Sunday, February 25, 2007

Portfolio A1 Update for 02/25/07

Last week I introduced Portfolio A1, a live mechanical portfolio that I developed and am maintaining at

For those that may be interested in watching the progress of this portfolio in the coming weeks and beyond, it is only appropriate that I talk a little about two predecessor portfolios that I modeled this portfolio after, as I believe the two ancestral relations may provide some clues about the offspring I am babysitting.

The first predecessor portfolio went live on 12/31/04 and uses a very similar stock ranking system and buying setups as Portfolio A1; the largest difference is in the selling rules, which are less restrictive in this portfolio than comparted to Portfolio A1. In the intervening 26 months, this portfolio has returned 94.63% vs. 19.74% in the S&P500. It has also had a maximum drawdown of 20.61% from peak levels during this period. One statistic that is important to note is that the annual turnover in this portfolio is 802%; in other words, the typical stock in this portfolio turns over 9 times ever year or once every 5.8 weeks.

The second predecessor portfolio, which only went live on 8/11/06, is almost identical to the first portfolio in terms of a stock ranking system, but has a slightly tighter set of buying and selling rules -- much more in keeping with Portfolio A1. In its 6 ½ month life span, this portfolio has returned 58.37% vs. 14.58% in the S&P500, with a maximum drawdown of only 7.60%. Because of the tighter buying and selling criteria, this portfolio has posted an annual turnover of 3098% to date, meaning that the typical stock has an average holding period of only 1.6 weeks.

This would be a good place to keep in mind the typical past performance caveats, but I think it is most important to acknowledge that Portfolio A1 is more likely to have annual turnover in the 3000% range, which means substantial transaction costs. As a result, I have dispensed with the $10 commissions for the predecessor portfolios and am using $5 commissions, comparable to those that are available from (which happens to also have an excellent blog, for those who are interested.)

As luck would have it, Portfolio A1 has no buying or selling transactions this week, as the graph below indicates. Though it is not particularly meaningful at this early date, it is interesting to note that while the S&P500 has been down a small amount since the portfolio went live, Portfolio A1 is already up 2.67% to date and has a 3% cushion on the benchmark. Starting next week, I will provide some commentary on the holdings and on any transactions that may be triggered.


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