Workshop Portfolio

Foolish Workshop
Finally, some serious backtested returns!

By Elan Caspi (TMFElan)

EL CERRITO, CA (Oct. 26, 1999) -- The action on the Mechanical Investing message board (the advanced companion board to the Foolish Workshop message board) has been fast and furious since Peter Kuperman finished assembling his backtesting database a couple of months ago. This was soon followed by the development of excellent backtesting tools from Brian Finney and Jamie Gritton. You can find the links to those in the Foolish Workshop FAQ, question 16.

Fools have been testing away using these tools, uncovering a variety of screen permutations with various numbers of stocks, holding periods, and starting times. With this wealth of information, it has become quite a challenge to keep up. In the interest of making life a bit easier for all you Workshop Fools out there, today we are presenting the results of backtesting four of the screens that we follow regularly. The same information will be added soon to the Screen Explanations page. The screens tested here are those that the database supports.

Jamie Gritton's backtester includes the screening parameters used to select stocks each month for each of the screens listed and can provide returns for those stocks at 1-, 3-, 6-, and 12-month intervals, 1986 through 1998. (We don't use the longer holding periods.) It is a monthly database, so we can run each screen as though a new portfolio were started each month of the year.

(To ensure accurate comparisons among holding periods, each screen covers the same total number of months. Because we do not yet have the returns data from 1999, every strategy finished at some time in 1998. For example: A strategy starting in May of 1986 would end in April of 1998 and cover a full 12 years. Each strategy's end point is therefore exactly 12 years after its starting point. Strategies starting in January end in December of 1997. They do not renew in January of 1998 because that would give them more than 12 years. This gives us an apples-to-apples comparison among screens.)

For each strategy, the CAGR was calculated for 5- and 10-stock versions renewing every month, quarter, half year, and year.

Each return quoted below is the average for 12 portfolios following that strategy, i.e., the Beta Quarterly Strategy is the average for 12 portfolios, the first starting in January 1986 and renewing in April 1986, June 1986, etc., every three months through December of 1997; the next starting in February 1986 and renewing in May 1986, July 1986, etc. through January 1998, etc. through the final portfolio that started in December 1986, and renewed every three months ending in November 1998.

We have data available to display the returns for each starting month separately, but I believe that most of the fluctuations between starting months are due to chance and we might as well ignore them. Several screens appear to have better returns when started in January, however, so I've chosen to show the January returns for annual strategies separately. (The regular annual returns include the January numbers in their average.) But I wouldn't trust those January numbers too much. It's better to lower your expectations.

OK, it's time to let the screens speak for themselves.

Beta Screen: Taking the Timeliness 1 stocks in the Value Line Investment Survey, simply sort these stocks in descending order by their beta. Select the 10 (or 5) stocks with the highest betas. Beta is a measure of a stock's price volatility.

                                                Ann.
#    Monthly  Quarterly  Semiannual  Annual (Jan. start)
5      18.8%      17.8%      19.3%    18.0%    26.3%
10     21.7%      20.4%      19.6%    16.8%    21.5%
The Beta strategy has mediocre historical returns. It shows no significant preference for any particular holding period, although the January annual screen is interesting. In several instances the 10-stock variation seems to perform better than the 5-stock version. As Moe Chernick suggested in his article about the characteristics of a good screen, "The screen must work with good but diminishing returns for lower-ranked stocks." The Beta screen doesn't have this quality, and I don't think it is a particularly good screen.

PEG Screen: For stocks ranked Timeliness 1 or 2 by the Value Line Investment Survey and with a positive current P/E, take the 25 stocks with the highest total return (26 week). From those, take the 10 stocks with highest projected EPS growth rate. Sort these in ascending order by PEG (current P/E divided by projected EPS growth rate). Select the 5 with the lowest PEG ratios.
                                                Ann.
#    Monthly  Quarterly  Semiannual  Annual (Jan. start)
 5     34.9%      35.2%      35.7%    30.6%    46.9%
10     27.2%      26.9%      28.8%    26.7%    41.8%
I've chosen to present both the 5- and 10-stock variations for PEG although Moe Chernick, its creator, never intended it as a 10-stock screen. Yet this illustrates the screen's behavior with respect to the aforementioned characteristic of a good screen -- pretty nice, and it really is not bad as a 10-stock screen. What do you think, Moe?

