This is a long post. If you haven't been following the Valuescreen screen test, this will put you to sleep.
Preston, I've been giving the Valuescreen idea a lot of thought. The question is how much "added value" would we get out of the screens, and of course, how much value is FA anyway. FA can have defensive value by keeping you out of some real losers, but can it have offensive value?
Let's use the S&P500 as a model. If we buy an index fund, we will match the market returns and can go fishing instead of watching your portfolio. Emotion and all of its pitfalls will be taken out of the equation. TA and FA would be meaningless.
Next, lets adjust our model based on two assumptions; 1) Stocks whose sectors have low Bullish %'s are less risky than stocks whose sectors have high Bullish %'s 2) Stocks whose RS is in a column of X's perform better than stocks whose RS is in a column of O's. In order to compare apples to apples, we will leave out the greatest market risk indicator of all, the NYSE % bullish indicator. We will be fully invested at all times.
Now our fully invested portfolio would consist of S&P 500 companies that are in low risk sectors and have RS's in a column of X's. This portfolio would consist of about 100 stocks, would require little maintenance, and would probably beat the market nicely.. If it didn't beat the market, that would mean that high risk sectors with stocks with RS's in a column of O's is the way to go. Not likely!
Unfortunately, not many people have the bucks to be invested in 100 stocks at a time. If we applied these principles to say a 10 stock portfolio it would end up being more risky instead of less risky than buying an index fund. If we only had 10 stocks and 1 or 2 took a big haircut, (say 20 to 30% each), it would have a tremendous impact on the portfolio both in terms of return and in terms of emotion (fear, doubt etc).
This is why we need FA. FA, in combination with the above TA risk factors, keeps us from the big haircut. Value Line 1&2 stocks with RS in a column of X's and in low risk sectors is probably our best haircut defense. IMO Value Line 1 & 2 stocks that do get pounded tend not to have RS in a column of X's and they tend to weaken 1st, that is they tend to give a few PNF sell signals first. (DURA Pharmaceuticals for example).
If 4 or 5 stocks in the 100 stock portfolio took a haircut, big deal. They would probably be offset by two or three doublers. The 100 stock portfolio does not need FA. Our portfolios, of course, do need FA.
The Valuescreen FA (VL 1& 2, growth & PE factors) gives the protection of having VL 1 & 2 stocks and adds the growth and PE feature. Is the growth and PE screen we are using worth the bucks?
That really is the bottom line.
Lets do another test run with your next set of monthly data. I'll sign up for a two month trial and we will have four months of data. If anyone else on this thread gets Valuescreen, maybe we can end up with a years worth of data to decide if it's worth it. Meanwhile, could you can check the first 5 or so hits we got against a library copy of Value Line to make sure we have the technique down and the software is doing what we ask it?
Have a good weekend
Duke |
