Stopped the Systematic Strategies

Last week I stopped following these strategies, both the momentum and The Acquirer's multiple.

Returns have been quite bad since starting in February:

• 2% for the momentum strategy.  Its been a choppy market.
• -28% for The Acquirers Multiple.  Value investing has done badly compared to momentum, since 2009 (1) (2).  I'm sure it will come back, I just don't know when.

On a daily basis, both strategies are high beta, and follow/magnify the movement of the Russel 3000 index.  If the index is up 1%, they're usually up 2-3%.  Same for down.  Holding 'value' - at least this kind of 'deep value' - meaning companies that are nearly dead - does not protect you.  On down days, they do worse than the market.

The reasons for stopping:

• Its hard to stick with when it goes wrong for long periods.  When you manually analyse and select own value stocks one-by-one, if a stock goes down, you can try to see why.  Has something changed with the fundamentals, or the macro environment?  Or have perceptions changed?  Has the whole market dropped?  Did you make a mistake?  You can (at least) try to look at the stock with a level head and see if you should cut losses or hold.  With a portfolio of non-discretionary stocks, theres nothing to do except to have blind faith,
• Manually analysing stocks takes more time and effort, but I can choose when to do it.  In most cases my long term investments won't be affected by missing a few weeks of work.  The exceptions are if results are unexpectedly bad, or for sudden crises (eg: HK protests) - though even these take weeks or months to play out.
• It was a pain in the ass to stay up trading 9:30-10:30 Monday nights.  I found Interactive Brokers pretty hard to use, sometimes I sold the wrong amount and accidentally ended up short.  It was only one hour a week, but it was a chore, and I didn't like doing it at nights.

I think the main advantage of the non-discretionary strategies is that it keeps you in the market, so you avoid FOMO.  However they get whipsawed in a trendless market, and will not protect you agains a 1987 style crash.

In the end, I decided hold cash, while building up a dividend portfolio.  I think this suite my personality better, and I can measure progress by dividends collected, instead basing it on stock price fluctuations.

Right now I'm 2/3rds in cash.

Like a diet, the best investment strategy is one you can stick with.

Systematic Trading: Week 8

Although the market is up, my momentum portfolio is now down 1% from starting.  The TAM portfolio is down 5%.

Value (The Acquirer's Multiple)

No change.  Waiting to rebalance late next month.

Momentum (Clenow)

Sold LCI and NVCR.
Bought DBD (Diebold Nixdorf: 271 shares at 13.25) and TLRA (Telaria: 494 shares at 7.23).

Systematic Trading: Week 7

US market went up slowly but steadily this week on trade deal news.  I bought 2 stocks in each portfolio on Monday (6th Apr) - now both are fully invested with 25 stocks each.

My Acquirers Multiple portfolio is down around 2%.  My Momentum portfolio is up around 1%.

Value (The Acquirer's Multiple)

Bought the next 2 stocks from The Acquirer's Multiple All Investable Stock Screener.  I will now wait for quarterly rebalancing.

Momentum (Clenow)

Bought 2 stocks:

• GH (Guardant Health), bought 50 shares @ $77.53
• TNDM  (Magenta Therapeutics Inc), bought 232 shares @ $16.66

My Portfolio

Is around 50% cash, 30% systematic and 20% discretionary.  

I'm sitting on the fence.  I want to be in the market because it can go up - I don't think we've had the final burst of euphoria that marks the end of a cycle.  Its like we're in 1998.  But we're also nearer to the end of the cycle than the beginning - and its hard to find stocks I want to buy-and-hold at these prices.  The systematic strategies help me participate in a rising market, but limit downside if the market drops like in 2008.

Systematic Trading: Week 6

The market has not been doing well, and its starting to look like a false breakout.

Nevertheless, RUA is still above its 200 MA, so I've been buying.  Bought the below on Monday night (25th Mar).

Value (The Acquirer's Multiple)

Bought the next top 5 stocks from The Acquirer's Multiple All Investable Stock Screener.

Momentum (Clenow)

Sold 1 stock:

• Sold LIVX at avg price of 5.465.  Loss of $330.

