2 Bad Years: Proven Statistically

Research
21

Georg - P123 has the historical holdings for most ETFs. That is how they are generating the S&P indices now.

Steve

22

Hi Florian,

I just want to thank you for your post. I am already considering some ETFs to add diversity so your advice is good, IMHO, and I have nothing to add to this excellent advice.

I appreciate your using my alias. Please, note, below, that I have a new alias after Marc said my bagging and stacking techniques were “DOA.”

Thanks again.

-Jim a.k.a. “The Dead Grocer”

23

Something else? Not at all. P123 has all you need to succeed. As a platform designed to serve different kinds of users with different approaches, it can be expected to have more than any individual needs. But that’s OK.

I use the things I use. Others use what they use. Either way, it’s all here.

The folks I worry about are those who think they are not succeeding because of things that are missing from p123. That is not at all true.

Maybe the problem people are having is that they are making things more complicated than they need to be. It’s about owning stakes in businesses — period, the end. My criticism of the articles I cited reflects my belief that the authors have no idea how the factor about which they write relate to evaluating businesses and what they are worth.

P123 is by no means excluded from the world of company analysis. Quite the opposite. It allows you to do the basics but do it more objectively and comprehensively than it could be done manually. That’s what fintech should bve about — doing the right things better than they could be otherwise done.

24

You are correct. The benefits of screening are drastically underestimated.

Screening, in and of itself, is the single most powerful tool one can have. My use of ranking systems is ancillary to screening. I use screens to decide what stocks I’ll consider. To narrow down, IK rost based on a ranking system and pick the top X number of stocks to buy or consider.

25

As long as you allow me wish for some newer quant strategies, I am good with every bit of the above.

Marc, I have always loved that you are sincere in your advice and recommendations. I could ask for nothing more. And the below is meant in fun.

-The Dead Grocer;-)

26

I have no idea what bagging and stacking are so I have no opinion on whether those techniques can be helpful. All I do suggest is that at p123, whatever is being bagged or stacked be information that gets you closer to a sense of what the business is about and how much its worth.

If you’re starting with good idea and relevant data, chances are you’ll be fine however you process and analyze it. If you’re starting with “factors” without having any sense of what they mean and how they relate to one another and to the task at hand (getting the right businesses at the right prices), I doubt there is any analytic technique, other than hopng for luck, that can help.

I sense from the forum that there is no shortage or knowledge when it comes to analytic technique; many seem way ahead of me in this regard. I suggest putting less energy into what people are already good at and focusing more on the gaps; understanding of business and how they should be priced.

Here’s a start. Chemed (CHE) is an intriguing stock with which I’ve been wrestling (easy to understand; hard to settle on an opinion). How about everybody research the hell out of that using the source material I suggested earlier. Then, let’s start a discussion thread on that stock.

27

Marc,

Bagging was an idea first recommended by Yuval in the forum. Stacking is similar. Both are ensemble techniques.

Yuval is not alone. O’Shaughnessy uses it too (bagging at least).

I am glad you embrace a diverse set of opinions and ideas.

-The Dead Grocer

28

This was discussed awhile ago. P123 found a source.

Walter

29

I wrote about screening versus ranking a few years ago: you can read the article here: https://backland.typepad.com/investigations/2017/06/-the-paradox-of-stock-screeners.html . . . This was written before I joined Portfolio123 and reflects my own personal opinion back then, not the policy view of Portfolio123. But it lays out some of the advantages of ranking over screening.

Also, AAII screens aren’t curve-fit through repeated backtesting. The fault with DMs vs AAII screens may lie in backtesting and optimization rather than in screening vs ranking. Also, very few if any of AAII’s screens have beat the S&P 500 over the past ten years.

We are working on a feature that allows you to buy and sell stocks directly from a screen without having to go to a live strategy or simulation. You just have to create a strategy, and then you can populate it from the results of your screen. Stay tuned.

30

The Morningstar “valuation” figure is opaque and has very little to do with DCF analysis. Don’t trust it–it hews very close to current prices for the large majority of stocks. There are hundreds of different ways to do DCF analysis, but Morningstar’s is the only DCF analysis I’ve ever seen where the valuation is almost always within ten or twenty percent of the stock’s current price. It seems faked to me.

This is not the case. We would have to subscribe to a service to get this information, and it would be very incomplete. Historical ETF constituents are not easy to come by unless they’re constituted on the basis of widely available indices. We are looking into it, but can’t make any promises.

31

Not sure I understand. Will this be available in DM?

32

To the contrary, the Morningstar valuation methodology is well-documented and can be found here:

https://www.schwab.com/public/file/P-7279763/Morningstar_Equity_Research_Methodology_Guide_Final.pdf

You can read Morningstar’s analysis for companies that are covered. This is provided for free by Morningstar in at least some cases.

As for company valuation:

As for this comment

Well, that is news to me. My understanding is that P123 is in fact subscribing to such a service and this is how the S&P indices are currently being generated. If this is not the case, then please let us know what the situation is.

33

I don’t think so. I would not press P123 for a clarification on this.

34

So I am a little confused here. I know that is my normal state of mind so please spare me the comebacks :slight_smile:

Back in May Marco indicated the following https://www.portfolio123.com/mvnforum/viewthread_thread,11763_offset,40

This was followed up by the announcement in August https://www.portfolio123.com/mvnforum/viewthread_thread,11886

Now Yuval and others are telling me that ETF constituent data is “sparse” and P123 doesn’t have it. OK, perhaps it is none of my business how the S&P indices are now being generated or where the constituent data is coming from. It is possible that I errantly came to the conclusion that P123 went ahead and subscribed to the aforementioned data service. But I’ve gotta tell you that this is spoiling my prime activity in life which is to petition for as much new functionality as possible.

