Portfolio Comparison: Mechanical Blend
May 21, 2011 Leave a comment
In my new upcoming portfolio comparison series, which begins in June, I will be tracking and comparing several different potential investing strategies. During May, we’re looking at each strategy in detail. Today’s strategy is a blend of mechanical screens, which I’m rather boringly calling the Mechanical Blend portfolio.
When it comes to mechanical investing techniques, there is one place where almost everything has been discussed: the Mechanical Investing board at the Motley Fool. Originally created sometime in the late 1990s, it has a long and storied history, with ideas and research contributed by people from across the globe. Today, the board offers an abundance of information and tools for the aspiring mechanical investor.
One of the major areas of research on the board is mechanical stock screening methods, using one of two sets of data: Value Line or SI Pro. There are numerous screens and backtesting tools to test the past performance of these screens. In short, it’s an excellent resource for anyone interested in mechanical investing methods.
With such an abundance of screens to choose from, it can be an incredibly daunting task to put together a blend, in which you purchase a number of stocks from several different screens. For the purposes of this comparison, I have chosen four different screens. The first three screens, which are PEG-Minimalist, LOWPE_ZLTDA and YLDEARNYEAR, all use Value Line data. The final screen is named silver_parachute and uses SI Pro data.
What do these four screens actually screen for? To be perfectly honest, I haven’t delved that deeply into any of them. What I do know, however, is that they all have done well in backtests. Of course, a backtest is no guarantee of future results, but it’s certainly a place to start.
This portfolio will be implemented using a Watch Account at Folio Investing. Each month, usually on the first Monday, I will completely rebalance the portfolio to contain only the top three stocks from each screen, with each stock receiving exactly a 1/12th share of the overall portfolio. In my personal experience, turnover appears to be a few stocks each month. In a taxable account, it might be advantageous to only rebalance if a stock’s share gets some percentage away from the target, but since there are no taxes in this comparison, I’ll simply do a full rebalance each month.
Since these four screens do not use the same underlying data set, it isn’t trivial to test the blend’s overall performance using the available backtesting tools. However, we can glean at least some information by looking at a backtest of a blend of the three Value Line screens, available from backtest.org. As you can see, in the backtest, this blend had a CAGR of 35%. I would be nothing short of ecstatic if it somehow managed to maintain this level of performance going into the future, but it probably isn’t likely.
This portfolio is probably the riskiest portfolio I’ve discussed so far, holding only twelve stocks. If one of the companies fails, it could impact the portfolio somewhat significantly.
Ultimately, however, I do expect this portfolio to perform relatively well, perhaps finishing among the top three portfolios in the comparison. Of course, that’s just a guess based on the backtests, and it could turn out to be completely and utterly wrong.
Disclaimer: This post is a description of my own forays into investing, offered as general market commentary, and should not be construed as investment advice or the recommendation of a particular security over any other.