Sunday Night Readings


Swedroe: The Sad Truth About Hedge Funds; See also A True Hedge Fund in an ETF – Index Universe

Managed Futures 2014 Outlook – Attain Capital

Forecast 2014: The CAPEs of Hope (pdf) and Forecast 2014: Mark Twain (pdf) – John Mauldin

Market Outlook 2014 – Mebane Faber

New Updates at Crestmont Research – Advisor Perspectives

Active is the New Passive – The Reformed Broker

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Equity Market Recovering Like October 2014
Some light reading:
Read more on Chung Hung Steel, Hedge Funds at Wikinvest

Weekend Reads

Below is my reading list for this weekend:

New Gold Bull Market Has Started – Chris Vermeulen

 Guaranteed* – MarketMinder

 Financial Advice Needs Makeover & Parrying an Attack on Fama – Index Universe

Bubble Valuation Blues & The Risk Forecast for 2014 – Advisor Perspectives

Bitten by the Gold Bug? Some Lessons – The Big Picture

Optimal Momentum has launched a new model

Where is the SPY trend headed and how much momentum is driving it? Click Here to find out now!

Graham Value Stock Portfolio Update

In January 2012 I announced a new portfolio, a Benjamin Graham “inspired” value stock portfolio.  The purpose of the hypothetical portfolio is to track returns for a portfolio of 15 stocks selected based on a variety of valuation metrics.

I originally intended to update the portfolio monthly; however, in the spirit of creating a lower turnover, value-driven portfolio it is now updated less frequently (the most recent update was July 2013).

I have also added an additional criteria to limit turnover in the portfolio (see below). The Graham portfolio is an attempt to add a value strategy to Scott’s Investments, which is otherwise focused on momentum, trend, income and market timing strategies.

The criteria used to select the stocks are listed below.  The tool used to perform the screen and backtests are courtesy of  Portfolio123 (“P123″).

The actual screen factors are below:

  • Liquidity filter: No OTC Stocks
  • Market capitalization > $100 million
  • Eliminate companies classified in the Miscellaneous Financial Services Industry, most of which are investment companies and funds and not the kind of stocks this all-star tended to seek
  • Current ratio must be at least 1.5
  • Long-term debt must be no higher than 10% above working capital
  • EPS must be above breakeven in each of the last four quarters and in each of the last five annual periods
  • Trailing 12 month EPS most be above EPS in the latest annual period
  • EPS in the latest annual period must be above EPS in the prior year and five years ago
  • The company must have paid common dividends in the last 12 months

The ranking system used as a basis for selecting the top 15 based among those stocks that pass the Graham screen are below:

  • Valuation – 60% of total
  • Trailing 12 month P/E (15% of this category)
  • Price-to-Book (15% of this category)
  • Price-to-Tangible Book Value (35% of this category)
  • Operating P/E, defined as Market Capitalization divided by Business Income, which is Sales minus Cost of Goods sold minus Selling, General & Administrative Expense and omits unusual items (35% of this category)
  • Earnings – 40% of total
  • 5-year EPS Growth Rate (50% of this category)
  • EPS Stability, defined as the standard deviation of EPS over the past 16 quarters, lower being better (50% of this category)

Stocks will now be sold when they drop below the 75th percentile ranking based on the ranking system above. Improvements in the screening and testing platform (via Portfolio123) allows a change in the sell/turnover rule from previous updates. Prior to this update stocks were sold when they dropped out of the top 20.

I began tracking this portfolio real-time on January 13th, 2012. As of January 15th, 2014 it is up over 45%. A real-world application of this portfolio could also utilize stop losses in order to prevent large drawdowns in single positions. However, for the purposes of tracking the portfolio results, all positions are bought and held until rebalancing.