We see fairly similar returns for the holding periods between one month and six months with a drop for the annual holding period. But the January start stands out in this case. Such a big difference may not be just due to chance.

Relative Strength - 26 Week Screen: Starting with all of the stocks ranked Timeliness 1 by the Value Line Investment Survey, select the stocks with the highest total return (26 week).
                                                Ann.
#    Monthly  Quarterly  Semiannual  Annual (Jan. start)
 5     34.8%      32.9%      31%      25.8%    27.5%
10     30.7%      29.6%      28%      24.4%    31.7%
The RS-26 returns seem to be better with shorter holding periods. But before jumping into the monthly screen, read Moe's excellent article about the true costs of monthly screens.

January seems to hold no special promise for the annual RS-26. October, of all months, has the best historic return at 37%, but I believe that is just a fluke.

Spark Screen: Taking all of the stocks ranked Timeliness 1, 2, or 3 by the Value Line Investment Survey, filter for the following attributes:
  1. Total return (26 week) is greater than or equal to 20%.
  2. %EPS 12-month Chg Latest Qtr is greater than or equal to 20%.
  3. % EPS Change from Last Quarter is greater than or equal to 20%.
  4. Estimated % EPS Change for the Fiscal Year is greater than or equal to 29%.
  5. Sort the remaining stocks by market cap and select the top 5.
                                                Ann.
#    Monthly  Quarterly  Semiannual  Annual (Jan. start)
 5     24.7%      28.4%      27.3%    25.1%    32.5%
10     22.1%      23.7%      24.7%    21.7%    27.4%
Sparfarkle, like Moe, never intended this as a 10-stock screen, but the numbers are instructive. We see the expected decline in returns when we go from 5 stocks to 10 stocks. We see no advantage to a short holding period. To the contrary, no one would likely select Spark5 as a monthly screen. And we do see quite an advantage to a January start.

One final note: I will be polling all fools on the Mechanical Investing and Foolish Workshop boards to ask which screens we should keep, add, or drop from our official Workshop Rankings at the start of the new year. We're not going to compete with the wonderful work being done on the message boards, listing an enormous variety of screens each week. The rankings here will be reserved for the straightforward "old faithful" screens. Yet we do need to keep up with the times. So join us on the boards and let us know which screens are precious to you.

Foolishly yours,
Elan

New Rankings | Workshop Returns


Workshop Portfolio


9/28/01 as of ~5:30:00 PM EDT

Ticker Company Price
Change
Daily Price
% Change
Price
AETAETNA INC NEW0.943.36%28.94
BABOEING CO(1.04)(3.02%)33.36
CATCATERPILLAR INC1.112.53%44.91
COGCABOT OIL & GAS 'A'0.693.59%19.90
DDDU PONT (EI) DE NEMOURS0.992.74%37.14
DGXQUEST DIAGNOSTICS(0.45)(0.73%)61.42
EKEASTMAN KODAK0.421.31%32.49
GMGENERAL MOTORS1.393.38%42.55
LHLABORATORY CORP AMER HLDG(NEW)1.141.42%81.21
MOPHILIP MORRIS COS(0.76)(1.55%)48.24
NEWPNEWPORT CORP0.261.90%13.97
NVRNVR INC(0.54)(0.38%)140.41
PKXPOHANG IRON & STEEL ADS1.097.51%15.61
PVNPROVIDIAN FINANCIAL1.075.64%20.04
QCOMQUALCOMM INC(0.40)(0.84%)47.16
RJRRJ REYNOLDS TOBACCO HLDGS(0.69)(1.19%)57.31
SLESARA LEE CORPUnchg.Unchg.21.09
UNFIUNITED NATURAL FOODS0.563.18%18.15
WMIWASTE MANAGEMENT(0.01)(0.04%)26.74