This is what the losing trade looks like:

Bought 6 stocks:

• FSCT (ForeScout Technologies), bought 91 shares @ $43.61
• TNDM  (Tandem Diabetes Care Inc), bought 57 shares @ $68.65
• EOLS (Pyxus International Inc), bought 169 shares @ $23.59
• PYX (W. R. Grace & Co), bought 140 shares @ $28.15
• AVLR (Avalara Inc), bought 72 shares @ $54.31
• NVCR (Novocure Inc), bought 83 shares @ $47.82

Systematic Trading: Week 5

Last week SPX closed above the much-watched 2800-2815 resistance area.  Its not convincing yet - this week we'll see if its a false breakout.

Following my system, I'm buying stocks, as the Russel 3000 index has been above its 200 MA.

Value (The Acquirer's Multiple)

Bought the next top 6 stocks from The Acquirer's Multiple All Investable Stock Screener.

Momentum (Clenow)

Bought 6 stocks:

• FSLR (First Solar), bought 73 shares @ $54.27
• CMG  (Chipotle Mexican Grill), bought 6 shares @ $648.90
• CDNS (Cadence Design System), bought 65 shares @ $61.37
• GRA (W. R. Grace & Co), bought 52 shares @ $77.40
• MSCI (MSCI Inc - not the MSCI index - the company that provides indexes), bought 21 shares @ $190.17
• PCAR (Paccar Inc), bought 59 shares @ $67.70

Systematic Trading: Week 4

The Russel 3000 index hovered above and below its 200 MA this week.  No buy or sell for either strategy.

This has been a losing week.  Its hard watching individual stocks that I bought go down 5-7% a day.  Don't think there is anything wrong with the strategies - both of them concentrate on small caps, which have had a rough time.

On a day to day basis, most stocks follow the index.  Both strategies seem to pick high beta stocks - if the index goes up or down by 1 or 2%, the stocks each go up or down 2 to 7%.  Just magnifying the index result.

Systematic Trading: Week 3

The Russel 3000 index remained above its 200 MA this week, I'm now holding 12 stocks.

Market Breadth looks strong - though its not used in my trading strategy.

Value (The Acquirer's Multiple)

Bought the next top 5 stocks from The Acquirer's Multiple All Investable Stock Screener.

Momentum (Clenow)

Bought 5 stocks last night:

• FLNT (Fluent Inc), bought 728 shares @ $5.39
• IIPR  (Innovative Industrial Properties), bought 50 shares @ $78.45
• INSM (Insmed Incorporated), bought 127 shares @ $31.05
• VCYT (Veracyte Inc), bought 196 shares @ $20.06
• OKTA (Okta Inc), bought 48 shares @ $81.72
  

Most of my positions are underwater.  I need to remind myself that the Momentum strategy is highly volatile.  Months with + or - 15% are common.

Systematic Trading: Week 2

The Russel 3000 index remained above its 200 MA this week.  I'm now holding 7 stocks.

Value (The Acquirer's Multiple)

Bought the next top 4 stocks from The Acquirer's Multiple All Investable Stock Screener.

Momentum (Clenow)

Bought 4 stocks yesterday:

• MRTX (Mirati Therapeautics Inc), bought 51 shares @ $77.70
• XPER  (Xperi Corp), bought 165 shares @ $24.04
• DOMO (Domo Inc), bought 117 shares @ $34.95
• LRN (K12 Inc), bought 120 shares @ $32.85

Systematic Trading: Week 1

This weekend the Russel 3000 index has been above its 200 MA for 3 days.

Who knows if it will continue?  It could be a false breakout.  Or it could be like 1998: a correction before a final 18 month melt-up.  I will trade the system regardless.

Value (The Acquirer's Multiple)

Yesterday, bought the top 3 stocks from The Acquirer's Multiple All Investable Stock Screener.

I will continue to buy and sell as the number of days the index is above the moving average. (N) changes.

After each stock has been held for 1 quarter, I'll rebalance.  i.e.: replace it with another stock if it is no longer within the top N rated stocks.

