Zacks' Voice of the People Highlights Opportunities With Quest Diagnostics, Molson-Coors and Rock-Tenn Company
CHICAGO, May 24, 2011 /PRNewswire/ -- Zacks highlights commentary from People and Picks Trader "JohntheWizard".
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Effective Stock Picking Using Your Own Watch List
A program like Research Wizard should be a money machine. It is not user friendly in back testing watch lists. Its most fearful enemies are your emotions.
When intraday certain stocks of your weekly selections start to run ahead or stay behind too much, your emotions push you to intervene. Its dearest friend is discipline. From a statistical point of view, you never know in advance whether an initial loser will rise again or an initial winner dives down South to perhaps finally come up again. Your back testing time span should be long enough to possibly have all these risks materialized during the statistically applied holding periods.
When you intervene to protect your losses and lock in profits, you get a different set of selection rules, based on the Intraday Highs, Lows, and Closes. It is straightforward to include those in your back testing algorithms. We found that these intraday interventions are more a hindrance than an advantage to push up returns. Bruce Vanstone found similar effects and published a book about it.
The following three aspects may seriously influence the reliability of back testing:
[I] Forward-looking and retarded bias
We found that both aspects appear to be the cause that fundamentals don't give any robust strategies except for the small caps of ZR #1 and #2 stocks.
[II] Survivor bias
We found that survivor bias decreases with increasing cap size. By only selecting stocks that presently survived history, heavy caps will show roughly 1% extra annual gains compared to back tests that include today's dead but yesterday's active stocks. Small caps show 3% to 5% extra annual gains, and for the illiquid tiny caps all bets are off.
[III] Equal versus market-cap weighting
We found that equal-cap weighting gives your annual results an extra push of roughly 20% compared to market-cap weighted portfolios. The reason is that the smallest caps usually show the highest growth potential. Market-cap weighting by definition gives the smaller caps less weight.
Selecting the most effective portfolios
We found that the weekly or monthly time series of only three items effectively determine whether stocks are poised to grow:
(1) 4-Wks daily dollar volumes (share price and trading volume)
(2) Market cap (share price and shares outstanding)
(3) Industry sector
Just imagine how this tremendously simplifies the challenge of quantitative stock picking with simple and error-free Dbases and reliable back testing:
(1) Make watch lists of 50 to even 1000 stocks; back test them over the past dozen years.
(2) Weekly or monthly narrow down your watch list to the 12 best using Graham's recycling principle. Or even simpler, just narrow down to the 12 stocks with the smallest market cap. That last principle also works for the small caps with ZR#1.
It is basically how we designed our P&P500 that gave us top positions in this game.
The idea of one of the most robust watch lists we ever formulated was based on recent suggestions by Mo and JaiH: the pack of 85 heavy caps that survived safely both the Internet and Credit bubbles. We are grateful to them for letting us pick their brains.
What about fundamentals? We chart them of individual stocks and any segment over the past dozen years. We include the S&P500 and Industry Sectors as segments. This enables us to measure the state of both the stock market and of the economy in historical perspective in terms of consolidated Sales, Earnings, Inventories, Receivables, Cash, Debt, Net Worth, you name it.
We chart these fundamentals also of our own watch lists and Presidents Clubs thereof. I'll tell you, you learn a lot about market dynamics when you study these charts, especially when you see how your watch list is doing compared to the S&P500. And you get an idea about the rationality of market dynamics and manipulation thereof.
What about Technical Analysis. We extensively back tested a number of Indicators but didn't find robust trading strategies. We believe that this is caused by the fact that the number of outstanding shares is missing in the analysis.
We have an internal paper detailing and substantiating our findings given above. If you ask for it here in this forum and only intend to use it personally, we can send it to you.
The most recent picks by «JohntheWizard» are:
A buy rating on Quest Diagnostics (NYSE: DGX), a buy rating on Molson-Coors (NYSE: TAP) and a buy rating on Rock-Tenn Company (NYSE: RKT).
About the Zacks Community
In 2008, Zacks Investment Research launched PeopleAndPicks.com, a stock-picking website where members of the Zacks community can test their strategies and share ideas with other members. Each user is scored on the accuracy of his or her picks, and top users are rewarded with free products from Zacks. Registration is free. To learn more about People And Picks, visit http://at.zacks.com/?id=5957
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Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Len Zacks. As a PhD from MIT Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3:1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit From the Pros by going to http://at.zacks.com/?id=5958.
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