Ed Page Croft reveals the simple but powerful systematic stock portfolio strategy that has helped him consistently achieve market-beating returns. To access the webinar in full please visit: http://why.stockopedia.com/creating-a-portfolio/

1. How to run a market beating
systematic stock portfolio
in only a few hours per year
The ‘NAPS’ Portfolio

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3. Webinar Agenda
• Background behind NAPS & Factor Investing
• NAPS Portfolio Review
• What are the NAPS? Performance YTD, standout winners & losers.
• Philosophy of the StockRanks, Diversification & Rebalancing.
• How to construct a NAPS / StockRank Portfolio
• Demonstration using the StockRanks portal, Folios, Screener.
• Q&A

4. Ed Page Croft, CFA
Co-Founder & CEO Stockopedia.com
Oxford Scholar, ex-Goldman Sachs Private Clients.

5. Why this matters to me?

6. My Portfolio in 2007
• Had quadrupled over 4 years
• Concentrated in 5 stocks
• Mostly in two ‘sectors’ - China & Cleantech
“My biggest holding will quintuple by
Christmas!”

7. Factor Investing
“Factors are the broad, persistent forces that have historically
driven returns of stocks, bonds and other assets.
“Factor investing leverages advances in data and technology to
deliberately seek these historical return drivers in portfolios.
“Understanding how factors work can help you capture their potential for
excess return and reduced risk, just as leading institutional investors
and active fund managers have done for decades.”
“Today, data and technology have democratized factor investing to
give all investors access to these historically persistent drivers of return.”

8. Impact

9. 2015 2016
FTSE All Share Portfolio

10. 2015 2016
NAPS Portfolio Returns

11. 1. No broker, newsletter or press tips read.
2. No bulletin boards trawled.
3. No company managers met.
4. No company accounts / results analysed.
How was this done?

12. 1 hour per year
using the StockRanks
based on the principles
of factor-investing
How was this done?

13. Selection Rules
• Rank by descending StockRank
• Exclude small & hard to trade shares
• Market Capitalisation > £50m
• Bid-Ask Spread < 5%
• 2 stocks from each sector

14. The NAPS
1. 2015 NAPS Portfolio / 2015 SNAPS Portfolio
2. 2016 NAPS Portfolio / 2016 SNAPS Portfolio
3. 2017 NAPS Portfolio / 2013-2017 Studies
A “Nap Hand" is a declaration that
you can take all 5 tricks - so it's only
ever used when you've got very
strong odds.Card Game “Napoleon”

15. Winners vs Losers 2015

16. Winners vs Losers 2016

17. *by June 30th 2017
Winners vs Losers 2017*

18. Breakdown

19. A philosophy
not a prescription

20. 1. Manage the Monkey
2. Align with the Payoffs
3. Give every stock a role
4. Keep your balance
Rules
QVM Factors
Diversify
Rebalance
Four Principles
for Stock Market Success

21. 1. Manage the Monkey
Apply a rules-based process to
avoid self-defeating mistakes

22. https://www.youtube.com/watch?v=K174mUaSV4U
Managing the Monkey

23. “The evidence is clear: quant models
usually provide a ceiling from which we
detract performance rather than a floor on
which we can build performance. We tend to
overweight our own opinions relative to those
of the models.
James Montier

24. 2. Align with the Payoffs
Select stocks exposed to
key drivers of return

25. Quality Value
Momentum
Quality
beats
Junk
Cheap
beats
expensive
Leaders
beat
laggards

26. Good Cheap
Improving
“Super”
Stocks

27. Junk Expensive
Deteriorating
Sucker
Stocks

28. Quality
Value
Momentum
StockRank TM
78
27
97
80
What is the StockRank?
Every stock in the market ranked against all the
others for three proven, historical drivers of return.