Below is a 14+ year backtest results for this screen  using a quarterly rebalance and .50% slippage to help account for bid/ask spreads. Backtests include the 75th percentile sell rule (stocks will only be sold when they drop below the 75th percentile ranking):


The stocks being sold are listed below:

Symbol Name Purchase Date Unadjusted Percentage Gain/Loss
WDC Western Digital 1/15/2013 98.44%
MRTN Marten Transport Ltd 4/15/2013 63.65%
NATR Nature’s Sunshine Products Inc 4/15/2013 19.52%
RGLD Royal Gold Inc 7/16/2013 15.92%
JOY Joy Global Inc 4/15/2013 7.29%
CUB Cubic Corp 4/15/2013 27.43%
GOLD Randgold Resources Ltd 7/16/2013 -9.75%
AAPL Apple Inc 4/15/2013 32.75%

The current portfolio is listed below. There is a higher amount of turnover due in part to the 6 month lag between rebalancing (the historical average has been 104% turnover annually):

Symbol Name Purchase Date Unadjusted Percentage Gain/Loss
AGU Agrium 1/15/2014 0.00%
AGI Alamos Gold Inc 4/15/2013 20.79%
HFC HollyFrontier Corp 4/15/2013 5.12%
CHRM Charm Communications 1/15/2014 0.00%
CVI CVR Energy 1/15/2014 0.00%
HP Helmerich & Payne Inc. 7/17/2012 91.35%
CVX Chevron 1/15/2014 0.00%
HUM Humana 1/15/2014 0.00%
JST Jinpan International 1/15/2014 0.00%
SWM Schweitzer-Mauduit Intl Inc 10/15/2012 40.08%
WMK Weis Markets Inc. 1/15/2013 34.58%
RCKY Rocky Brands 1/15/2014 0.00%
SCVL Shoe Carnival Inc. 1/15/2014 0.00%
TESS TESSCO Technologies Inc 7/17/2012 87.74%
CF CF Industries Holdings Inc 1/15/2013 14.48%


More on this topic (What's this?) Read more on Value Investing at Wikinvest

Dual ETF Momentum Portfolio – January Update

In February 2013 I announced a  “Dual ETF Momentum” spreadsheet. The idea was inspired by a paper written by Gary Antonacci and available on Optimal Momentum.

The spreadsheet is available on Scott’s Investment’s here. The objective of the spreadsheet is to track four pairs of ETFs and provide an “Invested” signal for the ETF in each pair with the highest relative momentum.

Relative momentum is gauged by the 12 month total returns of each ETF. The 12 month total returns of each ETF is also compared to a short-term Treasury ETF (a “cash” filter) in the form of iShares Barclays 1-3 Treasury Bond ETF (SHY). In order to have an “Invested” signal the ETF with the highest relative strength must also have 12-month total returns greater than the 12-month total returns of SHY. This is the absolute momentum filter which is detailed in depth by Antonacci, and has historically helped increase risk-adjusted returns.

An “average” return signal for each ETF is also available on the spreadsheet. The concept is the same as the 12-month relative momentum. However, the “average” return signal uses the average of the past 3, 6, and 12 (“3/6/12″) month total returns for each ETF. The “invested” signal is based on the ETF with the highest relative momentum for the past 3, 6 and 12 months. The ETF with the highest average relative strength must also have an average 3/6/12 total returns greater than the 3/6/12 total returns of the cash ETF.

Portfolio123 was used to test a similar strategy using the same portfolios and combined momentum score (“3/6/12″).  The test results were posted in the 2013 Year in Review.

Below are the four portfolios along with current signals:

Return data courtesy of Finviz
Equity Representative ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
US Equities VTI 28.97 16.68 Invested Invested
International Equities VEU 10.96 8.17
Cash SHY 0.24 0.22
Credit Risk Representative ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
High Yield Bond HYG 5.41 4.25 Invested Invested
Interm Credit Bond CIU 0.25 1.17
Cash SHY 0.24 0.22
Real-Estate Risk Representative ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
Equity REIT VNQ 2.59 -0.73 Invested
Mortgage REIT REM -5.72 0.21
Cash SHY 0.24 0.22 Invested
Economic Stress Representative ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
Gold GLD -25.76 -10.7
Long-term Treasuries TLT -9.43 -3.67
Cash SHY 0.24 0.22 Invested Invested


As an added bonus, the spreadsheet also has four additional sheets using a dual momentum strategy with broker specific commission-free ETFs for TD Ameritrade, Charles Schwab, Fidelity, and Vanguard. It is important to note that each broker may have additional trade restrictions and the terms of their commission-free ETFs could change in the future.


