Beating the market with long only portfolios

There are many methods of building a portfolio.

In this post I’m going to outline how I do my investments with the aim of beating the market consistently, something my analytics system has been doing for some time now. At some point I’ll also do one of those “how I made X% in Y months” posts, as they seem to be popular.

But before we get to that it is important to have a well-thought-out strategy for how to get there. This strategy needs to be rooted in your view of how the market operates in general. This is a view that shouldn’t change much ever, because it’s not about what happens short term, but rather the fundamental structure. Of course you can educate yourself and change it based on that, but this is unrelated to your short term price movements for example.

So what are we investing in here? The strategy will be used on US equity. Maybe it wouldn’t make a big difference if it was equity in any other well developed market, but if we’d be talking about some other asset class for sure this would make an impact.

From there I aim to pick 10 companies, each with an equal allocation. I don’t really bother with re-balancing within my personal portfolio because the holding period isn’t sufficiently long for it to make a big difference. I tend to hold onto a position from a few weeks to a few months, in general.

Why 10 companies? Because that’s enough to ensure there’s not too much exposure to a single company, and it gives me enough room to also diversify across a few sectors. It’s also not too time consuming to manage 10 positions, and if we add much more than 10 we only make it more difficult for ourselves to beat the market. The more positions, the closer we’ll get to the overall market performance. Naturally sometimes I’ll have a little bit less or more than 10 because of practicalities, but the aim is always to be at 10.

All positions are long only, and I avoid holding any significant amount of unallocated cash. Of course there might be unallocated cash available because your broker provides you with margin. But I try to avoid using margin to over-allocate, only using it to more efficiently open positions. I might decide to add more risk later, but have so far stayed rather conservative.

Why long only? Because the market tends to go up, and I’m not trying to time any tops or bottoms. I just want to allocate my cash into good positions. I don’t care too much about the daily ups and downs of the market, something which is rather liberating. I quickly grow tired of listening to the various reasoning for why the market is up or why it is down today. They don’t know anyway (think CNBC and similar), otherwise they’d talk about it beforehand. This daily commentary adds nothing but additional noise.

So we need to figure out where to allocate our cash, because cash doesn’t give us much return. That’s where I use my ranking system, which you can also use. It helps us quickly filter out many companies, greatly speeding up the process. From there I look to avoid those which seem too hot, i.e., those with a ranking value above 100 in relative terms. I have gone into some details as to why this works in other blog posts, but the key here is to exploit persistent statistical characteristics.

I’ve been working on a new summary page, as shown below. This greatly helps in finding these companies, as I often before needed to look directly on each company page. This new summary page should be released next week if all goes as planned.

New rank summary page layout

In short then, you don’t need to apply any complicated setups or use shorting or derivatives to beat the market. Instead you need to focus on picking winners.

These winners perform better than the market overall, and thereby allow you to beat the market.

Often when discussing this strategy with others they find it difficult to think of criteria to identify a winner. Now, of course, that’s what I do for you on this site. But, as a mental exercise, you can also turn it on its head and think which companies you’d absolutely not want in your portfolio. If you can exclude distressed companies that keep on under-performing, you’re also on your path to beat the market.

However, if you’d want to exclude a few companies from your portfolio it would probably require you to buy the overall market index and short these under-performers. That might fit you but it doesn’t fit my style as I prefer to keep it simple. So again, this is why I look for winners and stick with them as long positions instead.

This blog post was written by Christian, the main portfolio curator here at AgoraOpus. With a background from FinTech, he holds a MSc in Quantitative Finance and a BSc in Computer Science and Industrial Automation.

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