Sunday, December 14, 2008
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Stock Selection + Market Timing
... for absolute returns over the full market cycle
Live Test
For 43 months this blog tracked a "live test" of the Strategic Growth Model portfolio. This real-time test commenced in January 2008 and ended in August, 2011, with all trades posted in advance.
The purpose was to demonstrate that a systematic approach to investing can yield exceptional returns in all market conditions. More information about the system may be found at the bottom of this page.
The purpose was to demonstrate that a systematic approach to investing can yield exceptional returns in all market conditions. More information about the system may be found at the bottom of this page.
About Me
- Steve
- is a private investor; developed the Strategic Growth Model portfolio. Over the past 8 years, this systematic approach has been validated over a full Bull-Bear market cycle.
Posts
My Blog List
You need to read some of these great books
- The Psychology of Trading, Brett Steenbarger
- The Battle for Investment Survival, Gerald Loeb
- Reminiscences of a Stock Operator, Edwin Lefevre
- How to Make Money in Stocks, William O'Neil
- The Black Swan, Nassim Taleb
- Stock Market Wizards, Jack Schwager
- How I made $2,000,000 in the Stock Market, Nicholas Darvas
- The Right Stock at the Right Time, Larry Williams
- The Stock Trader's Almanac, Yale Hirsch
- Investment Psychology Explained, Martin Pring
- Trade Your Way to Financial Freedom, Van Tharp
- Methods of a Wall Street Master, Victor Sperandeo
- Liar's Poker, Michael Lewis
- The Goal, Eliyahu Goldratt
- 7 Habits of Effective People, Steven Covey
- How to Win Friends and Influence People, Dale Carnegie
- The Richest Man in Babylon, George Clason
About the Strategic Growth Model
The purpose of this “live test” is to demonstrate that a systematic approach to investing can yield exceptional results.
The system uses weekly data for all model inputs. I run the model and update this blog over the weekend. I post all trades prior to the week’s market open. The entire trading system is designed so that the portfolio does not require close supervision during the week.
You can think of the Strategic Growth Model (SGM) as a wave catching system. It first detects capital flows from one industry sector to another. It then uses a variety of fundamental and technical factors to identify the leading stocks in the ascendant sectors. Finally, when market conditions are poor, the system will move into a defensive stance to protect and grow capital.
The system doesn’t attempt to predict capital flows or trend reversals in the market. Rather, it attempts to “listen” to the market and then allocate funds to the sectors and stocks that are already attracting capital. It also allocates capital in accordance with prevailing market conditions. Results show that the system has generated returns in excess of the market over virtually any holding period of 26 weeks or more.
The pillars of the Strategic Growth Model are stock selection and market timing.
Stock selection.
The Alpha Stock Model (ASM-10) portfolio is the “alpha engine” for the trading system. Its role is to generate excess returns (alpha) without regard to volatility. This highly concentrated long-only portfolio is comprised of equal positions in up to 10 stocks. All stocks share growth characteristics that my research has determined are common to the market’s “big winners” prior to their big run-ups. These stocks are the market’s All-Stars. The predictive model I have developed to select these stocks is the system’s winning edge.
The ASM-10 portfolio is refreshed weekly, as lower ranked stocks are replaced with higher ranked stocks. The portfolio tends to generate exceptionally high returns during favorable market conditions, however, its high volatility makes it too risky for most investors to hold as a complete investment portfolio. To reduce the volatility, a risk management strategy is needed.
Market timing.
While some finance industry professionals will argue that it is impossible to profitably time the market, I have found that many of these same people are merely promoting their agenda. My own tests, including the live test documented here, have shown that a sound market timing system can consistently enhance returns while further reducing risk.
The SGM portfolio is a risk-managed growth folio that intends to accept exposure to stocks over the full bull-bear market cycle, with the objective of delivering enhanced risk-adjusted full cycle returns and smaller periodic losses than a passive buy-and-hold approach. The system adjusts its investment exposure from net-50%-long to net-50%-short, scaled in proportion to the average return / risk profile that stocks have provided under similar market conditions. The portfolio will remove a portion of its hedge during times that present the best probability of market gains, with an added emphasis on defending and growing capital during unfavorable market conditions.
It is important to note that the Strategic Growth Model’s investment stance is not based on a “forecast” of the market trend. Rather, it is based on the average tendency for the market to rise or decline given prevailing conditions. That may seem like semantics – a distinction without a difference – but it is essential to understanding the system’s strategy.
