# Small Cap Investing 12 Month Portfolio High Return



## Mr Bear (1 November 2017)

I'll be providing a look at my ASX portfolio of small cap stocks, a monthly portfolio will be provided with holding period of 12 months. At some point I will provide either my European or French small cap trades as well.

Theory is:
*Cheapest stocks with highest momentum.
*12 month holding period to make the most of after tax returns.
*High concentration with 6 stocks only.

1 November 2017 Portfolio
       Entry prices
PME  6.69
GCS  0.85
KGN  3.80
AQZ  1.505
PNC  3.05
PNI   3.3


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## greggles (2 November 2017)

Interesting. I look forward to your updates.


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## Mr Bear (1 December 2017)

*1 December 2017 portfolio*

I have not participated in this months portfolio as I did 1 November, I don't have 12 ongoing portfolios, this month is for record keeping purposes only therefore entry prices are 30 Nov close prices. I'll be providing three portfolios this month and going forward. Australia ex 300 (this is the portfolio from 1 November) All ords and ASX200. At some point I'll include my valuations on each security as I post and historical statistics of my portfolio so you can see expected returns. I also have a hedging overlay model that I'll discuss at some point when I have time to document it properly.

AUSEX300
FND 0.24
PNC 3.05
KGN 4.30
PNI 3.70
MLB 3.84
HLO 4.80

ALLORDS
ORE 6.26
NXT 5.82
HUB 9.70
KGN 4.30
MLB 3.84
BLA 12.84

ASX200
ALU 13.14
AWC 2.22
ALL 21.99
NXT 5.82
NST 5.83
REA 78.79

Mr Bear


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## Mr Bear (2 March 2018)

*1 March 2018 Portfolio
*
I have participated in this portfolio, this is my preferred trading month in addition to September 1 (August month end), this is because reporting season is done with and I have new growth estimates to update my model with. One downside is old momentum may not be the post reporting momentum and guidance has not significantly impacted the valuation, in effect I still own a cheap stock just not with the momentum I want, this is not too much of an issue, most of the time the market gets these things wrong so nothing to worry about.

I never trade end of December so that's why there was no 1 Jan post, over this time liquidity is low which impacts my liquidity filter and stocks drift up usually, the net effect not impacting my momentum filter but none the less given the busy time of year for me I just don't bother trading, I spent this year in Whistler with my family, I highly recommend it. Anyway end of Jan was just busy so I forgot, I also wasn't trading personally so wasn't on top of things at the time, again not a month I ever trade given I've just spent 5 months waiting for new information, why would I trade 30 days before I have all the new information (or trade on 5 month old info) the market has to give me.

A little on the hedge strategy and I mean little, just a mention before I document properly at a future date. I trade at the same points every time, at 140 point intervals, for example at the moment I have shorts open at 6020, this could also be 5880 or 5740 etc. I use a long term MA to determine what I consider fair value and will only hedge when the market is around 15% higher than fair value, there is one difference and I haven't seen this or anyone else talk about this in charting terms. I backward adjust the previous index value for inflation, I do it for fun (nerd fun or boredom maybe) but you don't need to worry about this too much, you would be in the ballpark anyway without it, but technically speaking comparing today's index value with a value 10 years ago is stupid, everything should be in real values. More on this at another time.

In regards to the previous portfolios some notable moves in KGN and PNI have contributed to the good performance, the Nov portfolio is up 33% at close today. See what happens over the next 9 months. On the bad side in the Dec portfolio MLB had an average announcement, despite this it's still very cheap.

This months portfolios

AUSEX300
PNI 4.6
PNC 3.36
ACK 1.4
CGR 0.55
KGN 9.04
AXL 2.11

ALLORDS
PNI 4.6
HUB 10.62
NXT 6.67
SIQ 11.44
KGN 9.04
PME 8.29

ASX200
CWN 13.5
CGC 7.28
RWC 4.29
CPU 17.84
REA 76.99
CCP 21.14

Mr Bear


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## Mr Bear (3 April 2018)

*3 April 2018 Portfolio
*
Market down since last month, the hedges at 6020 have paid off, closed some exposure at 5740 and 5880. Long term market fair value around 4900, around 15% down from where we stand today.

