An Investment Strategy You Can’t Refuse

Financial portfolio review
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‘Then and now’ comparisons are fascinating.

I’m constantly amazed to see how times change — or don’t change. It could be a city skyline, or community values. No matter what the setting, the contrast is always interesting.

A few years ago, I tracked down an original photo of my house. The picture dates back to 1906 — the year of construction.

I’ll never forget seeing the photo for the first time. Yes, it was my house — the windows, chimneys, and gables were unmistakable. But the setting was unrecognisable.

The photo shows the original family standing in front of their new home. You can see buggy tracks in the then dirt road, and a long forgotten neighbouring house sitting to the side.

It was like seeing an old friend, but with a completely different life to what you knew.

Images like this captivate me. I imagine the period of the original photo. I wonder what the people were thinking. I wonder what it would have been like to be there on that day.

Pictures are just one way to make comparisons. Another contrast is to look back at statements about the future. Some are hopelessly wrong. But others get close to the mark.

Have a read of these next few paragraphs…

Imagine a coin toss…but one where you’re playing with a LOADED COIN.

In other words: a coin that falls in your favour more often than not. Meaning the average winning payout is not 1-to-1…but 2.5-to-1. You have a $2.50 payout for a win…but only stand to lose a dollar if you lose.

Let me ask you: would YOU be keen to play? I don’t know about you, but I’d line up around the block to play that game ALL DAY LONG.

This is the Quant Trader advantage.

This 2.5–1 loaded coin is very similar to Quant Trader’s back-tested results over time.

When you average 38.5% for winners and only 17% for losers, you can do very well in the long run with a 53.4% strike rate. The average hypothetical payout rate has been 2.59-to-1.

Are you beginning to see the clear and present advantage of this kind of trading?

It’s a bit like being told that there’s a certain roulette wheel in the corner of the casino that’s got ten more black numbers than red numbers.

Statistically, it’s telling you that, over time, you can’t help but make a lot of money!

Quant Trader email — 15 November 2014

This is part of the original promotion for Quant Trader. It appeared a few days before live signals began. All the results at that stage were from back-testing.

I use back-testing all the time. It’s the best way I know to test how a strategy is likely to perform in the future.

The idea behind back-testing is simple. We want to test if a system worked consistently in the past. If it does, then there’s good reason to believe it will continue to work.

Back-testing doesn’t provide certainty. But it does indicate if an investment strategy has merit. It’s one of the great advantages of system trading. It can save years of trial and error.

Proof is in the pudding

So how does the back-testing stack up 12 months later?

First, here are the performance numbers from back-testing. These are the ones in the excerpt above. This is our ‘then’ period…

Average profit

38.5%

Average loss

-17%

Percentage of winning trades

53.4%

Payout ratio (dollars won for a dollar lost)

2.59:1

These are good numbers. The question is whether real life can live up to the past.

Okay, let’s see what ‘now’ looks like…

Average profit (all open & closed trades)

29.0%

Average loss  (all open & closed trades)

-13.5%

Percentage of winning trades

51.3%

Payout ratio (dollars won for a dollar lost)

2.26:1

(As of 25 November 2015)

This is a great result. The live signals are in line with the back-testing. The system is doing exactly what it’s supposed to do.

Now, let me explain a few things about these numbers. The first table shows the results of all closed trades. It covers the period from 1 January 1993 to 31 October 2014.

The second table is from 17 November 2014, the day live signals began. It includes all open and closed trades. I’m including open trades as they currently make up the majority of signals.

You’ll notice the average profit is lower for live signals. This is partly because many positions are still open. Some may move a lot further. This would increase the average over time.

I also expect the average loss will ultimately rise. The numbers from back-testing include a number of large bear markets. The future will also have its share of downturns.

But differences aside, the live signals are meeting the standard set in testing.

Betting with the odds

I have two charts to show you. The first is the All Ordinaries…

Source: BigCharts

[click to open in new window]

This is what the last 12 months looks like. It hasn’t been a vintage year by any means.

Now let me show you how Quant Trader’s trades are tracking…

[click to open in new window]

The chart shows Quant Trader’s hypothetical profits over the same time. As always, there is no allowance for costs and dividends. It also assumes $1,000 on every signal.

Quant Trader doesn’t get it right every time. In fact, close to half the trades have historically lost money. And that’s okay. It’s part of the strategy.

The aim is to trade stocks that meet the selection criteria. We then let the good trades run, and cut the ones that don’t. That’s how the system makes money.

Quant Trader doesn’t offer certainty — I don’t know any method that does. There’ll be times when the signals fail. That’s the reality of trading.

But I do know this. It’s a system with a long and consistent track record. That’s the best way I know to put the odds in your favour.

Until next week,

Jason McIntosh,

Editor, Quant Trader

Editor’s note: Did any of your stocks hit new highs this week? Chances are the answer is no. And that’s understandable…the All Ordinaries is still showing a loss for the year. But some stocks are surging. They could make a big difference to your portfolio.

Take HUB24 Limited [ASX:HUB] for instance. You’ve probably never heard of this stock, but last week it hit a four and a half year high. And that’s good for Quant Trader’s members. You see, Quant Trader has signalled this stock three times since July. The signals are now up 134%, 95%, and 62% respectively.

Anyone can get gains like these. It’s all about having the right strategies. You can learn more about these here. Look for Jason’s article. The title is ‘It’s an Eagle’s World’.

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Jason McIntosh

Jason McIntosh

Jason is a professional quantitative analyst. Before he graduated in 1991 he joined Bankers Trust — a Wall Street investment bank — to be a trader. After Bankers Trust was taken over in 1999, Jason, already financially independent, co-founded a stock market advisory and funds management business called Fat Prophets. At 37 he sold his part of that business and retired. These days, he’s a private trader and system developer. In 2014 he launched the wildly successful trading service: Quant Trader.
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