Prevailing market conditions are determined by empirical data, primarily the Thrust / Trend Model (T/TM). The T/TM does NOT rely on my subjective interpretation of data or my predictions of market trend. More information on the T/TM can be found elsewhere on this blog.
On this blog I have posted about concepts that I find useful in developing trading systems and managing risk. Some of my ideas are original, but many of them are synthesized from the books and websites shown in the sidebar. While I will not discuss the details of the predictive model or market timing criteria here, all other comments and questions are welcome.
This blog documents the model's hypothetical peformance. Past performance is no guarantee of future performance. The Strategic Growth Model drives a very aggressive style of portfolio management, and should be considered a high risk strategy. It is not suitable for all investors.
If desired I may be contacted at StrategicGrowthModel (at) gmail (dot) com.
The system uses weekly data for all model inputs. I run the model and update this blog over the weekend. I post all trades prior to the week’s market open. The entire trading system is designed so that the portfolio does not require close supervision during the week.
You can think of the Strategic Growth Model (SGM) as a wave catching system. It first detects capital flows from one industry sector to another. It then uses a variety of fundamental and technical factors to identify the leading stocks in the ascendant sectors. Finally, when market conditions are poor, the system will move into a defensive stance to protect and grow capital.
The system doesn’t attempt to predict capital flows or trend reversals in the market. Rather, it attempts to “listen” to the market and then allocate funds to the sectors and stocks that are already attracting capital. It also allocates capital in accordance with prevailing market conditions. Results show that the system has generated returns in excess of the market over virtually any holding period of 26 weeks or more.
The pillars of the Strategic Growth Model are stock selection and market timing.
Stock selection.
The Alpha Stock Model (ASM-10) portfolio is the “alpha engine” for the trading system. Its role is to generate excess returns (alpha) without regard to volatility. This highly concentrated long-only portfolio is comprised of equal positions in up to 10 stocks. All stocks share growth characteristics that my research has determined are common to the market’s “big winners” prior to their big run-ups. These stocks are the market’s All-Stars. The predictive model I have developed to select these stocks is the system’s winning edge.
The ASM-10 portfolio is refreshed weekly, as lower ranked stocks are replaced with higher ranked stocks. The portfolio tends to generate exceptionally high returns during favorable market conditions, however, its high volatility makes it too risky for most investors to hold as a complete investment portfolio. To reduce the volatility, a risk management strategy is needed.
Market timing.
While some finance industry professionals will argue that it is impossible to profitably time the market, I have found that many of these same people are merely promoting their agenda. My own tests, including the live test documented here, have shown that a sound market timing system can consistently enhance returns while further reducing risk.
The SGM portfolio is a risk-managed growth folio that intends to accept exposure to stocks over the full bull-bear market cycle, with the objective of delivering enhanced risk-adjusted full cycle returns and smaller periodic losses than a passive buy-and-hold approach. The system adjusts its investment exposure from net-50%-long to net-50%-short, scaled in proportion to the average return / risk profile that stocks have provided under similar market conditions. The portfolio will remove a portion of its hedge during times that present the best probability of market gains, with an added emphasis on defending and growing capital during unfavorable market conditions.
It is important to note that the Strategic Growth Model’s investment stance is not based on a “forecast” of the market trend. Rather, it is based on the average tendency for the market to rise or decline given prevailing conditions. That may seem like semantics – a distinction without a difference – but it is essential to understanding the system’s strategy.
Prevailing market conditions are determined by empirical data, primarily the Thrust / Trend Model (T/TM). The T/TM does NOT rely on my subjective interpretation of data or my predictions of market trend. More information on the T/TM can be found elsewhere on this blog.
On this blog I have posted about concepts that I find useful in developing trading systems and managing risk. Some of my ideas are original, but many of them are synthesized from the books and websites shown in the sidebar. While I will not discuss the details of the predictive model or market timing criteria here, all other comments and questions are welcome.
This blog documents the model's hypothetical peformance. Past performance is no guarantee of future performance. The Strategic Growth Model drives a very aggressive style of portfolio management, and should be considered a high risk strategy. It is not suitable for all investors.
If desired I may be contacted at StrategicGrowthModel (at) gmail (dot) com.
Boulder, Colorado USA
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