Medium Term Contrarian Investment Strategy - Thinking aloud

[xxjohnboy]

Hi all,

I have a pretty loose investment plan that I want to tighten up. I felt this was a good place to lay down my thoughts in a concise manner and get some feedback at the same time. Hopefully it can give food for thought for green and experienced investors alike.

Starting Position
So briefly to give you my starting position. I am actually pretty skint. I was a full time IT uni student (though just changed to part time for next semester to give more time to work on business). My realistic earnings right now are about $750 a week before tax. I am a solo musician so income varies depending on the number and type of gigs I do. I am looking to increase this by the end of the year to a comfortable $1000/week and hopefully higher.

I currently have $2000 invested in GWA which I bought on 13th April for $1.94. Right now they are $2.02 a share so I am happy that they are bucking the trend.

I am not paying rent right as I have been house sitting. This is about to end though and the thought of going back to live with the folks isn't hugely appealing so that free ride is likely to finish pretty soon.

Buying Strategy
Firstly, I will invest as much of my income as possible in the share market, and as soon as I have another $2000 saved up I will buy another lot of different shares. I came to the conclusion that anything less than $2000 meant that the $39.90 (2 x $19.95 for buy and sell) transaction fee with CommSec was too big a loss to start with.

This means I am not diversified right now, but that is just too bad. My plan is to continue buying in $2000 lots until I have at least 10 different shares in my portfolio without any of them making up an inappropriately large portion of my entire portfolio due to crazy gains. I need to clarify how many eggs I am going to allow in one basket, though I am so far from this stage that right now it isn't all that important. I know I am prone to a hard hit due to lack of diversification.

Choosing Shares
I am a big fan of the book Contrarian Investing. I do my own version of the low PE/ high yield approach. Basically I filter out smaller stocks by only investing in shares that Comsec allows 50% portfolio leverage (or higher) margin loan on. This filters my list of shares down to about 60 shares and I feel this is a reasonable protection from speculator stocks.

I then list all the shares from that list that have a PE below market or div yield higher than market.

Then I use a formula, which is pretty straight forward.

(Market PE / Share PE) = PE Rating
PE Rating is just a variable name I have given to the answer. The higher that rating the higher it is on my "to buy" list.

(Share Yield / Market Yield) = Yield Rating
Again, the higher the Yield Rating the higher the share is on my "to buy" list.

Then with these results I go like this...
(PE rating x Yield Rating) x (PE Rating + Yield Rating) = Buy Rating
The stocks with the highest buy rating are the ones that I buy. I calculate with the above formula as I think the data is more reliable if the PE and Div Yields compared to market have a low deviation from each other. By multiplying PE rating and Yield Rating together, the outcome is weighted to shares that have PE and Yield Ratings close together. However I did not want this to dominate my formula so I added the right hand side of the formula to smooth things out.

I follow this formula blindly unless a Buy Rating comes out at over 10 (which usually means a crazy low PE ratio), then I have a basic look at fundamentals to see if there is anything suspect.

Selling the shares
This is the part I need to neaten up. Some things I am considering.

• Minimising Tax - try not to sell shares within one year so as to halve capital gains tax.
• Stop Loss - I don't think I will use one. My reasoning is that if my formula says I should buy it now, then I should keep it now.
• Bailing out - if ComSec stops allowing margin loans on the shares then I will bail out.
• Locking in profits - I need to set a point at which I will sell shares to lock in profits. I am thinking this can be based on some hard figure in my formula. However I need to take in to account the tax benefits of holding for 1 full year.
• Updating the portfolio - Once I have held a stock for 1 year I will sell it and buy a top rated stock according to my formula. However, with transaction fees and tax I am better off holding the stock provided these costs are less than the opportunity cost of being in a share that is top rated according to my formula. I haven't made a rule for this yet.

Summary
So that is the plan so far. The philosophy is that I want to limit my emotional involvement in the buying and selling process by having hard and fast rules. When the computer says buy, I buy. When the computer says sell, I sell.


I'm open to feedback

 

[AlterEgo]

Have you back-tested this strategy? How do you know if it's likely to be profitable or not?

 

[skc]

Then I use a formula, which is pretty straight forward.

(Market PE / Share PE) = PE Rating
PE Rating is just a variable name I have given to the answer. The higher that rating the higher it is on my "to buy" list.