Momentum (Clenow)

Bought 3 stocks yesterday:

• LIVX (Livexlive media Inc), bought 673 shares @ $5.95
• LCI  (Lannet Company Inc), bought 389 shares @ $10.28
• EHTH (EHealth Inc), bought 64 shares @ $62.66

The Acquirers Multiple and Quantitative Value

After looking at momentum, I wanted to look at quant value screens/algorithms. Two interesting ones were "The Acquirer's Multiple", and "Quantitative Value".

The Acquirers Multiple

This single measurement is based on Enterprise Value (EV), which gives the cost you would pay to acquire the company. It takes into account a company's capital structure (eg: debt and cash), unlike market-cap based valuations such as PE. And it's more objective than book value.

Divide EV by earnings, usually EBIT¹. The resulting number measures how cheap the company is - the lower the better. You need to take a portfolio approach and buy 20-30 of them: these stocks go to zero occasionally² .

You end up with a bunch of shitty companies. Companies that are targets of lawsuits. Oil companies in the middle of a multi-year bear market. Retailers being killed by Amazon. Companies that no one wants to hold.

The theory behind this is mean reversion: After an industry has been is losing money for years, competition dries up, and eventually the remaining companies are profitable. They may not be very profitable, or have any growth prospects, but after their stocks have been priced for bankruptcy, any improvement in their situation means their stock prices will recover.

When trading using The Acquirer's Multiple, I should expect:

• Long periods of underperformance. This is true of value investing in general.
• Declines in bear markets:

(Source : Deep Value and the Acquirer's Multiple (28:20): QuantConn NYC 2016. This is not "The Acquirer's Multiple", but rather the lowest decile of value stocks - similar to TAM) 

The declines are less than momentum strategies, but still bigger than the S&P 500. I'd use the S&P 500's 200 MA to time the my entry.

• Long term returns of 15-17%. See results from 1964-2016 here.

Quantitative Value

This book gives is a more refined version of The Acquirer's Multiple. It uses EV/EBIT as its main screen, but does some other things:

1. First it screens out probable Frauds, Manipulations, and companies in financial distress, using statistical techniques.
2. Then finds the 10% of cheapest stocks by EBIT/EV.
3. Then tries to find stocks with strong Franchises (high ROA, ROC, FCF/assets, all over 8 years), and Financial Strength (profitability, stability, and operational improvements). The top half are chosen.

Backtesting

I was not able to do a reliable backtest on Quantopian because some fundamental data was missing. If I was trying again, I would try Portfolio123 or QuantRocket. Too bad. I would like to see the shape of the equity curve, the drawdowns, and how they would improve when we use a 200 MA to time entry. But I'm not willing to put any more time into this.

How would I trade this?

I could just buy the Quantitative Value ETF (QVAL), which selects stocks based on the book. Its holdings are equally divided among 50 stocks. Limited to the top 40% largest stocks (minimum market-cap is around 2bn). The expense ratio is 0.79%, meaning if I buy USD 100K and hold for a year, I'm paying $790.

I could also subscribe to the Acquirers Multiple screener for $500 a year, and buy stocks from their All Investable screen. I'd probably trade every week, and ease-in and out of the strategy based on the index's MA - similar to what I do for my momentum strategy.  After filling my portfolio, rebalancing would be quarterly.

Comparing the two: I'll probably go for the screener:

• It also filters out Frauds, Manipulations and Financial Distress (same as QVAL).
• It uses operating earnings instead of EBIT, which is slightly better.
• And it accesses smaller cap stocks (around 150m, depending on market conditions).
• It also eliminates stocks with high short interest (which QVAL doesn't do).
• The only thing it doesn't do is check for Franchise and Financial Strength.  This screen is based on purely cheapness and believes we can't distinguish quality.

Footnotes:

1 Tobias Carlisle preferred Operating Earnings (Revenue - COGS + SGA + D&A), as it excludes special items. See FAQ: "What are operating earnings?"↩
2 In an interview - which I can't find - Tobias Carlisle said that an average of 2% of stocks go to zero every year - market wide. For Acquirers Multiple stocks, the average is 6% a year. But that's the average - the bankruptcies tend to cluster in certain years.↩