Bruce Murison* contacted me at the start of June with an interesting proposition: He would open a dedicated account to trade the Acquirer’s Multiple All Investable Stocks Screen and post his strategy and results on the site. He thought knowing there was a public eye keeping him on the straight and narrow might assist with his discipline (the same reason I launched Greenbackd in 2008). He wondered if a real time, real money account tracking the acquirer’s multiple’s performance would be interesting to readers of the site. I of course leapt at the opportunity. Bruce hopes that his project might encourage outside the box thinking and maybe lead to others posting their strategies and ideas that could become an interactive community of users. Here begins Bruce’s first post in what I hope will be a long series:
I am dedicating a $25,000 real money account to trade stocks ranked favorably according to The Acquirers Multiple (TAM). Every stock will be chosen and traded according to these rules:
- For purposes of this plan, Qualifying Stock (“QS”) is defined as the stock on the All Investable Stock Screen (“Screen”) with the lowest Acquirer’s Multiple, after excluding stocks currently held in the portfolio.
- The fully invested portfolio will consist of ten QS and negligible cash.
- The initial portfolio will be constructed over the course of the first year by buying the new QS every 36 calendar days until fully invested.
- When any 36th day, measured from the date of the previous purchase, falls on a day U.S. markets are closed, the QS will be bought on the next trading day.
- Each stock will be reviewed shortly before the one year anniversary of its purchase. If its sale would result in a loss, sell just before the one year anniversary; if a gain, sell just after.
- Replace each stock sold with the current QS.
- If, however, the stock to be sold, would, if not already held, be the new QS, do not sell but hold for review again one year later.
- If a portfolio stock becomes the object of a takeover or merger that closes before the one year anniversary of its purchase, reinvest in the current QS as soon as the cash is received and / or any securities received in exchange are sold.
- Strive, at purchase, for equal dollar weightings of each stock, to the extent possible. However, no rebalancing trades will be made during a stock’s holding period.
- All trades will be market-on-close.
- No margin will be used.
- The performance benchmark is the total return of the Russell 3000 Index.
These rules vary significantly from the implementation steps that Tobias recommends on this site. I am not suggesting that mine are superior. I would caution that while my plan makes sense to me, it is not entirely backed by quantitative research.
One important difference is concentration. Tobias recommends twenty to thirty stocks for a full portfolio but I will hold only ten. Greater concentration tends to lead to higher returns at the cost of increased volatility. I am aiming for high returns so I accept volatility, but whether a ten stock portfolio is pushing concentration too far remains to be seen. It also remains to be seen how I will react when volatility actually strikes. I may be sending out for dramamine.
A second difference is portfolio construction. I am taking “scaling in” to the max. Whether this works out favorably only time will tell, but here is my reasoning:
By choosing the Screen’s single lowest TAM stock (not already held) ten different times, I expect to have a portfolio with a lower average TAM at purchase than I would by buying the Screen’s ten lowest TAM stocks all at once. This will depend on how often new stocks reach top ranking, among other factors. My approach may or may not benefit performance, but I am assuming that anything that drives a portfolio toward the Screen’s very lowest TAM stocks will be beneficial. As a cheapskate at heart, this feels right to me.
Why trade every 36 days? Well, after 325 calendar days I will be fully invested (first purchase on day one plus nine times 36.) In another 36 days the first purchase will almost reach its one year anniversary. (In practice, these day counts will be pushed a little into the future due to weekends and holidays.) By perpetually spreading out the trades, I will somewhat even out the effect of short term market fluctuations and will take all calendar effects completely out of the equation. It will also avoid violation of wash sale rules.
I will hold a substantial, though periodically decreasing, cash balance for the first year. I could, instead of cash, hold the temporarily TAM-uninvested portion in, say, a Russell 3000 index fund such as IWV and liquidate a little on each QS buy. However, with stocks at or near all time highs, I am exercising caution. This decision will come back to haunt me if the market keeps moving higher.
I have included a couple of rules to cover unusual situations, such as takeovers and stocks that stay high ranked on the Screener in a specific way. If I go to sell XYZ and look to the Screener for the stock that will replace it, what if I find, for example, that I already own the first and second ranked stocks and there in position three is XYZ? If I did not already own XYZ, it would be my new QS. So, why sell it? Hold it for another year and check again. If, on the other hand, a new stock is in position three and XYZ is fourth, then I sell XYZ and buy the position three stock. Maybe I will rebuy XYZ when I make my next sale, but who knows? Things like that can happen when adhering to a mechanical plan.
Why trade on the close? If I place a limit order, I may not be filled or the fill may be delayed and throw off my day counts. If I trade on the open, I join everyone who is reacting to overnight news or the latest stock story on CNBC. This tends to be unsophisticated, emotion driven trading. Trades toward the end of the day tend to be by professionals. I would rather trade with the pros. Trading on close also gives me a trade execution that I can easily correlate to an index closing value for performance measurement.
I am using the All Investable Stock Screen because it combines good historical performance, reasonable liquidity and a wide range of potential securities. I looked at the stocks listed on the Small and Micro Cap Screen and could not justify holding a portfolio of such names for the possibility of only slightly better performance.
As for capital allocation, I will initially invest 10% of the beginning cash in each of the first ten stocks chosen according to the rules. No rebalancing will be done during any stock’s typical one year holding period. However, upon sale, a large gain will not be reinvested completely in the new QS. Rather, some of the gain will be held as cash to restore some capital when reinvesting after taking a loss, with the balance, if any, spread as evenly as possible for reinvestment after selling the average performers. All portfolio stocks will be considered equally attractive and the temptation to overweight certain stocks that “look extra good” will be avoided.
I have tried to think of every situation that could arise so that a rule is in place before it happens, rather than having to make a sudden decision in the heat of battle. Adhering to a plan is much more difficult than developing one. I hope that having other eyes watching what I do will keep me on the straight and narrow.
I will report every trade soon after it happens and indicate the rules that caused it, along with information about portfolio value, cash activity, account balances and performance data.
I have no business relationship with Tobias Carlisle or Eyquem Investment Management LLC, except as a paid subscriber to this site.
I also need to point out that I am not an investment professional. I am reporting what I am doing, not encouraging anyone to follow along. I have no idea about anyone else’s financial situation or risk tolerance. Even if I did, I am not licensed or otherwise qualified to advise you. Nothing I write should be construed as investment advice, nor as an offer to sell or the solicitation of an offer to buy any securities. In other words, don’t try this at home.
Tobias is providing us an actionable, promising and rational approach to the apparent chaos of constantly changing stock prices. I deeply appreciate that he is willing to give me space on the site to write about how I am using his service.
*Bruce Murison worked for twenty years in different aspects of pensions and investments. Since 1995 he has been Executive Director of a charity.
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