(Share Yield / Market Yield) = Yield Rating
Again, the higher the Yield Rating the higher the share is on my "to buy" list.

Then with these results I go like this...
(PE rating x Yield Rating) x (PE Rating + Yield Rating) = Buy Rating
The stocks with the highest buy rating are the ones that I buy. I calculate with the above formula as I think the data is more reliable if the PE and Div Yields compared to market have a low deviation from each other. By multiplying PE rating and Yield Rating together, the outcome is weighted to shares that have PE and Yield Ratings close together. However I did not want this to dominate my formula so I added the right hand side of the formula to smooth things out.

I follow this formula blindly unless a Buy Rating comes out at over 10 (which usually means a crazy low PE ratio), then I have a basic look at fundamentals to see if there is anything suspect.

I'm open to feedback

An interesting approach to finding shares...

Too often you find low PE and high dividend yield because things have changed for the worse. Your earnings and yield numbers are historical but your share price has marked the new reality. I'd be interested to see what your top 10 buy candidates are and I would not be surprised to see 8-9 dogs with fleas (BBG / SWM / FXJ comes to mind).

Consider adding a two filters. Earning per share growth >0% and dividend yield growth >0%.

This will help to only buy shares when fundamentals are moving in the right direction. Your filter of Buy rating >10 needs thorough investigation is also a useful filter.

My guess is, if you do this properly you have a decent chance of beating the market, but not necessarily be able to generate absolute return.

Good luck.

 

[Happy]

Locking in profits can be replaced with protect profit strategy with:

Protect profit stop.

And I would strongly urge you to reconsider your determination not to use stop loss.

$19.95 per trade is bit much for $2000 parcel to my liking.

(Hope Chi-X operation will make some waves in transaction's cost reduction in Australia, Interesting if it had anything to do with E-Trade to drop down to $19.95 per trade)

 

[sinner]

I think skc pointed out the main thing, dividend payers should have their payout ratio considered and growth.

Otherwise, while your plan is in the infancy stages, congratulations on having a much more detailed and logical plan than most who post similar thoughts.

If you go to http://papers.ssrn.com and type in "contrarian" there are a huge amount of papers on, basically, what you're trying to do, with results from most of the developed world stock markets, including breakdowns on where returns can be expected to come from etc. You will probably find that either your investment horizon is too long (targetting short term contrarian profits is often a fade of <3months momentum with most of the returns coming from common factors and unpriced news) or too short (long term contrarian profits is often 3-5 years momentum fade).

Size is a very important characteristic here, so don't go filtering out stocks just based on what you think is fundamentally correct because you might be filtering the stocks sizes which provide outsized contrarian returns. Generally large and small is where these return profiles exist, not just in the larges.

 

[So_Cynical]

Buying Strategy
Firstly, I will invest as much of my income as possible in the share market, and as soon as I have another $2000 saved up I will buy another lot of different shares. I came to the conclusion that anything less than $2000 meant that the $39.90 (2 x $19.95 for buy and sell) transaction fee with CommSec was too big a loss to start with.

2K is probably not really enough...i started off using 5 then 18 months later upped it to 7 because i was having so much success (position sized for profit) and got punished a little following the Larger position size so have now adjusted it back to 4 > 5 (position sizing for risk) and feel more comfortable with that....i also had limited funds when starting off and still do somewhat.

*
This means I am not diversified right now, but that is just too bad. My plan is to continue buying in $2000 lots until I have at least 10 different shares in my portfolio without any of them making up an inappropriately large portion of my entire portfolio due to crazy gains. I need to clarify how many eggs I am going to allow in one basket, though I am so far from this stage that right now it isn't all that important. I know I am prone to a hard hit due to lack of diversification.

Dont get to hung up about diversification just yet, and don't worry about how big your basket is either...i started with 3 stocks back in Mid 2007 and now hold 23...i just looked back at an old portfolio screen shot (i take one every couple of months) and in June 2009 i was holding 13 stocks and still hold 4 from that portfolio.... opportunities come and go.

*

Choosing Shares
I am a big fan of the book Contrarian Investing. I do my own version of the low PE/ high yield approach. Basically I filter out smaller stocks by only investing in shares that Comsec allows 50% portfolio leverage (or higher) margin loan on. This filters my list of shares down to about 60 shares and I feel this is a reasonable protection from speculator stocks.

