Fundamental/Technical Hybrid Trading Strategy

[tech/a]

Does your software turn up a list of acceptable prospects?
If so can you post that list or private mail them to me?

Of course we could also let it run as it is and see if I can trade bad prospects
(Fundamentally) to a profit ( technically )

 

[Valued]

Does your software turn up a list of acceptable prospects?
If so can you post that list or private mail them to me?

Of course we could also let it run as it is and see if I can trade bad prospects
(Fundamentally) to a profit ( technically )

You should trade QAN and bitcoins then.

Tbh if you could find a broker willing to give you the exposure, I bet you could find a way to make money with bitcoins. I would be looking at derivatives though.

As for QAN, you short and the government bails them out, you long and they go bankrupt.

 

[KnowThePast]

Does your software turn up a list of acceptable prospects?
If so can you post that list or private mail them to me?

Of course we could also let it run as it is and see if I can trade bad prospects
(Fundamentally) to a profit ( technically )

Sure thing tech!

As I mentioned in the thread, I only backtest against companies in my list, not entire ASX. But my list would include almost all ASX companies that meet your criteria.

Also, I only look at EOY financials, no half year data.

WOW CAB REH ARP BHP IRI TRS ASX RMD JBH CCP CCV TGA ONT NVT DMP CRZ
FAN MND AUB BRG SRV LYL DTL NCK MOC CDA FLT ORI IRE SEK SGT WOR ORL
CSL DWS RCR NHF MIN ABC FSA FGE SGH BYI HSN PMV DCG KMD NWH WEB RCG
TPM SKE DJS CWP TNE ANG IAG SRX LCM BGL WTF COH IFM UOS RKN

Also attached is a spreadsheet with backtest results, if it's of any interest.

While I admire your ambition to turn bad FA good with TA, do you not think it will defeat the purpose of the exercise, which is to have the two complement each other? You are attempting to swim against the tide, which is fun to watch, but unlikely to produce the best result.

Buying companies with lowest P/B or P/E are some of the strategies that have been tested for many decades now and still have a high chance of beating the average. I would personally start with one of them for my universe of stocks.

View attachment ASFTechResults.xlsx

 

[Valued]

Sure thing tech!

Buying companies with lowest P/B or P/E are some of the strategies that have been tested for many decades now and still have a high chance of beating the average. I would personally start with one of them for my universe of stocks.

View attachment 56174

Valuing companies based on book value doesn't work though. Valuing on P/E is questionable. At best, it can show you what people are willing to pay for similiar stocks in the industry. If we don't care about price when looking at fundamentals, I am not sure why people get so excited about P/E and P/B ratios. This is not the way to value a company. If you value it this way what you are saying is that the current price is indicative of the past present and future value of this company, that or your valuation is unreliable because it does not take into account earnings growth etc. Either you're saying the price includes all of the information (then you should use technical analysis) or you have an unreliable way of valuing the company since you are not taking into account future value today - which is why growth companies then appear to be extremely expensive when they might not be.

 

[KnowThePast]

Valuing companies based on book value doesn't work though. Valuing on P/E is questionable. At best, it can show you what people are willing to pay for similiar stocks in the industry. If we don't care about price when looking at fundamentals, I am not sure why people get so excited about P/E and P/B ratios. This is not the way to value a company. If you value it this way what you are saying is that the current price is indicative of the past present and future value of this company, that or your valuation is unreliable because it does not take into account earnings growth etc. Either you're saying the price includes all of the information (then you should use technical analysis) or you have an unreliable way of valuing the company since you are not taking into account future value today - which is why growth companies then appear to be extremely expensive when they might not be.

Hi Valued,

Yes, PE and PB are not good valuation tools for individual companies.

As a group, however, the ones with low values tend to outperform. I offer no explanation for this phenomenon, I am just stating that it has been shown to exist by many studies.

I do something similar to tech/a, where I select a universe of companies based on a filter, then try to improve the performance by throwing darts at it.

PE and PB are not the filter that I normally use, but I think they make the best starting point for someone new because they are:
a) simple
b) proven to work (over most periods)

 

[joku]

Generally I don't like this idea.

