Why have a
mechanical portfolio?
This may seem a bit of a strange
thing for an Investment Club to do. After all, one of the main features of an
IC is to spend time discussing shares whilst a mechanical portfolio just
"is". You obey the rules and little or no discussion is required. But
there again, perhaps we're a strange Investment Club!
So why have one? Well,
first off we don't make decisions to purchase shares lightly. This is good in
as much as it reduces the number of bad decisions. Unfortunately it also means
that we can go several months without buying any shares. Not great for keeping
people interested. By having a mechanical portfolio we can ensure that shares
are bought and sold on a regular basis.
Secondly, we believe
that mechanical strategies can work. Most reject the idea based on the popular
but overly-simplistic strategies that get written about in newspapers and on
web sites (e.g. Beat
the FTSE or buying the best / worst performers from the last year). Such
attempts are invariably the result of data mining or statistical flukes and
before long start losing money when they get quietly abandoned. Strategies that
work are invariably more complex and often non-obvious.
Ultimately, we decided
to have a mechanical portfolio when we sat down and worked out exactly what we
wanted to get out of our club and how best to achieve it. This discussion
resulted in our adopting a formal investment strategy of which the mechanical
portfolio was just part. For more information about our strategy and hints on
producing your own, please follow the 'Club Strategy' link on the main menu.
What's so great
about your mechanical strategy?
The glib answer is
that it makes money and beats the market :)
We think that our
mechanical strategy has two main advantages over other types. First off, the
strategy now encompasses two sub-strategies. The first aims to pick companies
which are cheap by traditional 'value' criteria (price to earnings ratio, price
to book value, etc.). The second looks for companies which have high growth
expectations. The idea is that this provides diversification - if value is
doing poorly then there's a good chance that it is because growth is in vogue
and doing well and vice versa. We may consider further different sets of
criteria in the future to provide additional diversification.
The second advantage
is that having filtered companies we then rank them using a weighted criteria process.
This is a technique that seems to have been all but overlooked by other
mechanical strategy authors. It is sufficiently unusual that we had to write
our own software in order to rank and then calculate the criteria scores to
produce an overall score.
What are the
criteria based on?
As mentioned above
there are separate criteria for value and growth stocks. These are loosely
based upon the "Cornerstone Value" and "Cornerstone Growth"
strategies described in James O'Shaughnessy's book What Works on Wall Street. His
strategies call for buying 50 companies at a time - somewhat impractical for
your average Investment Club! This is one of the main reasons why we devised a
sophisticated ranking system so that would could pick a single 'best' company
each month.
Can our club use
your strategy?
There is enough
information on this website for you to replicate the strategy. However, we do
not in any way recommend that you do so and in particular that you do not
blindly buy and sell based on the share selections that get published here. We
must emphasise that the detailed information is put here partly to provide a
central repository for the club, partly to assist other clubs to consider the
idea of a mechanical portfolio and partly for vanity ;-)
If you should still
want to follow our picks, please bear in mind that:
We would be delighted
if our success inspired you to devise your own mechanical strategies, but given
the points above please don't rely on following ours.