The vast majority of my profits have come from small and micro caps (mostly not prospectors/miners) so sticking with stocks on commsecs margin list will servilely handicap you, dividend yield and trading profits are greatest with the mid, small and micro caps....small and micro caps are NOT speculator stocks just because of their cap size.

Also i don't think you can be a true Contrarian investor and use stop loss orders...the 2 don't go together IMO, a Contrarian investor makes decisions and backs their judgement...investors/traders using stop loss orders don't (in general)

Good luck.

 

[xxjohnboy]

Thanks for your feedback everyone,

I'll get back to a proper reply and keep you posted. Right now I am behind on a few things so don't have the luxury of writing a nice long post for you.

Thanks again!

JB

 

[xxjohnboy]

Hi guys,

Thanks for your input. Sorry, this is another short reply as I have been a data monkey for the last hour or more and need to run away from the computer before I cramp up. But I have made a spreadsheet which gives all the results using my formulas based on today's data from commsec.

I have made a separate portfolio to track the top 70 stocks (buy rating over 3) and see what happens.

It took me quite a while to compile the information so you may find it quite useful.

Cheers

John W

 

[xxjohnboy]

It seems the p/e ratios on CommSec keep changing even after trading for the day is over. So that made my data entry rather annoying. But, that aside, I have come up with a new formula. And it would give me these shares an that order. I have taken in to account forecast earnings and yield for 2013 according to commsec. I basically used my "Buy value" formula in my first post on forecast eps and dps in 2013. I divided forecast buy value by current buy value and got rid of anything that was below 1 (meaning the company was going down hill). Then I multiplied that number by my current buy rating and tada!

Now it is late, and I need to check for flaws in the formula. And explain it better. But I just wanted some closure for the evening by posting this message

Cheers

John W

KCN KINGSGATE CONSOLIDATED LIMITED.
ARI ARRIUM LIMITED
MGX MOUNT GIBSON IRON LIMITED
TFC TFS CORPORATION LIMITED
APZ ASPEN GROUP
ILU ILUKA RESOURCES LIMITED
PPC PEET LIMITED
BKN BRADKEN LIMITED
EHL EMECO HOLDINGS LIMITED
GFF GOODMAN FIELDER LIMITED.
TWR TOWER LIMITED
BLY BOART LONGYEAR LIMITED
HGG HENDERSON GROUP PLC.
SGN STW COMMUNICATIONS GROUP LIMITED
MIN MINERAL RESOURCES LIMITED
CMW CROMWELL PROPERTY GROUP
SLM SALMAT LIMITED
AAD ARDENT LEISURE GROUP
TSE TRANSFIELD SERVICES LIMITED
HIL HILLS HOLDINGS LIMITED

 

[herzy]

I am by no means experienced, and clearly your method varies to mine, but I would hesitate to look purely at P/E ratios (and even forecasts). My advice would be to use this as a preliminary if you desire, but then make sure to research the company thoroughly, try to look at upcoming announcements or key events for the company, the sector, and the market in general. There can be dangers in simply looking in the rearview mirror or relying on past earnings, as SKC and So_Cynical have pointed out (more or less).

A good example would be Linc (LYC). Extremely low forecast P/E at the moment, but ongoing delays on their TOL (temporary operating license) at their processing plant in Malaysia have seen their sp hammered. A little research would allow you to decide whether or not it's a good medium term buy (i.e. if TOL will get approved soon) or not - based purely on forecast p/e, you would be at a significant disadvantage.

I would also advise against relying on Commsec margin call data, as a lot of exciting companies can be found in small cap.

I also recommend IB - there are a few disadvantages (such as not owning the shares, and no DRIP), but at $6 brokerage you'll be able to have much smaller parcel sizes, which would be a significant advantage in your situation. You'd need a 2% increase (Commsec) before any profits, vs a .6% increase before profits (IB).

 

[xxjohnboy]

Hi,

Thanks for your recent feedback Herzy. Another reason for using the margin lending as a filter is that if I can get a formula that I am comfortable with I would like to leverage it as well. That I could not be bothered entering all the data for the whole market at this stage.

I've not heard of IB, so I will have to do some research in to this.

Gotta run, but here is my new formula before I go. And also attached is a spreadsheet of it.

