCF analysis that is really the core of what I do (although it only adds questionable value).

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#2) On May 04, 2010 at 5:07 PM, SockMarket (34.11) wrote:

Anticitrade,

Thank you. That's high praise, considering your work...

As for college I am staying in state at University of Colorado. I got in as a finance major but I have no idea what I want to do. (I applied as a finance major because that is the hardest college to get into, there are several on campus, so I won't have any trouble changing to other majors/colleges at CU.)

 

My models focus on different things but it is all fundamental factors, there is no technical trading involved (because my impression is that it does not work very well). I had several models that included beta requirements but wound up throwing them out later. That is about as close to tech trading as I got. 

I would like to use DCF but don't really know how it works (also I don't think I have the tools to screen for it) so I don't, at least knowingly, rely on that.

As for how I decide what to buy and when to sell let me give you an example:

Suppose all I look for are companies with an ROE over 20%. My screen will take all companies with ROE>20% and throw them into a list. For argument's sake we will say that only 3 companies make the list. Since they passed the model it is recommended that they be bought. 

Let us say that I screen again in 4 weeks' time. 2 of those companies no longer have ROE's above 20% so they no longer are included in the list. It is now recommended that you sell the two no longer in the list but hold the one company still in the list. 

It is very cut and dried and there isn't any room for boarderline companies but it does seem to work. 

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#3) On May 04, 2010 at 5:52 PM, anticitrade (99.12) wrote:

The toughest thing in this life is knowing  what you want.  It sounds like the finance program at your school is a good one and will hopefully continue to teach you how to think.  I personally like the combination of an undergraduate in engineering mixed with an MBA (but I am obviously very biased).

I think you have a good model.  The tough question you (and I) have to answer is:

What advantage do you have that others don't?  And why isn't it already priced into the market?

Your method of picking a selling point sounds similair to mine.  It will be interesting to see how this system works over ther next few months (which I expect to be quite bad).

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#4) On May 05, 2010 at 10:57 PM, SockMarket (34.11) wrote:

the thinking comment is accurate, I think :). Evidently only about 5% of the population really does it... I am not sure that it is something that you learn so much as a skill that you already have and simply learn how to direct. In any case same overall message.

As for my advantages I really don't know, I think I will probably learn very quickly when I get into the real world and out of one with mostly teens (not that my current world is a bad one). 

How do you decide when to sell a stock?

As for the models vs. the market, I suspect that 2 of my models, Mixed and Growth, will drop in tandem with the market but my value one will fair alright. It will certainly be an interesting test.

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