The Best(8-10)+ system periodically selects the 8 to 10 highest ranked stocks (or less when draw-down protection rules are in effect) from a segment of the market, avoiding stocks of companies with very high market capitalization, and also those which operate in certain industries which have historically produced low returns for investors. Additionally, the model switches to TLT (the iShares 10 Plus Year Treasury Bond ETF) under certain adverse market conditions.
Typically over the last 14 years the proportion of stocks in the portfolio was about 55% Large-, 25% Mid-, 10% Small-, and 10% Micro-Caps. During the last 3 years it only held Large- and Mid-Cap stocks.
The graph of the system’s performance against the benchmark SPY with dividends has a rising slope from 2000 onwards indicating that performance was always better than the benchmark’s, producing about 420 times more value from January 1999 to July 2013 than what a continuous investment in SPY would have provided.
Rolling 1-year returns were calculated starting each day from 1999 to 2012. There was never a loss over any 1-year period. The minimum return over 1 year was 8.3% and the maximum was 223.8%.
To simulate savings over time, terminal values were calculated to the end of May 2013 for annual hypothetical investments of $1. Starting with a dollar during each of the 14 years from 1999 to 2012, one would have invested a total of $14 cumulatively by the end. Summing the 14 terminal values, this strategy would have netted this dollar-per-year investor a tidy sum of $1,686. Following a B&H strategy in SPY, one would have only $22, about 1.3% of what Best(8-10)+ provided. Furthermore, the lowest annualized return, for any of the 14 time periods was 27.8% and the average for all the periods was 51.3%.
For a portfolio having a value of about $15-million I checked the last 36 trades to May 31, 2013, and also the actual total trading volume for these stocks on the days when the trades occurred. The individual trades require a fairly large number of shares to be bought and sold, but they are still a reasonably small fraction of the total daily volume traded, on average about 2.9% of the total. Defining the less liquid stocks as those whose percentage of the day’s volume to be traded by the model exceeds 3% of the actual daily volume, and assuming one can trade about 5% of these without affecting stock prices detrimentally, then the value of this portfolio should not be higher than about $8- to 10-million. Thus this system would be suitable for individual investors trading smaller portfolios, and not for professional fund managers.
This portfolio management system requires 2 to 6 trades each week. A simple ranking system is consistently applied to the stock selection process, which a sensitivity study showed to be very robust. This is this not a complex, high risk system with many parameters which could easily break down. The backtesting returns are not distorted by survivorship bias, and this model should continue to outperform in the future as well.
The benchmark for this model is SPY with dividends, unlike some other R2G models which chose an index without dividends as a benchmark, and therefore show performance comparisons distorted to the high side. This model has been backtested over the entire available period for which data exists at P123. It does not avoid the difficult years 1999 and 2000, unlike other models which conveniently start at a later date to show high returns.