Choosing Shares
I filter out smaller stocks by only investing in shares that Comsec allows 50% portfolio leverage (or higher) margin loan on.

I then list all the shares from that list that have a PE below market or div yield higher than market.

Then I use a formula, which is pretty straight forward.

(Market PE / Share PE) = PE Rating
PE Rating is just a variable name I have given to the answer. The higher that rating the higher it is on my "to buy" list.

(Share Yield / Market Yield) = Yield Rating
Again, the higher the Yield Rating the higher the share is on my "to buy" list.

Then with these results I go like this...
(PE rating x Yield Rating) x (PE Rating + Yield Rating) = Buy Rating
The stocks with the highest buy rating are the ones that I buy. I calculate with the above formula as I think the data is more reliable if the PE and Div Yields compared to market have a low deviation from each other. By multiplying PE rating and Yield Rating together, the outcome is weighted to shares that have PE and Yield Ratings close together. However I did not want this to dominate my formula so I added the right hand side of the formula to smooth things out.

Anything with a buy rating < 3 gets filtered out.

Allowing for future earnings
(Market PE / Future Share PE) = Future PE Rating
(Future Share Yield / Market Yield) = Future Yield Rating
(Future PE rating x Future Yield Rating) x (Future PE Rating + Future Yield Rating) = Future Buy Rating

Future Buy Rating / Current Buy Rating = Growth Prospect Rating

Anything with Growth Prospect Rating < 1 gets filtered out

Current Buy Rating x Growth Prospect Rating = New Buy Rating

Using This Formula, I ended up with the following shares in this order


KCN KINGSGATE CONSOLIDATED LIMITED.
ARI ARRIUM LIMITED
MGX MOUNT GIBSON IRON LIMITED
TFC TFS CORPORATION LIMITED
APZ ASPEN GROUP
ILU ILUKA RESOURCES LIMITED
PPC PEET LIMITED
BKN BRADKEN LIMITED
EHL EMECO HOLDINGS LIMITED
GFF GOODMAN FIELDER LIMITED.
TWR TOWER LIMITED
BLY BOART LONGYEAR LIMITED
HGG HENDERSON GROUP PLC.
SGN STW COMMUNICATIONS GROUP LIMITED
MIN MINERAL RESOURCES LIMITED
CMW CROMWELL PROPERTY GROUP
SLM SALMAT LIMITED
AAD ARDENT LEISURE GROUP
TSE TRANSFIELD SERVICES LIMITED
HIL HILLS HOLDINGS LIMITED
LEI LEIGHTON HOLDINGS LIMITED
NWH NRW HOLDINGS LIMITED
MLB MELBOURNE IT LIMITED
WHG WHK GROUP LIMITED
FBU FLETCHER BUILDING LIMITED
CGF CHALLENGER LIMITED
SVW SEVEN GROUP HOLDINGS LIMITED
NAB NATIONAL AUSTRALIA BANK LIMITED
PRG PROGRAMMED MAINTENANCE SERVICES LIMITED
FPH FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED
BEN BENDIGO AND ADELAIDE BANK LIMITED
AHE AUTOMOTIVE HOLDINGS GROUP LIMITED
CAB CABCHARGE AUSTRALIA LIMITED
TGA THORN GROUP LIMITED
CDI CHALLENGER DIVERSIFIED PROPERTY GROUP
ALZ AUSTRALAND PROPERTY GROUP
SGP STOCKLAND
WBC WESTPAC BANKING CORPORATION
GUD G.U.D. HOLDINGS LIMITED
ANZ AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
ORL OROTONGROUP LIMITED
GWA GWA GROUP LIMITED.
CHC CHARTER HALL GROUP
PMV PREMIER INVESTMENTS LIMITED
TOL TOLL HOLDINGS LIMITED

 

[Julia]

I've not heard of IB, so I will have to do some research in to this.

Gotta run, but here is my new formula before I go. And also attached is a spreadsheet of it.

Choosing Shares
I filter out smaller stocks by only investing in shares that Comsec allows 50% portfolio leverage (or higher) margin loan on.

I then list all the shares from that list that have a PE below market or div yield higher than market.

Then I use a formula, which is pretty straight forward.

Do you have a basis for believing the formula is/will be successful?
Are you going to eliminate any company which has a high PE?