This months portfolios

AUSEX300
PNC 3.39
CGL 6.63
RDH 2.95
OTW 3.01
KGN 8.50
NBL 2.47

ALLORDS
PNC 3.39
NCZ 1.22
KGN 8.50
BIN 2.80
IMD 1.18
NBL 2.47

ASX200
MMS 16.85
TWE 16.86
SIQ 10.93
CGC 6.83
RWC 4.42
CPU 17.31


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## Mr Bear (4 May 2018)

*1 May* *2018* *Portfolio
*
Sorry for the delay this month, out golfing yesterday, managed to get set in most of my stocks on Wed, still two stocks I'm trying to get filled on. PA I traded slightly different to this months 6 stocks that came out in my model (ex300), mainly because I wanted to diversify a bit more and take on a little riskier portfolio after taking on less risk end of February. Market bounced back strongly in April, small ords up around 5% after doing nothing the past 6 months. Market generally looks overbought and expensive in the small caps space, despite cheap stocks always being available I'm seeing far less opportunities than usual, on a liquid basis the universe is 15 stocks, around 35 including low liquidity stocks.

This month's portfolios

AUSEX300 - 10y Mean Performance 50%+
CGR 0.51
KGN 7.77
PNC 3.49
UNV 0.23
ST1 0.255
SHJ 0.895

ALLORDS - 10y Mean Performance 40%+
CUV 11.75
HUB 11.09
IMD 1.24
KGN 7.77
NCZ 1.26
PNC 3.49


ASX200 - 10y Mean Performance 20%+
CGC 7.26
GNC 8.89
MQA 6.43
OML 4.87
RWC 4.73
SIQ 10.86


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## Mr Bear (2 June 2018)

*1 June 2018 Portfolio*

Market continued higher during May but buyers lost commitment, we now start June roughly where we left off, I re-opened the hedge at 6020 after taking profits in March. Nothing huge about 10% short at the moment. I believe risk is to the downside but not worth increasing the hedge at this point in time.

I'll start providing some performance stats from the earlier portfolios in the coming months, the NOV portfolio is up around 40% to date.

This month's portfolios 

AUSEX300
AXL 2.38
UNV 0.25
RDH 2.84
SHJ 1.00
SAR 2.16
KGN 9.09

ALLORDS
RSG 1.24
HUB 13.78
BIN 2.69
SAR 2.16
WEB 12.48
IFM 0.9

ASX200 
SAR 2.16
ALX 6.65
RWC 5.75
DMP 49.23
IEL 9.68
OML 5.25


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## willy1111 (2 June 2018)

Mr Bear,

How do you allocate capital to the portfolios?


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## Mr Bear (2 June 2018)

willy1111 said:


> Mr Bear,
> 
> How do you allocate capital to the portfolios?



I don’t optimise the portfolio or anything like that, personally I like to keep things simple so each stock is equal weighted.

The way I suggest trading the model is as follows.

Let’s say you want to start a portfolio with 100k today, you could put all your money in the market at today’s price or add to the portfolio over a month, qtr, year etc. research has shown allocating funds over 12 months is about right.

I trade every two months that align with the month ending reporting season. So last day of the month, Feb, April, June, Aug, Oct and I skip Dec.. so invest 20k at each period

So the max amount of stocks you would diversify into is 30 but this never happens, probably average 20 or less.

So over the year you’re averaging into the market, diversifying your holdings and constantly buying the cheapest stocks with the best momentum. Breaking down the trades this way also helps trading the more illiquid small cap stocks and also gives you an opportunity every two months to add any savings to the portfolio.

Most importantly I’m not trying to time my entry perfectly, just follow the system to enter and exit.

I believe in being fully invested at all times, I will only ever hedge my portfolio but I still earn the excess return which you give up being in cash.


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## Mr Bear (2 July 2018)

Discontinuing this thread due to lack of interest, not sure if I approached this correctly however if there is any demand I will pick it back up. At a minimum I will provide the performance numbers in a years time and add some discussion to specific stock forums when I have time.


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## greggles (2 July 2018)

Mr Bear, don't mistake a lack of posts by others in the thread as a lack of interest. I was following along and I'm sure others were too.

I find threads about other people's trading or investment strategies to be interesting, but often I can't think of any questions or comments worth posting so I just observe.

I do appreciate your efforts.


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## willy1111 (2 July 2018)

Personally, I like to see performance data on total portfolio updated regularly.

 Perhaps if each month you included the % return for each portfolio and remind people you invest approx 20% of your capital in any one month, so looking to spread it over about 5 months. Ie November portfolio up 40%, Dec portfolio up 32%, Feb portfolio down 15%, etc.

