In the coming week, we will be starting the second half of 2016. The transition period will be turbulent as the market starts to digest the ...

Review of My Analysis in 1H 2016 Part One: Do I have an Edge?

In the coming week, we will be starting the second half of 2016. The transition period will be turbulent as the market starts to digest the impacts of Brexit. 

Looking back, it seems as though the first half of 2016 never happened as the S&P 500 turned negative for the year-to-date with last Friday's sell-off.

Instead of dwelling on what will happen in the coming weeks, I will take this chance to review on my own analysis and trade in the first half of 2016. As this will be a long review, I will be breaking down this post in to 4-5 parts. In the first part I will be blogging on how these potential superstocks fared and how did I fare from trading these superstocks. The next two parts will be on entries and exits respectively, and the last part will be a summary of the lessons learnt and the adjustments that I will be making to my trading system. If the needs arise, I will include on more part on the fundamental aspects of the potential superstocks.

In end December 2015, I have revamped this blog, posting analysis on potential superstock that I identified in my weekly scans. In the 26 weeks since, I have posted on 19 potential superstocks. In some of the weeks there was no potential superstock identified and in two weeks, there were two superstocks identified for the week. Of the 19 potential superstocks, 17 were listed in the US market and only 2 were listed in the Singapore market.

How Did the Potential Superstock Fare?

For simplicity, I will assume that the stocks were purchased at the last close price when I post the analysis. The stock is assumed to be held throughout and the performance will be based on the closing price as at last Friday, 24th June

This is a quick and dirty way of looking at how these stocks fared as in real life trading, we will be looking at optimal entry and exit points, stop losses etc. We will factor these in the next few parts of the review, for now let us look at the results.

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The 19 stocks have appreciated by an average of 23%, not shabby at all. In particular, there are 2 multi-bagger identified. DRD has appreciated 141% since I posted the analysis and Best World International has appreciated 261% in 5 months!

Of course, not all the potential superstock went on to make a profit in the simplistic assumptions. Of the 19 superstocks, 6 are in negative territory as at 24th June. BOSC is the biggest loser among the pack, posting a loss of 16% as at 24th June, not surprising at all given the extent of its breakout.

Maximum Gain and Drawdown

I have analysed the maximum gain of the stocks, defined as the profit at the highest price from the point of post to 24th June. The intention is to get a sense of how much profit that was returned to the market. While some of the stocks are showing a very small profit or even a loss at current price, at their peak the stocks may be producing supernormal returns too.

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I am referring to VRA, EDUC and JRJC which are up more than 30% at their peak even though they are posting a profit of only -3% to 2% at current price. The performance of the superstock portfolio will be improved drastically by selling at strength for stocks like these.

From this table, I can only see that Best World has actually posted a profit of 366% at its peak while its % profit at current price is 'only' 261%. If you have hung on to the trade throughout, you will be giving back a 105% return to the market. However, if you do not have enough hanging power you might not even get the 261% return in the first place. I will explore more on this delicate issue in the 'exits' section of the review.

The stocks posted in the first quarter appears to have a better highest return compared to those posted in the second quarter. It might be that those posted later do not have enough time to surge in price, or it may just be market conditions are better in the first quarter.

In the next column is the drawdown, defined as the lost at the lowest price from the date of post to 24th June. It is comforting to know that of the 19 stocks, only 6 have a drawdown of 10% or more, and just a single stock has a drawdown of more than 20%. This stock is once again BOSC, which was way overextended at the time of post. 

Among the 6 stocks with drawdown of 10% or more, with the exception of BOSC, they reached their peak price before going into negative territory. The implication is that exiting the stop loss at 10% will not stop me from reaping profits from these stocks. It is also possible to avoid some of these losses if I shift my stop loss to breakeven after price has gone up by a bit.

Comparing Against the Indices

Even though the potential superstocks have performed well, I would like to compare the performance against the indices to determine if the extra time and effort put into analysing the stock are worthwhile.

I will benchmark the US stocks against the Russell 2000 index since the potential superstocks are small-cap companies. For Singapore, I will be using the straits times index (STI) even though the STI represents the 30 largest stock due to the lack of alternative.

In the comparison, I will be using the level of the indices at the point of my blog posts. For example, I posted on IESC on the 27th Dec 2015. At that point, the last known level for the Russell 2000 is 1154.76. Russell 2000 is now at 1127.54, so the index has fallen 2% since then, compared to a 7% rise for IESC. I will obtain the performance of the index for each stock I analysed and assign equal weight to them.

The average return of the indices using the above mentioned method is 3%, compared to the superstocks' 23%. Unfortunately, when it comes to individual stocks, the statistics are not as rosy. Among the 19 potential superstocks, only 9 outperformed the market. 9 of the remaining underperformed the market and 1 matched the market performance. There was no obvious pattern stocks tend to outperform or underperform when the market was high or low at time of post, i.e. the stocks are as likely to outperform or underperform regardless of market conditions.

How Did I Actually Fare

We have seen above that by placing a trade the moment I post of the stock and hold it until now, I would have achieved an average return of 23% per stock or 443% of a single trade assuming equal trade size. Definitely trading cannot be so simple and we as human need to make things more complicated right? 

At the minimum we will need to find the optimal entry and exit point to maximise our returns. That was what I did, or at least tried to do. 

Among the 19 potential superstocks, I traded in 8 of them. As I traded in AVHI twice, that will be a total of 9 trades, 6 closed and 3 open.

My 6 closed trades returned an average of -0.7% compared to the 1.3% using the 'buy at post and hold' strategy. My open trades underperformed the simple strategy by -1.2% to 0.1%. The returns from the simple strategy by itself is rather bad (0.8%). I did not trade either of the multi-baggers. In fact, I did not manage to trade the top 8 stocks within the potential superstocks ranked by returns.

Closed Trades

Open Trades

Looking at my return among my 9 trades (-0.9%), the problem is two-fold. 

Firstly I am doing myself a dis-favour by selecting which stocks to trade. The best stocks give few chances for entry, and once  you missed it, you will take a big hit on your returns. On the other hand, weaker stocks pullbacks easily yet often traps the buyers who thought they purchased the stock at a good price.

Next I am not entering and/or exiting at the right price. Sure some of my trade has worked out fine, in particular VRA which I had booked a 20% profit instead of a 3% loss. EDUC would have been one of my greatest winner as at one point I had a paper profit of close to 50% on the stock which will allow me to outperform the simple strategy. There were a couple of trading mistakes I made along the way for AVHI and PLPM. Abandoning active trade management is probably not a solution as the 'buy at post and hold' strategy makes no sense in most of the situations. Moving forward I will need to improve on my rules for trade management and discipline to follow them closely.

I am glad to do this review. Just from part one of the review I have discovered a number of things on my trading. The positives include my ability to identify stocks that can outperform the market significantly, including two multi-baggers. To answer the question in the title, I feel that yes, I do have an edge over the market. I certainly did not expect the simple 'buy at post and hold' strategy to perform so well or that my active trade management to have a very negative impact on my trading results. Certainly more will come to light when I analyse the entries and exit in the new few parts of my 1H 2016 Review.


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