I agree with KTP that if you're going to use half-arsed "fundamentals" you should at least use an approach that has been shown to generally work. But then I believe these methods are expecting small out-performance - low single digit % based on holding a large basket of stock for a significant duration. It's not spectacular or even particularly reliable to start with so by the time you narrow exposure down based on a technical approach you add volatility to the fundamental advantage which was already a very minor advantage. You are also decreasing this already-low single digit out-performance (if it is still reliable after my point above) further by lowering your time-exposure based on your technical approach. There is also a question over what period the "fundamental" approach outperforms the market, it may largely be during a falling market (ie. by falling less than the market average) and in this case your technical approach would attempt to avoid this period and thus undermine the fundamental benefit anyway.

As for economic quality restrictions, they are one piece of a valuation puzzle that can be incredibly important in comprehensive fundamental approach but it is arguably useless by itself. Often a quality filter is more about finding stocks whereby a particular valuation model is more likely to be valid/appropriate. The only way I see this working is if you somehow can separate the advantages of this type of filter from the disadvantages - a fundamental investor using a comprehensive approach effectively does this or at least attempts to do it whether they know it or not.

 

[joku]

Tech,

Are you aware of stocks that have been standout successes/failures (profitable/unprofitable) for you in the past? Maybe there's something you could show us? Ideally you'd want to weight this against number of trades / time exposure but something is better than nothing. It might be interesting to consider any statistical skew in these two sets from a fundamental perspective. To attempt to do this thoroughly would require consideration of the fundamentals at the time of each trade which probably isn't appropriate for you to provide all that info here but we could at least consider what we can from a simple summary of a handful of good and bad stocks if you're willing to provide it. My reasoning for this is that I don't think any statistical skew based on fundamentals for a technical trader will necessarily make a whole lot of sense fundamentally. It's maybe just as likely that there could be fundamental features that are considered useless or bad from a fundamental investing perspective that have been advantageous to your method.

 

[tech/a]

If I trade stock I use a Trading system.

Techtrader is Published in its entirety in Nick Radge's Book
'Unholy Grails'----I have several others.

Click to expand



I think it starts on page 103 ish.

So No I have no idea of Fundamentals Past or present.

My purpose of starting the thread was for interest sake having seen many wanting to grab this
newsletter or that tip sheet and trade from them.
I just chose the book----as I saw it while browsing and suggested the input of T/A to the Portfolio.

My suggestion is that ANY portfolio---good or bad would benefit from the addition of Technical analysis to
it---not only for entries exits and perhaps trailing stops but also for position sizing and risk mitigation.

Dr Bruce Vanstone also agrees with my observation in his book.

 

[joku]

My suggestion is that ANY portfolio---good or bad would benefit from the addition of Technical analysis to
it---not only for entries exits and perhaps trailing stops but also for position sizing and risk mitigation.

Righto, different topic same general opinion as always then I think I've said this before but if not, I both agree and disagree with your general argument depending on context.

When I agree with it:

Most "fundamental investors" aren't really fundamental investors - or at least not by common standards of truly successful investors anyway (as opposed to those who market themselves as successful, holders of related academic paper, and those who claim X yrs experience in financial markets as if these things somehow prove they can or even know in theory how to operate successfully). Ultimately the fundamental investor title, as with the technical trader title, is an extremely loose term that does little to no justice to the minority who have a very well thought out strategy that has a bunch of rules relating to risk mitigation that are appropriately set based on their underlying strategy and constantly reviewed based on their ongoing performance. The majority don't do this and at risk of sounds so arrogant they are largely just a bunch of jokers. No one can really argue with you from this perspective.. research consistently suggests how hopeless the average investors methods are, and clearly a lack of general risk mitigation is one part of their problem.

When I don't agree with it:

