Another lesson from 2007
I always like to go back and analyze the previous year's data to see if there is something I can learn from what happened. I like to see if new information I've learned helps or hinders my trading. Most of the time, any new information causes me to perform poorly.
Last year was no exception. Although it was a pretty good year, I still didn't manage to outperform any of my screens. What that means is that all of my labor, sweat, knowledge, and effort created no advantage over a simple mechanical stock screen. I could have spent 15 minutes a week and created the same (or even better) results than I did with constant monitoring, reading, thinking and planning.
Don't get me wrong--I enjoyed every minute of all that hard work because I absolutely love what the market has to offer. I love reading about it, watching it, analyzing it and trading it. But I do think that I could spend a lot of the time that I spend on the market on other more productive things.
To give you an example, one of the things I've really studied this year is timing the market--going to cash when things suck and going crazy when things are going well. I put together several indicators that I think really capture the "underbelly" of the market and allow me to accurately predict the short-term direction of the market.
I went back and applied what I learned to my stock screens to see if I could utilize my timing models to capture the upswings and sit out the downswings. The results kind of shocked me. I expected to at least double my theoretical return. Instead, I cut it in half. For my style of trading and screening, market timing is counterproductive (at least over 2007 it was).
So, I'm back to the conclusion that I had at the end of 2006. If I stick to a mechanical plan in the good times and the bad, I have a very good chance of soundly beating the market.
Posts
3 comments:
Scott - just wanted to say that I completely identify with you in terms of having a screen that works well, but second-guessing it thinking you can do better by developing some rules for getting into and out of the market. I recently looked over my 2006 and 2007 results and found that whatever market timing model I used (whether my own, the Valueline 4% system, or taking the timing signals from various market timing websites), my performance was worse. I came to the conclusion that if you're using a screen that outperforms the market by a lot year over year (as opposed to investing in, say, an index fund), then being in cash hurts you over the long terms since timing systems are generally reactive to market movements and therefore can't capture the upswings after the dips.
Like you, I'm resolving this year to follow a purely-mechanical approach for the entire year without any timing schemes.
Discovered your blog a few days ago and enjoy reading it. Thanks for sharing your experiences and keep up the good work!
Matt
Now the market was more crafty than any of the logical new years promises that Scott had made. The market said to Scott, "Did you really say, 'You must not eat from any attempts at market timing'?"
Then Scott said to the Market, "We may eat fruit from any of the screens in the garden, but I know that 'You must not eat fruit from the tree that is market timing, and you must not touch it, or you will die.'"
"You will not surely die!" the Market said to Scott, "For you know that when you time the market your eyes will be opened, and you will beat the screens, knowing good and profit!"
When the Scott saw that the fruit of the tree was good for potential profit and pleasing to the eye, and also desirable for gaining wisdom, he took some and ate it. He also gave some to his blog readers, who were with him, and they ate it. Then the eyes of both of them were opened, and they realized they were not beating the screens.
So they sewed fig leaves together and made coverings for themselves.
I've learned the same thing as Matt. In general, you can get alpha from stockpicking or timing, but combining them may hurt more than help.
Great analogy, Jim!
Post a Comment