Robot Portfolio redux

[Ed_The_Gypsy]

It is Jan in Can again. Bloomerg's columnist, John Dorfman, has updated us on his Robot Portfolio. (Article seems to have disappeared from National Post's website. Go to Bloomberg.com instead
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aDfZA.kxtYKk

In the eighth year of posting the Robot Portfolio, it failed to beat the S&P 500 (dividends included) for the first time: 13% vs. 16% for S&P. Over the past eight years, however, it has produced an average return of 34% vs. the S&P of 4.6% [his numbers].

The Robot Porfolio consists of stocks that pass the following screen:
1) From all US stocks,
2) with a market value of $500 million or more,
3) whose stockholders' equity is greater than the comany's debt,
4) that made a profit in the last four quarters (leaving about 1000 stocks),
5) out of the survivors, selecting ten stocks with the lowest PE ratios (stock price divided by the last 4 quarters' earnings).

He doesn't actually sell this portfolio but he selects stocks from it for his customers.

Ten stocks is a VERY small portfolio. Only suitable for gambling.

From yesterday's closing prices of the stocks on the list for 2007, the total cost of one share of each would be about $354, so that ten round lots of 100 shares each would cost about $35,400 plus commission, etc.

As I recall, Arif had used a similar method with excellent success.

So, whaddaya think? Is this worth a bet with a small piece of the nest egg?

UncleMick, what does your testosterone say?

Cheers from Canadistan,

Gypsy

 

[Nords]

Sounds like a classic value screen by a guy who familiarizes himself with just as many stocks as he's comfortable at being able to keep track of.

It's worked for us. And for Warren Buffett, Lou Simpson, Walter Schloss, the Fishers, Tweedy/Browne, ...

The "small" part usually means that it's pretty volatile. If you're not forced to cash it in at a bad time then you don't care what the volatility is-- and even though it's more volatile than the index, over 10-20 years it's going to return more.

The antidote for testosterone poisoning is usually about 10-15% of the retirement portfolio.

 

[Ed_The_Gypsy]

The antidote for testosterone poisoning is usually about 10-15% of the retirement portfolio.

I am not quite comfortable with the idea of going back to buying individual stocks yet, but our fund portfolio has turned out to be so robust, even in downdrafts, that I might reconsider.

Anyone else want to comment?

Does anyone have warnings against mechanical stock picking methods or a sob story on the subject?

Tell all, please!

Gypsy

 

[Arif]

Ed,
I'm about 6 months late on this but.... I've been using the robot portfolio for the last 4 years. The list that came out this Jan made me nervous with all the homebuilders and related stocks. I had been running a parallel portfolio with the same criteria but kept coming up with different stocks. I turned chicken this year and decided to use my stock results instead of the published ones. I'm glad I did as my picks have beat the market and the original robot. Can't say it was superior analysis but rather dumb luck. Still made a ton of money the last few years using the strategy. Dorfman stopped writing for Bloomberg so presumably he won't be posting his robot next January but who knows.

 

[wildcat]

http://sec.gov/Archives/edgar/data/1389918/000091957407002296/d770856_13f-hr.txt

Ed/Arif -

His latest holdings

 

[Arif]

Thanks Wildcat.

I notice he bought Mohawk (carpet, tile, etc) but not sure when. I sent a PM to Brewer about this stock after going to Lowes to buy carpet and found out the price has gone up 50% AND the industry is consolidating. I was about 6 months late in my discovery as the stock has shot up 30% since January and is at or close to its 52 week high.

 

[Olav23]

Do you keep the stocks, and then repeat each year? Or do you sell the previous years holdings and start fresh?

 

[Arif]

Do you keep the stocks, and then repeat each year? Or do you sell the previous years holdings and start fresh?

You hold the 10 stocks selected in January for 1 year and after that you sell and buy the new list the following January.

 

[unclemick]

Hmmm - being an active trader - I usually go only 7 - 10 years and then pull the trigger if the stock hasn't performed - although I often get a twinge of guilt having read a few Bogle speeches on turnover/ aka how chasing alpha too hard may lead to excessive trading/associated costs.

I suspect those of us forum readers who must putz(hormones, etc, etc) - could use the rules at the start of this thread, maybe add a reread of the latest edition of Ben Graham's Intelligent Investor(Zweig? edited?) and for cats like me add a little Norwegian widow twist with a suitible list of dividend achievers perloined from somewhere and craft a stock screen to get some candidates with a personal twist.

Took me over twenty years to figure out Ben Graham's 'middle way' in his 1957 speech in the appendix of his fourth edition and avoid magic, mystery and manipulation.

heh heh heh

 

[Ed_The_Gypsy]

Hi, Arif,

Your comments are very interesting. Could you tell us what screener/screeners you use and give some details? I would like to look at this method a little more.

(I lost track of this thread when the forum changed, so I am a little slow myself. Thanks for your reply.)

