Thursday, December 27, 2007

Introduction to the Strategic Growth Model

Over the past few years I have developed a computer assisted model for stock selection that has proved to beat the market, the Alpha Stock Model (ASM). The system's foundational principles are based on published research regarding stocks and price performance, using data going back over 100 years and covering over 30 international markets.

To develop and test the model, I built a proprietary model database using several hundred weeks of market data, aggregated from multiple sources. I used pre-2007 data to develop a predictive model. Once the stock model was fully developed I then ran the model on "out-of-sample" 2007 market data with excellent results. Based on the strong mid-year results, I began using the system to trade a private hedge fund in mid 2007. The above chart shows the model results from the out-of-sample and live tests, combined for a total of 52 weeks.

The results are encouraging, so I have decided to continue the live test and will post the weekly results here, along with the following week's stock selections posted in advance. (That's why it's called a "live test.")

To complement the Alpha Stock Model and enhance the risk-adjusted returns I integrated a hedge strategy to manage risk, and a timing model to ensure that the portfolio's allocations are aligned with prevailing market conditions. The final system is called the Strategic Growth Model (SGM). The SGM portfolio is intended for investment by those seeking exposure to high growth equities and desiring enhanced full-cycle returns with limited volatility.

I intend to run the live test here through mid 2009.