KCN KINGSGATE CONSOLIDATED LIMITED.
ARI ARRIUM LIMITED
MGX MOUNT GIBSON IRON LIMITED
TFC TFS CORPORATION LIMITED
APZ ASPEN GROUP
ILU ILUKA RESOURCES LIMITED
PPC PEET LIMITED
BKN BRADKEN LIMITED
EHL EMECO HOLDINGS LIMITED
GFF GOODMAN FIELDER LIMITED.
TWR TOWER LIMITED
BLY BOART LONGYEAR LIMITED
HGG HENDERSON GROUP PLC.
SGN STW COMMUNICATIONS GROUP LIMITED
MIN MINERAL RESOURCES LIMITED
CMW CROMWELL PROPERTY GROUP
SLM SALMAT LIMITED
AAD ARDENT LEISURE GROUP
TSE TRANSFIELD SERVICES LIMITED
HIL HILLS HOLDINGS LIMITED
LEI LEIGHTON HOLDINGS LIMITED
NWH NRW HOLDINGS LIMITED
MLB MELBOURNE IT LIMITED
WHG WHK GROUP LIMITED
FBU FLETCHER BUILDING LIMITED
CGF CHALLENGER LIMITED
SVW SEVEN GROUP HOLDINGS LIMITED
NAB NATIONAL AUSTRALIA BANK LIMITED
PRG PROGRAMMED MAINTENANCE SERVICES LIMITED
FPH FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED
BEN BENDIGO AND ADELAIDE BANK LIMITED
AHE AUTOMOTIVE HOLDINGS GROUP LIMITED
CAB CABCHARGE AUSTRALIA LIMITED
TGA THORN GROUP LIMITED
CDI CHALLENGER DIVERSIFIED PROPERTY GROUP
ALZ AUSTRALAND PROPERTY GROUP
SGP STOCKLAND
WBC WESTPAC BANKING CORPORATION
GUD G.U.D. HOLDINGS LIMITED
ANZ AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
ORL OROTONGROUP LIMITED
GWA GWA GROUP LIMITED.
CHC CHARTER HALL GROUP
PMV PREMIER INVESTMENTS LIMITED
TOL TOLL HOLDINGS LIMITED

I've only taken a look at the above long list down as far as HIL. Of these, only TWR and SGN are demonstrating even the slightest uptrend. Most are in downtrend or at best flat.
Perhaps the latter half of the list will all be winners.

Can you say how you will pick your chosen stocks from this list?

I'm assuming you will not be buying all of them.

 

[noirua]

I still reckon that if a method of trading/investing is complicated, or drawn out, it either wont work or gets buried in a portfolio of confusion, or being very rude 'a load of crap'.

Cash, as we all know, is the closest to 100% safe and if half your portfolio is just that you massively reduce the risk.

Contrarian thinking by anyone who is inexperienced is a load of tosh, it's plain dangerous, and best avoided. We are up against other investors and many go short or long and place limit orders to buy and sell, and for this reason trailing stop losses are absolutely vital. Yes, you must reduce losses and run profits, and this is part of investment discipline.
I trade mainly on the LSE:AIM market, the mad house, and learn't the hard way at times. No 1, I learn't 'I'm not clever'; No 2, NO system works; No 3, always blame myself and never point to anything else or broker; No 4, absolute discipline at all times; and No 5, if I should have sold a losing stock and suddenly it recovers 'I HAVE FAILED' the worse thing in disciplined trading that can happen.
Spread betting and CFDs are even more important to maintain a rod of iron on discipline and pay extra to cover every eventuality; if you don't then one day your account will be wiped out, and financially, you/me with it.

Many know all this and perhaps my comments upset a few, 'TOUGH', get over it -- good luck and good fortune.