30. 100
StockRank
TM
75
What is the StockRank?
Ranked as percentiles between 0 (worst) and 100 (best)
“Good, cheap, strong”
“Junk, expensive, weak”0

31. StockRank Performance
Top Ranked
+120%
Bottom
-49%
* Based on quarterly rebalanced portfolios of >£10m market capitalisation LSE listed stocks split into deciles according to StockRank.
2014 2015 20162013 2017

32. Average annual percentage of stocks with positive returns (winners)
versus percentage of stocks with negative returns (losers) in each StockRank decile since launch in April 2013 (by Nov 2015).
stk.pe/stockrank-odds
Hit rate of picking winners

33. Nobody likes buying cheap stocks (problems)
Nobody likes buying good stocks (boring)
Nobody likes buying leading stocks (scary)
It’s contrary to human nature
Why are high StockRank
shares often underpriced?

34. StockRanks Webinar
http://stk.pe/webinar-stockranks

35. 3. Give each stock a role
Diversifying a portfolio across
sectors, size groups & styles

36. Diversification
1. How many stocks?

37. “Diversification is a hedge
for ignorance”
Warren Buffett
The most dangerous quote in finance?

38. Random 5 stock portfolios
StockRank 90+
*Portfolios of 5 LSE stocks >£10m market cap held since inception.
stk.pe/how-many-stocks

39. Random 15 stock portfolios
StockRank 90+
*Portfolios of 5 LSE stocks >£10m market cap held since inception.
stk.pe/how-many-stocks

40. Random 25 stock portfolios
StockRank 90+
*Portfolios of 5 LSE stocks >£10m market cap held since inception.
stk.pe/how-many-stocks

41. “If you are doing a limited amount of
work on individual stocks or no work at
all like most investors, diversifying with
20 or 30 stocks is most definitely the
right plan for you.”
Joel Greenblatt
Author, Columbia Lecturer, Gotham Capital

42. How many stocks?
2015 2016

43. How many stocks?
2015 2016

44. • Aim to build up to 20+ stocks
• Bear in mind costs & size
How many stocks to own?
stk.pe/folio-breadth

45. Diversification
2. Across classifications

46. Several ways to diversify
Sector
Size
Style
Across Financials, Energy, Technology etc
Across market cap from Small to Large
Across High Flyers, Contrarian, Turnarounds etc
Region
Across countries and regions
Risk
Across volatility from Conservative to Speculative

47. Sector Classification
TRBC - A simple but effective sector classification schema

48. Sector Classification
10 Economic Sectors
• Energy
• Basic Materials
• Industrials
• Consumer - cyclical
• Consumer - defensive
• Financials
• Healthcare
• Technology
• Telecoms
• Utilities
stk.pe/trbc-sectors

49. 2015 2016
Why diversify across sectors ?

50. 2015 2016
Why diversify across sectors ?

51. Risk/Style Webinar
https://www.youtube.com/watch?v=gw0E9Y42sEI

52. 4. Keeping your Balance
Rebalancing a portfolio to
maintain factor exposures

53. How much to buy in each position?
In an uncertain situation with many alternatives…
• Avoid overconfidence
• Keep it simple stupid
Should I buy more in my favourite positions?
Should I use mean-variance optimisation?
Equal Weighted Position Sizes

54. £100,000 / 20 = £5,000 in each position.
Portfolio Size / Number of positions = Weight
e.g.
How much to buy in each position?

55. Why does rebalancing matter?
Exposure to key return drivers drifts.
Share prices drift, fundamentals & estimates change.
Quality, Value, Momentum

56. Why does rebalancing matter?

57. Why does rebalancing matter?

58. • TIME - on a fixed schedule
i.e. once per year, or a quarter ever quarter
• THRESHOLD - on big moves
i.e. when weights, rankings or classifications drift
When to rebalance a portfolio?