I suspect those of us forum readers who must putz(hormones, etc, etc) - could use the rules at the start of this thread, maybe add a reread of the latest edition of Ben Graham's Intelligent Investor(Zweig? edited?) and for cats like me add a little Norwegian widow twist with a suitible list of dividend achievers perloined from somewhere and craft a stock screen to get some candidates with a personal twist.

Took me over twenty years to figure out Ben Graham's 'middle way' in his 1957 speech in the appendix of his fourth edition and avoid magic, mystery and manipulation.

unclemick,

I am having trouble putting this method into a check list as in the first post.

Cheers,

Ed

 

[cute fuzzy bunny]

I wonder how much of this is a good solid picking screen that'll beat the market most of the time and how much is drawing a comparison against the last 8 years, 3.5 of which were the worst years in quite some time. Granted it did well in a couple of good up years.

The other comment is that a better comparison might be this strategy vs a large or mid cap value index rather than all large cap stocks. Then add a little risk to this as its a lot more concentrated and your holding time is only a year.

The mechanical screens tend to work great for a while, but tend to fall apart after 10 years or less. The dogs of the dow was real popular for a while, until the latter half of the 90's.

Plus as mentioned above, the screen promoters often fail to match their screen against an equivalent benchmark.

 

[Ed_The_Gypsy]

Good points, CFB.

I wonder myself. I should compare the results against my value-oriented index portfolio.

Understand, I am just curious at this point. Perhaps this year will provide more interesting data.

Gypsy

 

[cute fuzzy bunny]

Heres the thing...markets DO have some measurable movements and some correlations that you can track, and buying discounted equities that arent completely impaired businesses is a good strategy.

The problem comes from the time frame and the intangibles.

A significant piece of market movements in terms of under a year or two or three can be completely psychological and have nothing to do with fundamentals. Otherwise, the markets would move exclusively in sync with profits and expectations of future earnings.

Time frame wise, a year is too short. It might take 2-3 years or more for a dented business to really come back. It might re-land on the 'screen' for a second or third year, but you might just as likely end up thrashing through companies and never really getting all the "good" upside.

I'm also leery of people who talk about their performance vs the major market indexes starting in 2000. Its a situation where the indexes are in a worst case scenario.

I'm also leery of 'systems'. You can back test 1000 of them and come up with the handful that worked great all the time, historically. They just might not do as well going forward.

If I were in an individual stock picking mood, I might use a screen like this to pick up dented companies with good business prospects for recovery. And keep 'em. But I'd do that business recovery analysis on top of the screen.

I suspect that over a 20+ year period, buying a value index of the desired cap size will do as well or better, with less volatility, less chance of capital loss from the concentrationg, lower costs and a lot less work.

But then you'll just be standin' there...doing nothing..

 

[Ed_The_Gypsy]

I suspect that over a 20+ year period, buying a value index of the desired cap size will do as well or better, with less volatility, less chance of capital loss from the concentrating, lower costs and a lot less work.

(emphasis added.)

Point taken.

Thanks, bunny.

 

[Arif]

Ed,
I use the same criteria as Dorfman (he uses a bloomberg terminal) did with his robot but I use yahoo's screener which might explain why I get different stocks than he does. Still not sure though. The last couple of years the screen I ran did better than the published robot port. This year my portfolio is up about 13% (not counting this weeks losses). The stocks selected by Dorfman's robot port. was full of homebuilding and their supplier's stocks which made me very apprenhensive of buying them. If my online portfolio tracker is right that port is down about 1% as of today.
I'm no stock picker but the screener made sense to me in that you were buying companies with bad news but decent financials. Sort of the same value approach I use with my real estate.
Honestly, I need to commit more time and energy into selecting stocks but the results so far are hard to argue with.
As far as comparing the results to the correct index the short answer is I'm too lazy to figure it out and be 100% accurate. The screener basically selects companies that have a market cap of atleast $500 million so theoretically it could include small cap, mid cap and large cap.
Below are the stock symbols that were selected from the screen I ran in Jan:
A
BSG
SBH
CHB
GMR (paid a hefty dividend)
MTH (ouch)
OMM (takeover)
PALM
PPP (takeover announced)
WIRE

 

[cute fuzzy bunny]

made me very apprenhensive of buying them.

Good. If you arent a little apprehensive when buying value stocks, there probably isnt a lot of value in them.

Its when you feel stupid while buying them that you get the really good bargains.

 

[Ed_The_Gypsy]

April 2009 Update on Dorfman's Robot Portfolio Stocks

John Dorfman stopped his column two years ago. However, James Daw at the [Toronto?] Star continued with it in Canadian stocks for 2008 and is running another set of ten stocks for 2009. His comments below:

TheStar.com - Business - Robot Portfolio stumbles

His 2007 portfolio lost money. His 2008 Canadian portfolio lost 40%. (Mine was up ~13% in 2007 and down ~34% in 2008.)