Quite simply, when you discuss specific rules. Risk mitigation and portfolio sizing etc is entirely dependent on the volatility and general performance expectation of a particular strategy, and also certain strategies may need to be avoided where they would undermine the core reason for profit/outperformance by a greater level than that which they benefit the portfolio. A long winded example, but for the last 5yrs I've run at ~23% CAGR with <12% trades under-performing the accum index, and <5% trades resulting in or carrying a nominal loss. Under such parameters, the benefit of strictly holding 3% or lower weighting in individual stocks, as opposed to 6% or lower, whereby that rule would result in an expected drop in CAGR of multiple points, it simply doesn't make sense. If I could do it without the CAGR drop of course I would! but unfortunately that isn't the case, and I have to work within the limitations of my strategy. If I have one "catastrophic loss" each year... which is way beyond what I'm experiencing or should even reasonably expect, it would drop my CAGR rate by what? around 6-7% (can't be bothered to do the math right)... that is still a 16-17% CAGR... around 10% above what the accum. index has done over the same period so still an extremely successful result by general standards even in the face of what I'd call low probability downside. Now I don't build my rules based on these historical numbers being sustainable, but I do make what I consider to be conservative assumptions about my strategies ability to outperform which go into forming the basis of my weightings and general risk mitigation. Stops / Trailing stops also get considered but would cause higher trading fees and less efficient taxation which undermines 2 very significant benefits for my otherwise typically medium/long term holdings - this doesn't mean I can rule out stops all together, but I will rule them out where I believe the net effect to be negative. Personally, this means I don't use stops, but I am always evaluating that, and recently I had a bit of a light-bulb moment on how I may be able to implement them in a specific situation which I've never heard/read about before which I'm yet to full think through but I think will improve what I consider to be a weaker spot within my strategy - I don't want to explain this publicly but it gives you an idea of my thought process.. everything is evaluated and re-evaluated as I continue to critically analyze ongoing performance and continue to learn and continue to generate the odd new idea. My risk management is just implemented in a very different way, based on my very different strategy. Only an imbecile would go up to Buffet and tell him he's got his risk mitigation strategy all wrong, and (though with far less certainty) the same is probably true for myself and also the guys on this forum like craft and a handful of others who clearly shows a willingness to critically analyze their strategies and of course consider general portfolio strategies as they might be best applied to their method.

Apologies for the rant

 

[tech/a]

Righto, different topic same general opinion as always then I think I've said this before but if not, I both agree and disagree with your general argument depending on context.

When I agree with it:

Most "fundamental investors" aren't really fundamental investors - or at least not by common standards of truly successful investors anyway (as opposed to those who market themselves as successful, holders of related academic paper, and those who claim X yrs experience in financial markets as if these things somehow prove they can or even know in theory how to operate successfully). Ultimately the fundamental investor title, as with the technical trader title, is an extremely loose term that does little to no justice to the minority who have a very well thought out strategy that has a bunch of rules relating to risk mitigation that are appropriately set based on their underlying strategy and constantly reviewed based on their ongoing performance. The majority don't do this and at risk of sounds so arrogant they are largely just a bunch of jokers. No one can really argue with you from this perspective.. research consistently suggests how hopeless the average investors methods are, and clearly a lack of general risk mitigation is one part of their problem.

When I don't agree with it:

Quite simply, when you discuss specific rules. Risk mitigation and portfolio sizing etc is entirely dependent on the volatility and general performance expectation of a particular strategy, and also certain strategies may need to be avoided where they would undermine the core reason for profit/outperformance by a greater level than that which they benefit the portfolio. A long winded example, but for the last 5yrs I've run at ~23% CAGR with <12% trades under-performing the accum index, and <5% trades resulting in or carrying a nominal loss. Under such parameters, the benefit of strictly holding 3% or lower weighting in individual stocks, as opposed to 6% or lower, whereby that rule would result in an expected drop in CAGR of multiple points, it simply doesn't make sense. If I could do it without the CAGR drop of course I would! but unfortunately that isn't the case, and I have to work within the limitations of my strategy. If I have one "catastrophic loss" each year... which is way beyond what I'm experiencing or should even reasonably expect, it would drop my CAGR rate by what? around 6-7% (can't be bothered to do the math right)... that is still a 16-17% CAGR... around 10% above what the accum. index has done over the same period so still an extremely successful result by general standards even in the face of what I'd call low probability downside. Now I don't build my rules based on these historical numbers being sustainable, but I do make what I consider to be conservative assumptions about my strategies ability to outperform which go into forming the basis of my weightings and general risk mitigation. Stops / Trailing stops also get considered but would cause higher trading fees and less efficient taxation which undermines 2 very significant benefits for my otherwise typically medium/long term holdings - this doesn't mean I can rule out stops all together, but I will rule them out where I believe the net effect to be negative. Personally, this means I don't use stops, but I am always evaluating that, and recently I had a bit of a light-bulb moment on how I may be able to implement them in a specific situation which I've never heard/read about before which I'm yet to full think through but I think will improve what I consider to be a weaker spot within my strategy - I don't want to explain this publicly but it gives you an idea of my thought process.. everything is evaluated and re-evaluated as I continue to critically analyze ongoing performance and continue to learn and continue to generate the odd new idea. My risk management is just implemented in a very different way, based on my very different strategy. Only an imbecile would go up to Buffet and tell him he's got his risk mitigation strategy all wrong, and (though with far less certainty) the same is probably true for myself and also the guys on this forum like craft and a handful of others who clearly shows a willingness to critically analyze their strategies and of course consider general portfolio strategies as they might be best applied to their method.

