Letting Programs and Formulas Manage Your Investment Portfolio

Imagine a computer that can tell you which company's share to buy and when to buy them, and at the end of a 5 year period, you can most certainly outperform a benchmark Index such as the S&P500 by a margin of 2 - 3 %, which is a significant difference over 17 years.

This is a new concept and investment idea that I have gotten interested in, after listening to the advice of a successful fund manager who was kind enough to guide me. This kind soul is none other than Mr William Cai, one of the speakers from the ETF forum that I attended in April this year.

2 of the books that he recommended, which I will in turn recommend to you are called <The Little Book That Beats The Market> by Joe Greenblatt and <Quantitative Value> by Wesley R. Grey PhD and Tobias E. Carlisle.



To summarise the contents of the books, it is basically the proof that by following a set of relatively simple formula strictly, one can consistently generate high returns of more than 15% per annum over a minimum investment period of 3 to 5 years. The books went to great lengths to validate their methodology and conducted extensive back-testing using high quality data of up to 17 years and are free of various biases such as survivor-ship bias and look-ahead bias.

Survivor-ship bias is the use of data that excludes companies that are no longer around today. This bias dilutes the test results by not looking at companies that are doomed to fail, information that is not available in real life application. Look-ahead bias is the use of point-in-time data that are usually not available at the stated period as it takes a few months before annual reports are audited and released. Such data are "in the future" and not possible for real life execution.

The concept is to first eliminate all poor quality stocks from the universe of stocks that I am looking at. Poor quality refers to the possibility of going bankrupt as well as the tell tale signs that the company is faking its financial results. Next, I will rank all stocks separately against 2 measurements: Quality and Price. Based on the 2 measurements, I will re-rank them according to their aggregate score to find the top 1% of stocks that are relatively the cheapest and of highest quality.

Being all pumped up, I am ready to put this concept to the test. With my knowledge of using advanced Excel formula and newly acquired Excel skills such as web scrapping and integrating Excel with Access database, I am very well aware of what I need to do to conduct my own tests. But I am faced with 1 major road block, and that is the source of data for my testing.

Garbage in, garbage out. So to avoid having useless results that could fatally mislead my test, securing reliable data is extremely important. However, as you might expect, quality stuff do not come free. One of the data source that the books recommended, Compustat's point-in-time data, is the database that I would really like to get my hands on. But I have no idea how to obtain it. If you happen to have access to this database, kindly let me know and allow me to use the data. I would be in your debts.

Regardless, I have managed to find a source of 10 year financial statement data which I am able to scrap for free. I shall use this source to build my financial model and run some preliminary tests on the concepts described in the books. Once the system is built, it would only take the plugging in of quality data for me to achieve the end result I want.

So here's my plan:

After building the system and running as much tests as I possibly could, if the results are as the books describes, I intend to raise funds of SGD100K to try out the investment strategy. The portfolio shall consist of up to 10 stocks with equal weightage. I will strictly follow the instructions churned out by my system for 5 years, with the portfolio being re-balanced every 12 months.

One of the biggest obstacle that an average person faced when trying to accumulate wealth is the very regulations that is put in place to protect them. Many investment funds can only serve accredited investors, people who are either earning SGD300K a year or have assets worth SGD2mil. This makes the rich richer while the poor have to struggle to find good returns on their money.

Hence, with the up and coming trend of crowdfunding platform and the roundabout regulations on securing funding from others, I believe that an average person should be allowed to invest in such high return projects.

While there are definitely some risks involved in this investment, the margin of safety is relatively wider as compared to picking stocks individually. Nonetheless, to assess if you should even consider investing, here's a basic checklist that I have created.

For a minimum investment of SGD10,000:
1) Are you taking home less than SGD3K a month?
2) Are you saving less than SGD500 a month?
3) Does SGD10K make up more than 50% of your total cash and cash equivalent assets?
4) Is the total debt that you currently owe (mortgage, car loan, school loan etc) more than your 4 year income?
5) Is the monthly repayment on your debt more than 50% of your take home salary?

If your answer to any of the above 5 question is "Yes", I am sorry to say that you should not consider investing in such strategy and should opt for safer options such as the new Singapore Saving Bond that is stipulated to launch in mid June 2015.

As a disclaimer, I am not authorised to managed funds as I do not have the proper license. But if you trust me and would like to find out more about this strategy, feel free to get in touch with me at my email ohhanwee@gmail.com

Thank you for reading. If you have any comments or feed backs, please post them in the comment section below.

Disclaimer

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