People read the thread, I have been, I think if you start showing good performance stats, consistent posting month in month out of performance measurement and I think it will start to generate more interest and then questions may start about your processes/selection method.


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## investtrader (3 July 2018)

Ditto


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## Mr Bear (3 July 2018)

Thanks for the feedback.

I'll bring it back to the Small Cap model only for the rest of the year until we have some performance and hopefully a bigger audience. This is where I have most of my capital and is the most interesting from a research perspective. I'll also add my valuation as previously discussed, this might get a bit more interest from any readers as I suspect people will think some of them are outrageous. Brokers like to create targets that are achievable and won't make them look stupid, in my opinion these short term targets aren't useful.

The val does not mean this is what is expected in the next 12 months, this is just the forecasted value of the business based on everything we know today, as the picture develops over many years we would expect the business to trade towards this price or get hammered!! You never know what lies some of these salesmen are telling you. I have a large margin of safety, this doesn't mean I haven't had any 50% losses (because of the liars) but these are very few, in return I get plenty of 100% + returns, the hit rate is 80%

1 July 2018 Portfolio

AUSEX300
Ticker - Price - Val
AXL - 2.20 - 16.00
UNV - 0.32 - 6.00
RDH - 3.15 - 6.70
RHP - 1.185 - 3.00
ST1 - 0.245 - 1.80
CGR - 0.57 - 2.65

I added more to my hedge at 6165, will probably add some more tonight, I'm roughly 20% hedged at the moment, average price is slightly above 6000.


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## investtrader (4 July 2018)

Mr Bear,
I like this type of trading. I have done a bit of work on rotational trading systems using momentum. They work really well on small caps even with 12 month minium holds, but give big drawdowns. This is because during down markets these 'overbought' type stocks get hammered. So I see you are using the value momentum effect. Hopefully the value part helps with the DD.
I've also a lot of experience with www.portfolio123.com where you can test these value momentum factors ad nauseam on the US market. No reatil equivalent exists for our market.
So I am following closely.
PS Are you using a screener for the fundamentals?


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## Mr Bear (4 July 2018)

investtrader said:


> Mr Bear,
> I like this type of trading. I have done a bit of work on rotational trading systems using momentum. They work really well on small caps even with 12 month minium holds, but give big drawdowns. This is because during down markets these 'overbought' type stocks get hammered. So I see you are using the value momentum effect. Hopefully the value part helps with the DD.
> I've also a lot of experience with www.portfolio123.com where you can test these value momentum factors ad nauseam on the US market. No reatil equivalent exists for our market.
> So I am following closely.
> PS Are you using a screener for the fundamentals?




The Australian small cap market shows a momentum effect that I haven’t been able to replicate in other markets except Korea. This is for both pure momentum and my model of value and momentum. This isn’t to say other markets aren’t significantly profitable it’s just that Australia consistently outperforms.

My model is primarily a value model, the current universe is 60 stocks, the average return on the universe is 40%. You would do very well by taking the 6 cheapest stocks, these are all very cheap on a conservative DCF model. 

I expect and know from experience drawdowns will be few but can be large, when you forecast for so many stocks and take into account fraudulent CEO’s a downgrade on even a cheap stock can be huge, this has nothing to do with buying a momentum stock. 

Blue Sky for example was in my universe, didn’t buy it but look what happened.

Adding momentum however combines two things, stocks I think are cheap with stocks that cleary fund managers think are cheap. I want to be buying cheap stocks that instos are driving up, that’s the whole game, you can buy cheap stocks all year but if no-one else sees them that way then you have capital sitting there achieving nothing. When adding this overlay performance is significantly increased, it’s actually hard for people to do, they see a stock up 50%-100% and don’t buy for that reason, I don’t care because I know it’s still cheap.

Also some other relevant info,
Momentum alone typically performs better when we increase the rebalance period, for example from yearly to qtr to monthly. This doesn’t apply in my model.

Interestingly the more concentrated the portfolio the higher return, my asx200 model this also does not apply, in fact a portfolio of 30 asx200 stocks will before the same as a portfolio of 6 stocks. Small caps the more concentrated the better.

And yes I use a screener but I’m not using any ratio analysis, I use my own DCF model to value the stocks. Momentum factor is simply total return, I’ve ised plenty of other momentum factors but this simple one works the best.


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## investtrader (5 July 2018)

Mr. Bear,
Thanks for the detail. Okay, so you calculate a DCF valuation for all stocks in your universe? How do you estimate earnings for AXL for example?
Which screener? Thanks.