59. JanJun
Semi annual
Annual
More frequent… more return, higher cost!
Buy here
Time based rebalancing
On a fixed schedule

60. • Frequency depends on:
• Account Tax Status (avoid CGT in ISA/SIPP)
• Portfolio Size (large accounts can trade more)
• Frictional trading cost (small caps expensive)
stk.pe/cost-worksheet
Time based rebalancing

61. Threshold based rebalancing

62. How to minimise the cost of rebalancing?
Commission + Bid-Ask Spread + Stamp Duty*
£12 + 1% + 0.5%*
20 positions purchased £240 + 1.5%
*only on purchases
Crazy to do a full rebalance too often!
Annual rebalancing is ok for most private investors.

63. How to minimise the cost of rebalancing?
Ad-hoc or semi-annual rebalancing suggestions:
1. Replace big ranking movers.
2. Replace poor performers.
i) Opportunity Cost of holding onto losers.
ii) Stop Losses can trigger sales.
3. Rebalance at position weight thresholds.
Do not trigger un-necessary cost.

64. “Rebalancing is the simplest,
and yet one of the most
powerful, ways of buying low
and selling high”
Andrew Ang
Professor of Business, Columbia Business School
Author: “Asset Management,
A systematic approach to factor investing”

65. 2015 2016
All the Portfolios

66. Building a Portfolio

67. What are the NAPs?
• Rank by descending StockRank
• Exclude small & hard to trade shares
• Market Capitalisation > £20m
• Bid-Ask Spread < 5%
• 2 stocks from each sector
A portfolio of shares selected according to the
following simple rules.

68. • No more than 1 in each industry group
• Size diversification - at least:
• 6 small caps
• 6 mid caps
• 6 large caps
• No Microcaps !
New 2016 Rules
Some additional anti-risk measures brought in
in 2016

69. Community Results

70. Two Vocal Subscribers
Mechanical Bull http://stk.pe/mechbull
GrinderTrader stk.pe/grinder-trader
25% annualised over 3 years
38 per cent in first year
Two of the most vocal StockRank systematic ‘farmers’
with their remarkable success stories to date.

71. Community NAPS Feedback
Dozens of successful advocates - many of them on this webinar.
• Average 14% annualised returns (as of Jan 2017)
• Mostly UK, 16% European, 11% USA.
• 24% are using Stop Losses
• Between 8 and 42 stocks in each portfolio.
• 2/3 even sector distribution. 1/3 uneven.
• 24% annual rebalancing, 27% semi-annual, rest ad-hoc.

72. Variations - Buy Rules
Must be paying a dividend yield >2%
“I include other factors - PEG, ROCE etc”
“I use QM not QVM”, “I don’t use V”
Moderate Debt levels
“Do not buy stocks with Debt > 75%”

73. Variations - Diversification
“If no 90+ UK stocks I use other regions”
“I find that fewer stocks works better than many.
My 2017 portfolio may be only 5 stocks.”
“I ignore utilities and financials completely”
“Use other factors to diversify instead of sector”

74. Variations - Stop Loss
“Rigorously apply a 7-10% stop loss.”
“If I had included a stop loss of say 10% I
would have made a small profit so far rather
than a loss.”
“Sell when StockRank falls below 80.”
“A 20% stop loss is better for psychology.

75. Variations - Rebalancing
“Will consider rebalancing on major moves.”
“Ride the winners and quickly cut the losing
stocks.”
“I rebalance when price reaches my target.”
“I top sliced when > 40% gain”

76. Emotional Brakes
“Even in a mechanical portfolio I still get
emotional attachment to shares. e.g. when IG
design, which has been a large winner in my
portfolio met my sell rules.”
“Emotional restraint matters. I sold Indivior in
breach of my own rules after it had declined in
value, and then missed out on a prolonged
upswing.”

77. Concentration vs Leverage
There are 2 ways to increase returns:
1. Concentrate in just a few stocks (get lucky)
2. Diversify and add Leverage (get smart)
stk.pe/concentration-vs-leverage
Managing leverage risk is easier than managing concentration risk !

78. Getting Started

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