Below are investment-related articles I am reading this week:

Does the CAPE Still Work? John Hussman

5 Structural Reasons for Higher Profit Margins – Pragmatic Capitalism

You Are Here – The Reformed Broker

Swedroe: An Inflation Risk Reality Check & The Best Approach to ‘Value’ – Index Universe

Seesaw Rider – Bill Gross, PIMCO

Delong and Krugman: Legitimate Bitcoin Bashers or Political Punditry? Turnkey Analyst

Market Valuation Overview & Is the Stock Market Cheap? Doug Short

January High Yield Dividend Champion

In December 2010, I created a screen/hypothetical portfolio called the “High Yield Dividend Champion Portfolio.” The screen is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on Scott’s Investments.

The High Yield Dividend Champion Portfolio uses a small number of historically relevant ideas to create a simple, yet powerful investment plan. As I previously detailed, “Some studies have shown that the, highest yielding, low payout stocks perform better over time than stocks with higher payouts and lower yields.”

The High Yield Dividend Champion Portfolio attempts to capture the best high yield, low payout stocks with a history of raising dividends. There are numerous ways to rank high yield/low payout stocks. The screening process for this portfolio starts with the “Dividend Champions” as compiled by DRIP Investing. The list is comprised of stocks that have increased their dividend payout for at least 25 consecutive years.

To date the portfolio is up over 74%.  I mentioned in the 2013 year in review that valuation of high yield stocks was a concern (see World Beta and O’Shaughnessy).  I do not know what 2014 will bring, but I have lowered my expectations for future returns of US equities and high yield stocks.

There are a number of ways to filter high yield stocks to avoid those susceptible to a “crash”.  The High Yield Dividend Champion portfolio starts with the Dividend Champion list, comprised of quality stocks that have sustained dividend growth over the past 25 years. In addition, the payout ratio rank and dividend growth rank filter stocks which may have unsustainable payouts or low dividend growth.

For 2014 I am adding a valuation filter to the screen.  We still begin with the Dividend Champion list, which is first sorted by yield and the lowest 50% yielding stocks are eliminated. Eliminating the lowest yielding stocks ensures only stocks with a relatively “high” yield make the portfolio.

The remaining stocks are then assigned a rank based on their yield (the higher the yield the higher the rank), payout ratio (the lower the payout ratio the higher the rank), 3 year dividend growth rate, and price-earnings (P/E) ratio.  Extra weight is given to yield and payout ratio rankings.  The 5/10 year Dividend Acceleration/Deceleration metric will no longer be used (5-year average increase divided by 10-year average increase)

The top 10 stocks based on the new ranking system make the portfolio. Stocks will be sold at the re-balance date (generally around the 5th of the month) when they drop out of the top 15 (to limit turnover) and are replaced with the next highest rated stock.

There is turnover in two positions this month.  WGL Holdings Inc. (WGL) is being sold at a capital gain of 2.49% and original purchase date of 12/6/12. Northwest Natural Gas (NWN) is being sold at a capital loss of 4.66% and original purchase date of 4/5/13.

Proceeds from the sales will be used to purchase McDonalds (MCD) and Tompkins Financial (TMP).

