Jeffrey Cohen, President and Investment Advisor Representative
March 13, 2022 22:05:00 CT
On Friday night we ran our CQNS UP and DOWN runs for our house account.
11,064 US listed tickers traded on Friday, and a total of 1,111 DOWN and 2,401 UP US common stock tickers passed data validation. UP and DOWN are analyzed and run separately.
If you hold all DOWN stocks evenly, the expected return is 7.51%, for a variance cost of 0.00033.
If you hold all UP stocks evenly, the expected return is 6.07%, for a variance cost of 0.00012. investing
Key takeaways (KTAs):
1. Equity market expected return for the next year is 5%. This is below current inflation.
2. Three (UP) and four (DOWN) stocks have significantly better scores than holding all UP or DOWN stocks evenly. They are UP: $LSCC $NVDA $ACLS and DOWN: $MARA $MXL $PI and $FTCH. There are fewer 'all-stars' than normal.
3. You should expect a 24% larger return and 175% larger price volatility when investing in companies with negative vs. positive net income in the latest quarter reported.
4. Diversification hurts DOWN short bets. You would expect to do best by shorting one of two stocks $SLNH and $LWLG. If you short them together, equally (say $10k apiece), your expected result declines by about half. This is the ultimate dog-star hypothesis coming true. The worst individual stocks are the worst portfolios.
5. Diversification helps UP long bets. The best one stock has a 50% lower expected result than eight portfolios varying from 4 to 9 stocks held evenly. These 'best' portfolios found have 9x the expected performance than holding all UP stocks evenly (full diversification).
6. The best, or most efficient portfolio found, has 5 stocks held evenly: $CLFD $LSCC $SI $SITM $TTD. This is an academically and mathematically interesting result. These stocks have individual CQNS UP rankings of 0 (best), 431, 1,357, 175 & 1,460. This breaks the 'all-stars' hypothesis that says that the best portfolio is made up of the best individual stocks. This may only be true when expected returns are higher than they are today.
- When expected returns are lower, it is more valuable to find ways to reduce price volatility beyond simple heuristics. Variance costs outweigh expected returns.
- When expected returns are higher, buy higher BETA stocks and hang on for the ride. Returns will outweigh variance costs.
We now discount the price of our full market CQNS runs to $500 apiece until further notice. Last year they sold for $750, but we understand this is a declining market.
Finally, we have some ideas to test next week. We are going to inject a few relevant tickers into our run to see if they materially change the 'best portfolios found.' You can probably guess what they are (indices? commodities? crypto?). Let us know if you want to collaborate, or have us test your hypothesis.