Apologies for the rant

Agree with most written up.
In particular that highlighted.
My ponderings are just that.
The idea is placed up as food for thought.
The mechanics of it should be designed by
the trader.

The seed has been sown and flushed out those
who obviously think and hone their trading methodologies.
Appreciate your input.

 

[joku]

In particular that highlighted.

Rather effective anti-rant highlighter you have there

 

[tech/a]

Update
Additions and possible
Pyramid.

SGH is a daily chart sorry will alter next post.









Total portfolio expenditure $79808.
Balance $20192

 

[zipzap]

Before jumping into the fundamentals, I personally think it helps to backtest the screening criteria the fundamental analysis utilises particularly if the fundamentals are quantifiable so that you have some idea if the basket is likely to outperform the index.. That then involves rolling the basket into new groups of stocks quite often more often than on an annualised basis..say once per month/quarter etc..

 

[tech/a]

Before jumping into the fundamentals, I personally think it helps to backtest the screening criteria the fundamental analysis utilises particularly if the fundamentals are quantifiable so that you have some idea if the basket is likely to outperform the index.. That then involves rolling the basket into new groups of stocks quite often more often than on an annualised basis..say once per month/quarter etc..

Certainly agree ZZ.

Its just an exercise.
If people believe there is merit and
suggestions like yours should/could
be implemented fine.

Im just doing something very rudimentary for those who
have very rudimentary capability.
In the hope that it can point "L" platers in a direction.

If nothing else get them thinking

 

[kmlk]

I was actually thinking of using all the stocks selected in Roth's Book as the universe.


View attachment 55675


Then Using T/A to enter and or exit.
Welcoming input from all Fundies and Techies.

I was also going to use a market stop as well.
Perhaps one which stops buying if "X" happens and sells the total portfolio
if "Y" happens.

Position sizing---risk management and portfolio heat---along with issues like opportunity cost
could be addressed.

My view was to use it as a way to help SMSF mid to longer term Traders/Investors
like myself.
Just made sense to a Duck!

Could be worth while??

You know what's funny Tech/A, being a newbie, and still learning (this was my exact approach), I literally have done that. I use incredible charts, and simply put all the companies in. I made my first trade with CCL bought at 8.6 and sold at 9.4 recently. My second trade just opened (TGR) and I also purchase NWH. However looks like my TA is a little shonky, I have read plenty of books but I still don't know which way to go. What would your advice be techa?

But honestly that what was (is) my strategy get big companies (buffet / fundamentals) and then use TA for entry/exit. I actually purchased this book

 

[systematic]

Found this thread searching for something else, and read through it.
Was surprised that no one mentioned this was / is Alan Hull's exact approach in his, "Active Investing" book. He used stock doctor star stocks as well (and in a later edition, I think that's all he used)...but at least originally he also used Martin Roth's Top Stocks book as part of the universe.

From there it was, "technical analysis" - exactly as you have proposed, tech/a.

Jim Berg does the "fundamental / technical" combo, as well.

Those in this thread who mention valuation miss the point of Roth's book. A quality company is not necessarily value at any given point in time. But that's not the point. The point is to highlight the quality companies.

Now...as to the criteria...I wouldn't use Roth's for a quality list. But that's beside the point.

 

[tech/a]

As far as I know Boggo uses the two principals.
T/A and F/A and he uses Stock Doctor.

I never went any further other than holding the universe in a separate file and
I looked back the other day to see how they went.
Seemed OK
But I could see where some trades (Those I looked at) could have benefited
from some T/A to maximize performance.

There is not enough interest in T/A and suggestions I have made over the years
for me to put in much effort these days.

Happy to leave those that know with what they know.
Just as I am happy with what I know I need to know.