LunaticTrader

Investing with the Moon

Random stock portfolios

Posted by Danny on May 26, 2011

Our test portfolios on tickerspy.com are turning one year old.
So it is a good moment to have a look how this experiment  panned out.

Our aim was to beat the performance of the S&P 500 index with a portfolio of random stocks.
Every month the worst performing stock is sold and replaced by a new random stock.
In doing so we try to remove the bad apples and we keep the good ones.
We made two portfolios, the first one uses 10 stocks from the S&P 500 Index, the second portfolio has 10 stocks chosen from the Nasdaq Composite.

The results:

Portfolio 1 has gone up 23.5% (vs 22.3% for the S&P500), so it beat the market by 1.2%
You can also see it has been less volatile than the market, so it was done with less risk.
Here is the equity curve, blue line represents the portfolio:

lt1

Portfolio 2 has gone up 33.3% (vs 22.3% for the S&P), so here we outperformed the market by a full 11%.
Also this was achieved with lower volatility and only random stocks, low risk, no margin, no shorting.
Here the equity curve, again blue line for the portfolio:

lt2

Conclusion: you can do quite well by buying random stocks and just throwing out one bad apple from the portfolio every month.

You can keep following our test portfolios on tickerspy.com:

http://www.tickerspy.com/portfolio.php?pid=112814

http://www.tickerspy.com/portfolio.php?pid=112817

Danny

2 Responses to “Random stock portfolios”

  1. Pat Burns said

    This strategy is essentially assuming momentum — that the underperforming stock will
    continue to underperform. It would be interesting to see the difference if there were
    no trading at all.

    I think the real power of random portfolios is doing it hundreds or thousands of times
    to see what the distribution is. One (of several) pertinent posts on Portfolio Probe
    is http://www.portfolioprobe.com/2011/11/07/some-new-ideas-in-financial-mathematics/

    • Danny said

      Thanks for your comment and link.

      To do it with no trading at all would be rather pointless.
      Removing the weakest stock every month is a very essential part of this strategy.
      During our lunar Red Period we keep a 10% cash position, which gets reinvested in a new random stock at the start of each lunar Green Period. Then the worst stock is sold again at the start of Red Period.
      Can’t do that without trading.

      Danny

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