For some reason, Yahoo's stock finder can't find me all of these stocks for 3 Jan 09, but three of them seem to be up ~5% or more since 3 Jan 09.

His 2009 portfolio is:
Fairfax
Methanex
Precision Drilling
First Quantum Minerals Ltd
Petro-Canada
Agrium
AGF Management
Russel Metals Inc.
Magna International
Transcontinental Inc.

One of Dorfman's pieces of advice was to use judgement when selecting stocks from this screen. Looking back on the first of the year (of 2009), I would not have selected Petro-Canada (a poorly run company IMHO, in spite of the fact that it was later bought out by Suncor), Magna International (an auto parts company in a world with auto companies in trouble), Transcontinental Inc (a printer in a paper-less world where newspapers are going out of business in a recession), Precision Drilling (in a country where Alberta raised drilling royalties and drove rigs out of town, and in a time when oil prices were crashing), etc. etc.

There were signs in 2008 which suggested there were more than one bubble.

I would not damn the Robot Portfolio based on the performance of Daw's screened portfolio. It looks like he only took the raw results.

I am thinking that it might be a good idea to review the portfolio along the way in case something wicked this way comes. This breaks the mechanical portfolio concept, though.

I wonder how Arif has been doing since 2007 (see above)?

Ed

 

[Ed_The_Gypsy]

I might also point out that Daw's were basically Canadian stocks, although some are traded on the NYSE.

 

[Arif]

Hey Ed,
Haven't posted in awhile but I saw this thread.
I sold all my stocks in June 2008 and use the money to buy a business.
That 34% loss was from the Robot portfolio?
It would be interesting to see what Dorfman would come up with this year. One thing I noticed while doing the robot port. was that about 30-40% of the stock selected would be different from Dorfman's. I guess it was because he was using Bloomberg and I was using Yahoo.

 

[Ed_The_Gypsy]

Hi again, Arif. Welcome back!

No, I don't use the Robot Portfolio. I have long been interested in mechanical schemes, though and this deep value one interests me. I have been waiting for a bust like this to see how it would fare in a downdraft--and this one is a monster!

Good timing, man! I hope your business is doing well. (It wouldn't take much to do better than stocks.)

I have been thinking of using a little of my pot to start a small business, too. How could it be more risky than what we are experiencing?

Cheers,

Ed

 

[REWahoo]

Arif, great to see you posting again!

If you feel comfortable in sharing, please tell us about your business. Has the downturn in the economy hurt your revenue?

 

[Arif]

Hey Ken!
Well as you know I bought a pool service/maintenance company in San Antonio. We've grown about 34% from November of last year and this month we qualified to work on home warranty calls. The lady that manages the region including Texas said we should be able to get about 500 calls per year. I just hired a new guy last week to handle the increase workload.
One thing I have noticed is that new prospects are more price sensitive than they were last summer. Some just want us to come out an teach them how to take care of their pool rather than sign up for weekly cleanings.
We're still using that finder's fee from the pool store with great success though.

I think in this environment you must think out of the box. What worked last year might not work today so you have to adapt and over come. Just like in the military.

 

[Arif]

Hi again, Arif. Welcome back!

No, I don't use the Robot Portfolio. I have long been interested in mechanical schemes, though and this deep value one interests me. I have been waiting for a bust like this to see how it would fare in a downdraft--and this one is a monster!

Good timing, man! I hope your business is doing well. (It wouldn't take much to do better than stocks.)

I have been thinking of using a little of my pot to start a small business, too. How could it be more risky than what we are experiencing?

Cheers,

Ed

Hey Ed!
Sorry I didn't see this post when I replied to Ken.
So the 34% drop was a model port? I would be interested to see how the robot is doing year to date.
Some say buying a small business is risky but after this downturn I beg to differ. Due your homework and anticipate you'll lose about 20% of the customers and plan accordingly. It was a steep learning curve during a very busy time of year (June) and we made some mistakes and brought some new ideas. This June will mark our 1 year anniversary in business and we anticipate atleast doubling our gross revenue.

 

[Ed_The_Gypsy]

Hi, Arif,

I just read what I wrote and I can see I was not clear. Gotta try again.

My personal retirement pot was down 34% in 2008.

I am not using a mechanical system, just my own seat-of-the-pants ideas:
70% equities, 30% bond funds, CDs, etc.
Equities 50/50 US/foreign.
Bond funds also 50% US, 50% foreign.
Equities mostly VG funds, but also have BP and Chevron for oil/energy today, plus BRK-B (not a good buy).

And so forth.

Even having taken a hit, I am still happy with my approach.

Well done with your business!

I am thinking of starting a small business myself. I took such a big hit with a decent portfolio, why not take a risk with a few grand?

 

[Arif]

Ed,
If you don't mind me asking. What type of business are you looking to get into?