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(12/24/1998)
Workshop1.30%7.32%(12.02%)(20.66%)(18.91%)
Comparable S&P 500n/an/an/an/a(19.07%)
S&P 500 (DA)1.95%7.48%(8.33%)(21.22%)(14.88%)
NASDAQ2.02%4.71%(17.46%)(39.68%)(31.41%)
DJIA (DA)1.68%7.07%(11.07%)(17.86%)(2.22%)

Internal Rate of Return -- Annualized Rate of % Gained (Lost)
  Since Inception (12/24/1998)
Workshop(17.62%)
vs. S&P 500(17.63%)

Trade Date # Shares Ticker Cost/Share Price Total % Ret
1/8/0126MO40.9448.2417.82%
1/8/0122RJR50.1057.3114.39%
1/8/0167UNFI16.4518.1510.34%
12/24/9824CAT43.0844.914.24%
1/8/018NVR136.63140.412.77%
1/8/0140WMI27.4426.74(2.54%)
1/8/0150SLE22.5421.09(6.42%)
1/8/0161PKX17.8315.61(12.46%)
1/8/0115DD48.8337.14(23.95%)
1/8/0129AET38.1728.94(24.19%)
1/8/0139COG28.7519.90(30.79%)
1/8/0114QCOM75.5447.16(37.57%)
1/8/018LH134.6981.21(39.70%)
12/27/9918GM73.2642.55(41.92%)
1/8/0118BA59.5333.36(43.96%)
1/8/019DGX114.4961.42(46.35%)
12/27/9920EK65.0932.49(50.08%)
1/8/0120PVN55.5020.04(63.89%)
1/8/0115NEWP74.9613.97(81.36%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
1/8/0126MO$1,064.50$1,254.24$189.74
1/8/0122RJR$1,102.25$1,260.82$158.57
1/8/0167UNFI$1,102.12$1,216.05$113.93
12/24/9824CAT$1,034.00$1,077.84$43.84
1/8/018NVR$1,093.00$1,123.28$30.28
1/8/0140WMI$1,097.50$1,069.60($27.90)
1/8/0150SLE$1,126.88$1,054.50($72.38)
1/8/0161PKX$1,087.75$952.21($135.54)
1/8/0115DD$732.50$557.10($175.40)
1/8/0129AET$1,107.00$839.26($267.74)
1/8/0139COG$1,121.37$776.10($345.28)
1/8/0114QCOM$1,057.62$660.24($397.39)
1/8/018LH$1,077.50$649.68($427.82)
1/8/0118BA$1,071.50$600.48($471.02)
1/8/019DGX$1,030.44$552.78($477.66)
12/27/9918GM$1,318.62$765.90($552.73)
12/27/9920EK$1,301.75$649.80($651.95)
1/8/0120PVN$1,110.00$400.80($709.20)
1/8/0115NEWP$1,124.37$209.55($914.83)
 
Cash: 
Total: 
$10.80
$15,681.03
 

Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.
• DJIA (DA) = dividend adjusted. Dividends have been added to the total return of the DJIA.

Note
Note: The Workshop Portfolio was launched on December 24, 1998, with $4,000 which was invested in the Foolish Four strategy. Approximately $15,000 was added on January 8, 2001, to support five additional mechanical strategies. At that time approximately $1000 was transfered out of the Foolish Four strategy to bring the Foolish Four into balance with the other strategies. (That's why the Foolish Four's overall return is not consistent with stock values.) Such rebalancing will take place each year among the strategies so that each will start out with approximately the same value at the begining of the year. No more cash additions are planned. The first four tables above show the overall performance of the portfolio. Below that we also track the performance of each component strategy. All transactions are announced publicly before being made, and returns are compared daily to the S&P 500 and the Dow. (Dividends are included in the yearly, historic and annualized returns.) Stocks are chosen using strategies developed by the Workshop community.