 

[So_Cynical]

Using This Formula, I ended up with the following shares in this order


KCN KINGSGATE CONSOLIDATED LIMITED.
ARI ARRIUM LIMITED
MGX MOUNT GIBSON IRON LIMITED
TFC TFS CORPORATION LIMITED
APZ ASPEN GROUP
ILU ILUKA RESOURCES LIMITED
PPC PEET LIMITED
BKN BRADKEN LIMITED
EHL EMECO HOLDINGS LIMITED
GFF GOODMAN FIELDER LIMITED.
TWR TOWER LIMITED
BLY BOART LONGYEAR LIMITED
HGG HENDERSON GROUP PLC.
SGN STW COMMUNICATIONS GROUP LIMITED
MIN MINERAL RESOURCES LIMITED
CMW CROMWELL PROPERTY GROUP
SLM SALMAT LIMITED
AAD ARDENT LEISURE GROUP
TSE TRANSFIELD SERVICES LIMITED
HIL HILLS HOLDINGS LIMITED
LEI LEIGHTON HOLDINGS LIMITED
NWH NRW HOLDINGS LIMITED
MLB MELBOURNE IT LIMITED
WHG WHK GROUP LIMITED
FBU FLETCHER BUILDING LIMITED
CGF CHALLENGER LIMITED
SVW SEVEN GROUP HOLDINGS LIMITED
NAB NATIONAL AUSTRALIA BANK LIMITED
PRG PROGRAMMED MAINTENANCE SERVICES LIMITED
FPH FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED
BEN BENDIGO AND ADELAIDE BANK LIMITED
AHE AUTOMOTIVE HOLDINGS GROUP LIMITED
CAB CABCHARGE AUSTRALIA LIMITED
TGA THORN GROUP LIMITED
CDI CHALLENGER DIVERSIFIED PROPERTY GROUP
ALZ AUSTRALAND PROPERTY GROUP
SGP STOCKLAND
WBC WESTPAC BANKING CORPORATION
GUD G.U.D. HOLDINGS LIMITED
ANZ AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
ORL OROTONGROUP LIMITED
GWA GWA GROUP LIMITED.
CHC CHARTER HALL GROUP
PMV PREMIER INVESTMENTS LIMITED
TOL TOLL HOLDINGS LIMITED

In order hey .. jeez thats a funny looking (in order) list of large/mid cap Contrarian potentials...with many stocks im watching, a few i have owned and 2 i do own and a few suprises.

Its hard to see how AHE, ALZ, CDI, CMW and SGP are a Contrarian play at the moment with their share prices where they are..so many of the others are commodity/China/Global growth linked stocks.

Still almost certainly there will be 3 or 5 stocks on that list that will out perform, and 3 or 5 that will significantly under perform, how you find the out performers i don't know.

 

[xxjohnboy]

I still reckon that if a method of trading/investing is complicated, or drawn out, it either wont work or gets buried in a portfolio of confusion, or being very rude 'a load of crap'.

I don't believe my formula is very complicated or drawn out at all. It started simply as a combination of low PE and High Yield stocks. After reading skc's post about adding a growth filter I decided it was a good idea. This is because the dummy portfolios I have been closely monitoring have in fact been hammered by the shares with forecast profits and yields going down. I didn't quite do it the way skc suggested, but it results in a similar result which gives weighting to bigger prospects of growth in eps and yield.

The ones that have hurt are APN, SWM, MYR, HGG, RIO and HGG

The only shares that have not beaten the all ords since creating any of the 4 dummy portfolios I have made at different times this year(1 in Feb, 1 in March, and 2 in April) are
BBG, HGG, GFF, RIO, APN, ARI, SWM, SLM, MYR, SGN.
All except one of the big losers of APN, SWM, BBG, MYR, RIO could have been avoided using my new formula taking in to account forecast earnings and yield. GFF, ARI, SLM, SGN and HGG are shares I would still have bought and they had far less in losses than the other shares. In fact on my February portfolio ARI actually beats the all ords. My old portfolios consisted of the following shares. These old portfolios used an old and different formula but their results are still useful for creating a new formula. They were based on low pe, or low pe and yield.

AAD
AIX
ALS
APN
BBG
CIF
CTX
GFF
GWA
HGG
MYR
OST
RIO
SGN
SLM
STW
SWM
TAH
TTS
TWR
VAS

That is 20 shares in total, with 10 out of 20 not beating the all ords. And overall they are not beating the all ords either. Like skc said, the dogs with fleas bit me pretty hard. I believe the new filter will have a significant impact so I will wait and see what results they deliver as time goes on.

And of course, I know this is all in hind sight so the figures and things will have changed around. I am not putting any guarantees on this new formula. I am trying it out. I tried the old formula and it has so far proved to be unworthy. I am performing bigger tests with more shares now to try and give more data to work with and more reliability in the formula.