The top 15 stocks based on my ranking methodology are below and displayed in order of their overall ranking (figures are December month-end):

Name Symbol Yield Payout 3-yr P/E
Chevron Corp. CVX 3.20 32.73322 11.15152 10.22
Helmerich & Payne Inc. HP 2.97 37.53754 80.78965 12.62
Eagle Financial Services EFSI 3.38 37.43842 3.273327 11.08
Universal Corp. UVV 3.74 39.92172 2.08393 10.68
McDonald’s Corp. MCD 3.34 58.48375 11.34791 17.51
Tompkins Financial Corp. TMP 3.11 48.78049 5.032115 15.67
Altria Group Inc. MO 5.00 75 8.225114 15.00
ExxonMobil Corp. XOM 2.49 32.94118 12.23508 13.23
Target Corp. TGT 2.72 46.1126 23.44095 16.96
Cincinnati Financial CINF 3.21 47.19101 1.194918 14.71
American States Water AWR 2.82 51.59236 13.48455 18.30
UGI Corp. UGI 2.73 47.08333 7.079563 17.28
Community Trust Banc. CTBI 2.83 42.52492 1.492757 15.00
Old Republic International ORI 4.17 63.15789 1.428764 15.15
Piedmont Natural Gas PNY 3.74 66.66667 3.481022 17.83
Leggett & Platt Inc. (tied with PNY) LEG 3.88 68.57143 3.672965 17.68

The current portfolio is below:

Position Shares Purchase Price Purchase Date
CVX 120 106.45 12/6/2012
MCD 167 96.54 1/3/2014
HP 280 65.48 7/5/2013
UVV 294 45.55 4/5/2012
UGI 431 42.49 8/5/2013
LEG 577 31.72 8/5/2013
XOM 196 89.01 4/5/2013
MO 395 34.24 3/5/2013
AWR 674 27.25 7/5/2013
TMP 321 50.3 1/3/2014


If you enjoy these free tools, please consider making a donation on the home page of Scott’s Investments using the Paypal link in the upper-right corner!

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ETFReplay Portfolio for January + New System!

Among the more popular portfolios on Scott’s Investments has been the Portfolio.  I previously detailed here and here how an investor can use to screen for best performing ETFs based on momentum and volatility.

The portfolio begins with a static basket of 15 ETFs. These 15 ETFs are ranked by 6 month total returns (weighted 40%), 3 month total returns (weighted 30%), and 3 month price volatility (weighted 30%). The top 4 are purchased  at the beginning of each month. When a holding drops out of the top 5 ETFs it will be sold and replaced with the next highest ranked ETF.

In addition, ETFs must be ranked above the cash ETF SHY in order to be included in the portfolio, similar to the absolute momentum strategy I profiled here. This modification could help reduce drawdowns during periods of high volatility and/or negative market conditions (see 2008-2009), but it could also reduce total returns by allocating to cash in lieu of an asset class.

Time to Buy Out of Favor ETFs for 2014?

The top 5 ranked ETFs as of 12/31/13 are below:

HYG iShares iBoxx High-Yield Corp Bond
VTI Vanguard MSCI Total U.S. Stock Market
LQD iShares iBoxx Invest Grade Bond
SHY Barclays Low Duration Treasury

For December the portfolio maintains positions in VTI, HYG and EFA. RWX was sold for a loss of 2.51% and the proceeds used to purchase LQD.

Backtests for this strategy from 2009-2013 are posted below (note that the results do not require an ETF to drop out of the top 5 before being sold – when an ETF dropped out of the top 4 it was sold in the backtest):

6 3 3

What if we employed a pure momentum strategy on the same basket of ETFs? Purchasing the top 4 ETFs based on 6 month price momentum (no volatility factor), no cash filter, and rebalancing monthly has produced the following results from 2009-2013:

6 month momentum

The momentum only strategy has produced slightly higher returns and slightly higher volatility than the 6/3/3 strategy. This makes sense, since the 6/3/3 strategy incorporates volatility in the ranking system and also requires an ETF to be ranked higher than SHY(cash) before investing. Since cash has little volatility, the 6/3/3 is more likely to invest in cash, leading to lower returns and volatility.