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## bngood (8 July 2018)

Mr Bear, 
It is always interesting reading how others trade. I watch with interest.
The lack of liquidity in all of the AUSEX300 stocks you listed keeps me from trading them, but that is just me.  It looks like it has worked for you. Good work.


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## Mr Bear (8 July 2018)

bngood said:


> Mr Bear,
> It is always interesting reading how others trade. I watch with interest.
> The lack of liquidity in all of the AUSEX300 stocks you listed keeps me from trading them, but that is just me.  It looks like it has worked for you. Good work.



How much liquidity are you looking for? some of these are admittedly small but paying extra when the returns are so high isn’t much of an issue.. or is your primary concern exiting? I usually get filled without moving the market much at all and my portfolio is over 200k.


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## investtrader (9 July 2018)

Secret huh!


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## tech/a (9 July 2018)

Hi Bear

Thanks for putting in the time and effort.
Some seriously excellent results for your
portfolios.

Congrats.


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## Mr Bear (9 July 2018)

investtrader said:


> Mr. Bear,
> Thanks for the detail. Okay, so you calculate a DCF valuation for all stocks in your universe? How do you estimate earnings for AXL for example?
> Which screener? Thanks.



Correct, I don’t estimate the earnings myself, I collate the information from various sources, I do however use my own terminal growth rates and growth rates for earnings from year 4 onwards until the terminal rate kicks in. I admittedly have access to information the average person doesn’t. The screener is Reuters Eikon product.

My secret as you have alluded to is how I construct the DCF model, everything else I’m happy to share.


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## investtrader (9 July 2018)

Guessing you work for an insto. then. 
What earnings did you use for AXL? Last question, I think.


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## bngood (9 July 2018)

Mr Bear said:


> How much liquidity are you looking for? some of these are admittedly small but paying extra when the returns are so high isn’t much of an issue.. or is your primary concern exiting? I usually get filled without moving the market much at all and my portfolio is over 200k.




I don't like to go below 10 day MA vol x close/5 > $100,000
It means I can pyramid in (if it moves) without worry and I can always get out without worry.  Yes it's the exits I am most concerned about.  

But that is just me. There are so many ways to trade.


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## Mr Bear (9 July 2018)

tech/a said:


> Hi Bear
> 
> Thanks for putting in the time and effort.
> Some seriously excellent results for your
> ...



Thanks Tech, I’ve been watching your recent thread, haven’t had enough time to read through it properly yet, completely different method of trading but one I have been interested in for a long time.. will share some thoughts when I get around to it..


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## Mr Bear (9 July 2018)

bngood said:


> I don't like to go below 10 day MA vol x close/5 > $100,000
> It means I can pyramid in (if it moves) without worry and I can always get out without worry.  Yes it's the exits I am most concerned about.
> 
> But that is just me. There are so many ways to trade.



I haven’t spent as much time as I should on analysing liquidity and therefore spreads in my trading, what I do know is I don’t pay much relative to my returns, there is also a trade off, I know from researching these smaller names the less liquidity also results in larger returns so you still get paid off in a way.

As I have mentioned I trade every second month 5 times a year, soon this will need to be monthly, this allows me to enter/exit without moving price much.


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## Mr Bear (9 July 2018)

investtrader said:


> Guessing you work for an insto. then.
> What earnings did you use for AXL? Last question, I think.




Company guidance for FY18 is 7m, I’m expecting EPS of 0.132.

Then FY19 0.18 and FY20 0.30

This means they currently trade on 7x 2020 estimated EPS.


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## bngood (9 July 2018)

Mr Bear said:


> I haven’t spent as much time as I should on analysing liquidity and therefore spreads in my trading, what I do know is I don’t pay much relative to my returns, there is also a trade off, I know from researching these smaller names the less liquidity also results in larger returns so you still get paid off in a way.
> 
> As I have mentioned I trade every second month 5 times a year, soon this will need to be monthly, this allows me to enter/exit without moving price much.




What you are doing is getting excellent results and you definitely don't overtrade.  
Stick with it. I watch with interest.


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## Miner (18 August 2018)

Mr Bear
Thanks for an excellent series of postings. I found this thread ironically searching for AXL postings.
Very good work and please keep it up.
Now I have registered on your thread.
Regards


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## willy1111 (11 October 2018)

@Mr Bear I'd be interested in seeing you continue with this thread


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