Contrarian thinking by anyone who is inexperienced is a load of tosh, it's plain dangerous, and best avoided. We are up against other investors and many go short or long and place limit orders to buy and sell, and for this reason trailing stop losses are absolutely vital. Yes, you must reduce losses and run profits, and this is part of investment discipline.

Maybe you are right, but I am going to think like a contrarian anyway.

Have you back-tested this strategy? How do you know if it's likely to be profitable or not?

The reason for my belief in the low pe and high yield approach is based on the Book by David Dreman called Contrarian Investing I read in 2000. He did comprehensive studies on the markets and it seemed to point to a simple way of beating the market, which was to go with low pe stocks. He offered alternative approaches as well which included the high yield approach. I'm not looking to be a trader or anything, I just want to get good medium term profits with minimal effort and stress.

Also, Sinner. Thanks for link http://papers.ssrn.com I will check it out some day soon.

Thanks everyone for both positive and negative feedback. This post has made me think through my process more thoroughly and been very helpful to me. I really appreciate it.

Thanks

John W

 

[noirua]

You cant run profits if you do not control losses and unless you are the one and only genius you can only do that with a stop loss in place. You could of course watch your screen from 10am to 4pm every trading day but you will end up shouting at stocks, "go up, go up, damn you". If you have limit orders in place and stop losses you can go to work and let matters take care of themselves -- unless like me you don't have to work, but I do trade and invest in three markets and I would get only about 3 hours sleep a day without a strong disciplined trading method.

It has been difficult to trade in 2011 and 2012 particularly in the resource sector due to a continuous market drift due to forced and frustrated stock holders. Australia has been particularly badly hit by European problems. If Greece sneezed the ASX wobbled all over the place. If good news arrived a stock went up but sellers came in by the lorry load to take it back down again. Any strategy must fail if there are so many desperate to get out of bombed out stocks -- unless you turn to shorting.

Maybe markets will be good from here on and perhaps for many years - so if we get 15% rises every year most strategies will SEEM to work.

 

[herzy]

Please explain to me how AAD is in a downtrend Julia? Like SC I am familiar with a few stocks the list has thrown up, but only (interested in) holding AAD.

That said, there are many companies there I would avoid (e.g. OST, BBG).

 

[odds-on]

Hi Johnboy,

The following book is for any true contrarian investor! Have you read it?

http://www.amazon.com/The-Contrary-Thinking-Humphrey-Neill/dp/087004110X

You might enjoy it.

Have you thought about using other search criteria for medium term contrarian investment ideas? For example:-

- $100 million < Market Cap < ASX20
- Price to sales ratio < 1
- 52 week percentage change < -30%

In my experience it throws up some interesting stocks where a bit of contrary thinking could be profitable due to the cyclical nature of a business or it just being out of favour in the market.

Cheers

Oddson

 

[Julia]

Please explain to me how AAD is in a downtrend Julia? Like SC I am familiar with a few stocks the list has thrown up, but only (interested in) holding AAD.

That said, there are many companies there I would avoid (e.g. OST, BBG).

I said I'd only looked at some of them. I also said most I'd looked at were in a downtrend or flat.
After a spike up in April AAD has been rangebound. Not in an uptrend by my definition.
But hey, if you like it, good luck.

 

[herzy]

I've only taken a look at the above long list down as far as HIL. Of these, only TWR and SGN are demonstrating even the slightest uptrend. Most are in downtrend or at best flat.
Perhaps the latter half of the list will all be winners.

I said I'd only looked at some of them. I also said most I'd looked at were in a downtrend or flat.
After a spike up in April AAD has been rangebound. Not in an uptrend by my definition.
But hey, if you like it, good luck.

My apologies Julia I read your post incorrectly to mean you'd read all of the stocks down to HIL, and concluded that most are at best flat. Not being a technical-based investor, I can't comment on AAD's trend in the future, but was interested to know why you thought it was going down. Sorry for the confusion.

Thanks for your analysis of AAD as well. For anyone interested, I like AAD because of a low p/e, high payout, and (IMO) sustainable earnings with logical avenues for growth being acted upon.

Contrarian? Probably not, although it is involved in tourism and leisure, which I suppose aren't seen as particularly favourable conditions at the moment (due to high AUD, depressed economy = less people going out, etc).