All,
This is a continuation of my efforts to understand P123, the “Core : Combination” ranking system and how it performs and why. It also documents my admittedly amateurish efforts at improving the performance. Part 1 documents my test of the “Core : Combination” ranking system using the S&P 1500 as my stock universe, initially using a moderate (25 stock) portfolio and then a concentrated (5 stock) portfolio. Part 2 documents my analysis of using the 6 components of the combination (growth, low volatility, etc.) individually, to see how each performed. There were definite surprises, at least for me. Then I decided to see what the contributions in performance of each of the subfactors of each core components were. This post, part 3, documents that effort. In order to keep this from being a lengthy post, I will limit my documentation of each subfactor to CAGR, Max Drawdown, and Sharpe ratio. This is for a 5-stock portfolio on the S&P 1500 with a sell rule of “Rank < 95 // Sell low-ranking stocks”.
Growth
EPS … 4.06%, -63.59%, 0.23
Sales … 7.61%, -74.37%, 0.36
Operating Income … 1.66%, -77.80%, 0.14
Then I decided to adjust the weights of each factor for Growth, first by CAGR and then by Sharpe ratio, to see how that impacted performance of Growth. There were modest improvements using both methods of weighing. Here are the results:
Original … 9.73%, -76.12%, 0.43
CAGR-weighed … 10.26%, -73.77%, 0.45
Sharpe ratio-weighed … 10.06%, -70.30%, 0.44
Low volatility
Beta … 9.03%, -41.89%, 0.53
Price volatility … 9.63%, -41.31%, 0.70
Original … 8.91%, -31.14%, 0.67
CAGR-weighed … 8.91%, -31.14%, 0.67
Sharpe ratio-weighed …, 7.89%, -36.33%, 0.61
Momentum
Price changes … -4.32%, -87.84%, 0.03
Technical indicators … 13.14%, -50.71%, 0.59
Quarterly returns … -2.34%, -86.45%, 0.04
Industry momentum … 13.93%, -64.08%, 0.55
Original … 3.26%, -70.89%, 0.21
CAGR-weighed … 3.80%, -71.46%, 0.24
Sharpe ratio-weighed … 10.18%, -69.82%, 0.29
Quality
Margins … 5.89%, -41.76%, 0.36
Turnover … 7.14%, -59.68%, 0.40
Return on capital … 8.58%, -56.39%, 0.44
Finances … 5.91%, -62.70%, 0.32
Original … 9.96%, -62.83%, 0.49
CAGR-weighed … 12.25%, -56.03%, 0.59
Sharpe ratio-weighed … 9.91%, -61.41%, 0.48
Sentiment
Estimate revision … 15.69%, -55.36%, 0.69
Surprise … 8.30%, -67.40%, 0.39
Recommendations … 3.89%, -62.26%, 0.23
Short interest … 16.09%, -32.48%, 0.85
Original … 20.83%, -47.62%, 0.88
CAGR-weighed … 22.35%, -38.24%, 0.98
Sharpe ratio-weighed … 21.92%, -42.37%, 0.98
Value
Earnings … 11.13%, -75.36%, 0.45
Sales (*) … 15.87%, -85.98%, 0.28
Free cash flow … 5.17%, -90.55%, 0.27
Assets … -6.69%, -94.07%, -0.01
(*) I made the following note in my file regarding sales: “The above results are very deceptive regarding the CAGR - there was a HUGE gain near the end of the testing period that accounted for almost all of the total gain.”
Original … 18.18%, -77.37%, 0.61
CAGR-weighed … 15.97%, -77.82%, 0.56
Sharpe-ratio weighed … 10.79%, -80.17%, 0.42
I then used the same method described above to adjust the weights of the 6 nodes in Core : Combination. Alas, I did not save the results, so I will have to post that tomorrow.
Everyone should get the idea as to what I am doing. What kind of comments and guidance can you provide?
Cary