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Thanks for your insights Rick. I may have been trying too hard for a cheap
laugh in my last message. I try to use a consistent strategy that, rather
than using a brute force technique of sceening the entire market, screens a
segment of the market that is likely to out perform. This segment includes
more than 50 stocks and should be at least somewhat comparable to
O'Shaugnessy's results. I cherry pick a handful of stocks to buy and sell
from this segment using technical analysis. As you said, when I limit myself
to a handful of stocks, statistical comparisons with O'Shaugnessy's results
become doubtful.
In reality, because I am cherry picking, there is probably no meaningful
difference between an annual rate of return of 14.45 percent and a standard
deviation of 30.14 and an annual rate of return of of 18.22 percent and a
standard deviation of 25.99. I hope you won't criticize me too much for
trying to add a little levity to the list and piling on the fundementalists.
I guess the point is, I try to focus on a segment of the market that has
historically and statistically outperformed. Additionally, contrary to some
of the opinions expressed on the list, O'Shaughnessy's study indicated that
fundemental parameters, such as price to sales, can add value to a stock
selection strategy. I agree that few individual investors can purchase, much
less manage, enough securities to provide a sample that could be correlated
with O'Shaughnessy's results, however, O'Shaughnessy offers mutual funds that
apply his strategies. In fact, he recently added exit fees to those funds to
discourage the much maligned and frequently misunderstood market timer.
Take care,
Dan Harelson
Pocatello, ID, USA
In a message dated 98-08-02 23:43:43 EDT, you write:
<< Hi Dan,
O'Shaughnessy's book is a good example of how a little knowledge can
sometimes be more harmful than helpful to the individual investor. The
results of
this study had been circulated among institutionals, its true audience, a
few years prior to its release to the general public. One of the key points
he makes but many readers tend to gloss over is the number of stocks to be
held. Less than 5% of all private investment accounts have sufficient
assets to hold 50 stocks in any meaningful quantity. Without the
diversification provided by holding a large number of issues, the portfolio
returns become erratic and the choice of strategy becomes no better than
random chance and in some cases more dangerous. This is something he has
repeatedly emphasized in interviews since the book was published. Even if
your account is large enough to do it, actively trading more than a handful
of positions properly is almost impossible for any one person. No, these
results were meant for institutional clients staffed large enough to handle
"back office" duties a portfolio of this size would require.
I think if anything useful can be taken from his work you have to look past
his statistical forest. First,deciding on an comprehensive investment
strategy based on fundamentals, TA,or whatever, and *sticking to it* over
the long hall through thick and thin is
the key to success. The second important thing is that it is wise to employ
different methods for choosing large cap and small cap issues. The last
thing is that if his theory is correct, then it supports the methods of a
couple of other Irish lads, Mike O'Higgins, of Dow Dogs fame and Bill
O'Neil, founder of the CANSLIM.
You might also want to reconsider by your desire for volatility as a
"speculator" too, unless you are selling options perhaps, as this is really
the "gamblers" mantra. The last thing you want is volatility in trading
system returns. Ideally you want to see the equity curve plot for your
trading system follow a nice smooth upward slope. Perhaps you confuse
volatility in return with the daily true range of prices for your tradable.
But even large values of range are not really desirable because it indicates
the security in most cases is no longer trending. Most of us are not nimble
enough to trade non-trending stocks profitably and consistently. In
addition, when stocks become "wide & loose," as characterized by daily
higher highs and lower lows, they are virtually impossible to trade with ANY
system and represent only punts. For stocks that are in strong trends and
with large values of range like the internet stocks this summer, stops have
to placed so far out that in most cases any well designed money management
rule would keep you out of the trade anyway. Even if you could take the
trade, prices are generally moving so fast the slippage will eat you alive.
Just some food for thought.
regards,
Rick,
Tokyo, Japan
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