It would be nice to know what the current situation is regarding indices and ETF constituent data (for 1500 ETFs, not just the S&P ETFs). Also, what the future plan is once the transition to FactSet. If this is a sensitive area then OK I can live with that answer.

Thanks
Steve

35

The traditional way of getting S&P 500 constituents was for Marco to periodically remind me that we haven’t update in a while and for me to go to S&P’s web site and hunt for changes index constituents. That was for S&P 500 only. The others were added after we became an S&P licensee, and index constituent data was included in p123’s license. But S&P, in its corporate wisdom, decided to separate index constituent licensing into a separate profit center and make users (not just p123; all users) pay separately.

P123’s needs are sufficiently modest to allow for it to download holding for the ETFs it needs as per its chosen frequency. Accordingly, P123 declined to purchase a newly-created separate license for Index constituent data. And based on the way S&P started reducing the asking price, I suspect many many others also declined.

There is nothing sketchy about this. All holdings for all ETFs are publicly disclosed daily; typically via HTML and Excel download for the fund’s web site.

For those who model based on ETF constituents and who, therefore, need a large volume of data, it’s more convenient to license from a data provider who collects the info and, essentially, sells convenient access. That’s what gets sold; the information itself (just like everything else we use that comes from 10-Ks, 10-Qs etc) is freely available.

Like S&P, FactSet also licenses ETF constituents, and in theory, we could license all constituents for all ETFs in an automated way. But although the information if free, convenient automated access is not. We do not at this time sense enough interest on the part of enough users to justify the additional cost.

36

This is all fine and dandy but is just dancing around the issue. You can get current S&P constituents from the ETF provider, but I don’t think you can get historical info. I won’t question where you get the historical data from because that is where it gets sketchy.

My issue is that Marco had identified a source for $240 / month that provides all historical constituent data for the majority of ETFs and I was under the impression that this was the “plan”, to use this alternate supplier’s data. If that is NOT the case, then so be it. I’m not pressuring or questioning anyone, I am just saying that it is quite peculiar that no one even recognizes that route now. Yuval says that historical data is “sparse”. Even you Marc, refer to the S&P data, not to this alternate supplier of ETF constituents.

Anyways, I’m not trying to make waves, I just don’t understand why the change of direction in what seemed to be a pretty clear path forward.

Steve

37

It’s a question of priorities, Steve. We’re working on a whole host of product developments, and implementing the switch to FactSet and offering global data has to take priority over adding ETF constituents to our system, which involves a lot of programming work on both the front end and the back end. Regarding the data being sparse, there’s no way that I can see to get any ETF historical data prior to 2009, even with that source that Marco identified. In the meantime, we’ll be shortly releasing a way for you to import your own factors through an API, and if you want to subscribe to a service to get historical ETF component data, you’ll be able to add that data to your systems.

38

Yuval - I got 'ya. I was just confused by the disconnect. If somebody had said: “Yes we looked at it but decided in the end to go a different way, or isn’t a priority right now,” I would have understood.

Thanks

39

Hi Florian,

Maybe I am the only one but my ports are more volatile recently than I could have expected from my backtests and early out-of-sample results. In hindsight, I could have been less concentrated and more diverse.

I am considering checking the correlation of each stock I purchase, in my ports, with each of the Sector Spyder ETFs. This can be done on the web page. I would then purchase an equal amount (would not have to be equal) of the least correlated ETF when I purchase a stock in my port.

The good:

  1. reduces individual stock risks

  2. reduces overall market risks

  3. low slippage on ETFs

  4. investing in the S&P 500, by itself, would offer diversification for my small-caps

  5. these low correlation ETFs have a positive expected return (but may underperform the S&P 500).

  6. I cannot short with my SEP IRA. I.E., Pairs-trading and statistical-arbitrage would not be an option even if I knew how to do it.

  7. Inverse ETFs have a negative expectation

  8. Inverse ETFs have volatility-drag.

  9. the inverse correlation of inverse ETFs is not perfect and you can lose money on the ETF and the stocks you hold. My stomach is probably too weak to stand that for long.

The bad:

Likely to be holding a lot of Consumer Staples and Utilities. Boring but probably the best thing to hold when the recession comes. These do underperform the S&P 500 but not as much as I thought. And not as badly as the average Designer Model, as you note (excluding fees even).

Just a thought, FWIW.

In any case, the excellent posts and your Designer Models (which are doing well) are much appreciated.

-Jim

40

Jrinne,

Looking at the past two years is shortsighted to say the least. Most strategies on this site have a strong fundamentals basis. We have been in a growth regime for the last 10 years with market gains overweighted to a few high octane, high sentiment growth stocks which take on high debt at low interest rates with delayed profits. At the same time a lot of these stocks don’t have great fundamentals by a historical basis and would be unable to perform in an environment with less altered macro money flow dynamics. This is not typical of historical market activity.

Not to say that a lot of models aren’t flawed but if you are considering a model to be flawed because it underperforms for 2, 5, or 10 years then you are too short sighted. No model is going to reliably beat its benchmark every year without significant optimization. And then in that case it will be more likely to underperform thereafter. There have been several articles stating value investing is dead. Maybe it is but it was in 1999 too. And stock investing was dead in the late 1970s too. Keep in mind also that Buffet has $128 billion in cash accumulated. This is not a good environment for fundamental stock picking.

Chasing models that have performed the best the last few years IS chasing performance. Also finding a model that has performed well the last two years probably isn’t going to perform well over most of history.