Sweet Briar College student Jenny Young, who is testing rules-based investing models in Professor Tom Scott's "Principles of Investing" class, addressed a small group of investors at a cooking class in Richmond, Virginia last Saturday. Watch the video below to hear what she had to say about The Naked Portfolio Manager.



Want an update on Sweet Briar's performance v. Wall Street? Go to Professor Scott's website. (New to The Naked Portfolio Manager blog? For a description of the Sweet Briar experiment, read "How Sweet Briar students plan to outthink Wall Street" by Professor Scott.

Labels: Richmond, Sweet Briar, Wall Street

With this blog, I have emphasized over and over again that by ignoring the stock market forecasters and prognosticators and simply following a set of empirically based rules in a disciplined manner, you can meaningfully improve your investment results. Here's an experiment you can do with your own computer to see the results of naked strategies for yourself.

One very simple thing you can do to enhance your return is rebalance your portfolio at regularly scheduled intervals. To test this, select up to ten stocks and then select a time period to test. Go to Google Finance Historical Stock Prices and download excel spreadsheets with the historical stock prices and the time period you have chosen. Then you can copy and past those historical prices into this spreadsheet that Professor Tom Scott of Sweet Briar College (I'm helping guide his "Principles of Investing" class apply rules-based investing strategies) was kind enough to share with us.

The spreadsheet compares the difference in return between a buy-and-hold portfolio with no rebalancing and a portfolio that is rebalanced at regularly scheduled intervals. You can download weekly data, monthly data, or yearly data and enter it into the spreadsheet. The calculation assumes that you rebalance your portfolio back to an equal weighting for each security at the end of each time period.

In most cases, you'll find that the rebalanced portfolio does better than the buy-and-hold. Depending on the volatility of the stocks you select, the difference can in some cases be 2% or more per year.

Now stop and think about this. We're comparing two strategies for investing for the exact same stocks. Yet one strategy results in meaningful differences in return. How is that?

Stocks are constantly oscillating on a range. When you rebalance, what happens is you sell stocks that are trading in the high part of the range and buy stocks that are in the low part of their range.

Now remember, no strategy works all the time for all stocks. It's possible to find time periods and stocks where systematic rebalancing does not produce better results than the buy-and-hold. And you of course need to consider the effects of taxes and trading costs. But if you do this experiment enough times, I think you'll agree that over time, you can add significant value by rebalancing at regularly scheduled intervals in a disciplined manner.

Labels: Sweet Briar

Professor Tom Scott of Sweet Briar College has compiled the results for the first month of our test.

If you will recall, the students in Professor Scott's "Principles of Investing" class created five "naked strategies" or rules-based methods and produced a portfolio based on empirical research. Each of these models is purely mechanical. There's no human judgment involved. You simply apply the rules to determine the stocks in each portfolio.

Obviously, we cannot draw conclusions after just one month, but according to Professor Scott, four of the models did indeed outperform the S&P 500, and only one trailed the Index in the first month. By the end of the year, we'll have a total of 60 data points (five models and twelve months) and may be able to draw some inferences based on the results.

You can go to Professor Scott's website and see the results for yourself for month #1. You'll also see the stocks the students' models identified for February.

Sign up for email alerts to my blog so you won't miss out on future updates on the Sweet Briar experiment!

Labels: Sweet Briar

Who would do a better job at selecting investments: A 20-year-old student with zero experience in finance, or a professional portfolio manager 3x her age, who's backed by a team of the best analysts on Wall Street? A lot of people at Sweet Briar College would say the student would outperform the portfolio manager.

Labels: Sweet Briar

 
The above drawing is from The Naked Portfolio Manager and is illustrator Carolyn Schallmo's representation of what may go through a judgment-based manager's head before he buys a stock. It's a mysterious process: "Poof!"...and all relevant facts are processed and a decision is made.

As mentioned in my previous post, I had a chance last week to visit Sweet Briar College and review the progress of the class developing rules-based methods for portfolio management. After one student named Morganne Young explained her rational for selecting several different variables to construct her model, she asked an extremely profound question: "How do I determine how to weigh each of these variables in my model?"

Her question emphasizes yet another of the key advantages that statistical prediction, or rules-based decision-making, has over human judgment or intuitive decision-making. With statistical prediction, the model designer can use historical data to determine how much weight to give to each variable. With the "Poof!" process as illustrated above, it's unclear how the decision-maker weighs his inputs, or if he even gives any consideration to it at all.

Labels: Sweet Briar, variables

Last week, I had the opportunity to visit Sweet Briar College and review the progress the students are making in developing their "naked strategies," or rules-based methods for portfolio management.

Many of the ladies had the makings of really great models. I was especially intrigued by a model developed by Heather McPheeters and Andrea Jones designed to capitalize on opportunities in the currency markets. Lindsey Davis and Morganne Young also both seemed to have an excellent grasp of how to apply statistical prediction to making investment decisions.


[By the way, if your reading this at Sweet Briar and you don't have a copy of The Naked Portfolio Manager yet, I think the bookstore still has a few copies!]

Labels: emotions, human error, rules, Sweet Briar