Hi folks,
I've been toying with the following idea, and would love to gather feedback. Using, a weight that makes sense for your age e.g. 20-30% of your portfolio (with the rest being in traditional ETFs such as VTI), you'd pick 30-50 stocks that historically are up-only (think Visa), treating it as an ETF. When I buy VOO I certainly don't research all 500 picks, I look at the chart and trust that the index managers make good picks. Same goes for a Dow Jones index, which is only 30 picks.
What if you essentially created your own index?
I used the following criteria:
- Preference for large and mega cap (all but 1 ended up in this bucket)
- Consistently growing earnings
- Charts that generally go up and to the right
- Quicker to recover from recessions than VTI
- Aim for somewhat reasonable diversification across industries
- I did not particularly care about *how* much the stock grew, only that it did so consistently
- I do NOT care about analysts opinions, leadership changes, news, lawsuits, or any other fundamentals. I only care about how the chart looks like and if earnings are on an up-trend. In other words, if something changes and the company starts underperforming compared to the rest of the list on a 2+ year time span, they're rotated out, regardless of why this happened. This means that you do NOT "keep up with the news". You do not read quarterly reports or listen to investor calls.
- Equal weights. I tried clustering companies via pairwise correlations and this actually ended up with worse results (though I'd love to learn more here!)
- The portfolio does significantly better than SPY if you start at the year 2000 (i.e. I wanted to include at least 2 recessions)
Here are backtesting results (via portfoliovisualizer.com), I had to remove a handful of picks that didn't go all the way to before the 2000 recession:
https://i.imgur.com/OzNZnVT.png
Results:
- The portfolio did almost 10x better than SPY 1999 to today
- With a lower standard deviation, lower drawdowns, better 'best year' and 'worst year', and a higher sharpe ratio
Discussion Points:
- "Historical results don't predict future results". Sure! But I'd rather take my chances with a chart that goes up and to the right for 30 years than one that's been going down the entire time.
- "Why don't you go develop your fancy Kodak pictures over at Sears?" This is a fair point, which is why we also rotate companies out of the index, using an inverse of the entrance criteria. Not all will be winners over time, which is why we pick at least 30 (preferably more, but it isn't easy finding these companies).
Here is the list I came up with (remember, I know *nothing*, and want to learn nothing, about the fundamentals of these businesses):
- Microsoft
- Apple
- Visa
- Mastercard
- Intuit
- Walmart* (were flat from 2000 for 13 years)
- Dollar General* (earnings growth are inconsistent with the rest of the list)
- Costco
- Nike
- LVMH
- Ulta
- Berkshire Hathaway
- Broadcom
- McDonalds
- JNJ
- PG
- Hershey
- Lockheed Martin
- United Health Group
- Pepsi
- Deere
- CSL
- Roper
- ODFL
- GWW
- MCHP
- DHR
- ELV
- ABT
- ADP
- LIN
- TPL
- RLI
- NDSN
- IEX
- APH
- CSGP
- EGP
Submitted January 03, 2023 at 03:57AM by Junglebook3 https://ift.tt/omtIHbX
