portfolio test

[victor]

I've read many times in this forum that you can beat an index simply by avoiding the worst 1/3 stocks.

I think it's easier to be said than to be done. So I would like to perform a test.

Well, the last days I've been downloading the financials from the 30 dow stocks and ranking them acording to:

1. Financial quality and earnings strenght.
2. Piotroski score (see papers in the forum)
3. Valuation (PE and PEG)

I've made three groups: Good, Neutral and Bad.

The good: AIG, American Express, Disney, Home Depot, Intel, J&J, McDonalds, 3M, Verizon and Exxon.
The neutral: Citigroup, Caterpillar, GE, IBM, Coca-cola, Altria, Merck, MSFT, Pfizer and Procter&Gamble.
The bad: Alcoa, Boeing, DuPont, GM, Honeywell, HP, JP Morgan, ATT, United Tech., Wal Mart.


Starting 2nd of January I will create 2 portfolios:
1. Long the good and the neutral.
2. Long the good, short the bad.

Goals:
For 1.: see if we can beat the DJIA
For 2: see if we can get absolute returns, check the volatility.

[nodoodahs]

I'm pretty confident the dollar will tank in '06, too. I was just asking!
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[victor]

NO.

And I tell you why.

Henry is convinced that the euro is overvalued.
I am not.

I pay my food in euros and I'm not going to put any single euro in the US market.
I'm almost sure that the portfolio will win the index, but I don't want to own a currency that may rain from helicopters. Maybe I'm totally wrong, but it's not me who will finance your SUV's and plasma TV's. Not for now.

Beat the index, beat the currency and beat your ideas. Too tough.

Blame it to Bill Bonner and the daily reckoning team.

[nodoodahs]

All that typing, and I forgot the most important question:

You gonna put any real money on it?


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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[nodoodahs]

I'm not surprised at all by Verizon.

I use http://finance.yahoo.com and track on a portfolio there. You can enter transaction date, shares, purchase price, and check the current value of your portfolios at a glance, and it's free! I have a suggestion for how to enter this in a portfolio tracker ...

To accomplish your first goal you could "buy" 100 shares of the top two thirds for about $96,000 and that would "buy" you a competing portfolio of 881 shares of DIA to mark the competition. Then you could also keep track of dividends.

For the long/short, you would need to tie up $47,500 for buying the top ten. To go short 100 shares of the bottom 10, you would get in proceeds about $40,400 - meaning you would need about $20,200 in collateral to open the position and $12,000 to keep it open, which you could do by margining your long stocks. This would give you plenty of room in the mark to market if the short stocks appreciate, and I imagine the dividends would equal out. However, the comparison may be unfair since one portfolio is using margin and the other isn't. To keep it simple and fair, why not consider the shorted stocks to be capitalized by a 100% cash backing. This means you would compare the total dollar gain of the long/short to a total dollar gain of $87,900 worth of DIA or 807 shares, give or take. Then you could track the dividends paid by you for the shorted shares, and to you for the long shares, separately for each portfolio.

Sorry to be so long-winded about this.
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[victor]

Hello Bill,

I'm still working on it.

My first thought was to weight them through equal number of shares. This is, if I want to beat the Dow let's weight the portfolio as close to the dow as possible.

Second. I will try to follow the portfolio through simulator.investopedia.com.
Has anyone out there used this simulator?

Finally, thanks to this proxy, these last days I had the oportunity to check the financials of the 30 Dow components. Just the big numbers (no SEC fillings reading)
Now it's almost finished I have to say that I've been surprised by the final portfolios.
I couldn't imagine KO, PG or MSFT out of the top ten.
I neither could imagine Verizon as #5.
And finally, I get surprised by the awful numbers of GM, T and DD.

Comments welcomed.

Best regards.

[nodoodahs]

Excellent idea!

What weighting will each stock have? Will they be weighted by price, i.e. 100 shares of each, like the Dow? Or will they be weighted equally, i.e. $10,000 worth of each, like a typical investor's portfolio? Or will they be weighted on market capitalization like the S&P 500?

If you're comparing to the DJI perhaps equal share weight is best. I believe that equal dollar weight is the weigh to go in a portfolio, unless you have reason to believe in some of your stocks more than others. FWIW the equal-weight S&P 500 index outperforms the market-cap weight S&P 500 pretty consistently.

I'll be doing some listings of large caps to avoid/short or go long in preparation for the new year. Should be fun!
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.