Beginning in 2014 we will track both the 6/3/3 strategy (same system as 2013) as well as the pure momentum system, which will rank the same basket of 15 ETFs based only on 6 month price momentum. There is no cash filter in the pure momentum system, volatility ranking, or requirement to limit turnover – the top 4 ETFs based on price momentum will be purchased each month. The portfolio and rankings will be posted on the same spreadsheet as the 6/3/3 strategy.

The top 4 6 month momentum ETFs:

6 month
VTI Vanguard MSCI Total U.S. Stock Market
EEM iShares MSCI Emerging Markets
RWX SPDR DJ International Real Estate

Ivy & Commission Free ETF Portfolios – January Update

Early in 2012  Scott’s Investments added a daily Ivy Portfolio spreadsheet to track the 10 month moving average signals for two portfolios listed in Mebane Faber’s book The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. Faber discusses 5, 10, and 20 security portfolios that have trading signals based on long-term moving averages. The Ivy Portfolio spreadsheet tracks the 5 and 10 ETF Portfolios listed in Faber’s book. When a security is trading below its 10 month simple moving average, the position is listed as “Cash”. When the security is trading above its 10 month simple moving average the positions is listed as “Invested”.

The spreadsheet’s signals update once daily (typically in the late evening) using dividend/split adjusted closing price from Yahoo Finance. The 10 month simple moving average is based on the most recent 10 months including the current month’s most recent daily closing price.  Even though the signals update daily, it is not an endorsement to check signals daily. It simply gives the spreadsheet more versatility for users to check at his or her leisure.

The page also displays the percentage each ETF within the Ivy 10 and Ivy 5 Portfolio is above or below the current 10 month simple moving average, using both adjusted and unadjusted data. If an ETF has paid a dividend or split within the past 10 months, then when comparing the adjusted/unadjusted data you will see differences in the percent an ETF is above/below the 10 month SMA. This could also potentially impact whether an ETF is above or below its 10 month SMA. Regardless of whether you prefer the adjusted or unadjusted data, it is important to remain consistent in your approach. My preference is to use adjusted data when evaluating signals.

Top 50 Trending Stocks

The current signals based on December’s closing prices are below. As with recent months, US equities continue to show strength and developed international equities are also showing strength.

The first table is based on adjusted historical data and the second table is based on unadjusted price data. Adjusted data is my preferred method for averaging prices; however, if you use a charting or financial site which uses unadjusted prices you may see moving average signals closer to those in the unadjusted table:

ivy adjusted


ivy unadjusted


I also provide a “Commission-Free” Ivy Portfolio spreadsheet as an added bonus. This document tracks the 10 month moving averages for four different portfolios designed for TD Ameritrade, Fidelity, Charles Schwab, and Vanguard commission-free ETF offers.

Not all ETFs in each portfolio are commission free, as each broker limits the selection of commission-free ETFs and viable ETFs may not exist in each asset class. Other restrictions and limitations may apply depending on each broker.

Below are the 10 month moving average signals (using adjusted price data) for the commission-free portfolios:

commission free1


commission free2

2013 Year in Review

Thank you for all of your support and readership in 2013. I will briefly summarize the 2013 performance of each strategy and portfolio tracked on Scott’s Investments.  The changes to individual portfolios that are regularly updated on the 1st of the month will be posted separately.

If you are interested in creating and extensively testing stock and ETF portfolios, consider

Ivy Portfolio

The Ivy Portfolio, inspired by Mebane Faber, uses 10 month simple moving averages for 10 different ETFs to generate buy and sell signals.  The strategy had a low total return for 2013 when compared to a balanced portfolio like the iShares S&P Balanced-Growth Allocation (AOR):

(backtests courtesy of

ivy 2013 Portfolio

The portfolio uses a momentum strategy to invest in up to 4 ETFs each month. It is intended to be a low volatility portfolio by requiring  ETFs to also be ranked above a cash filter. The portfolio finished up 5% for the year, lagging SPY and AOR:

etfreplay 2013


All-Season ETF

The objective of the All-Season portfolio is not to create a one-sized fits all portfolio, but to create a simple, low volatility portfolio with exposure to different asset classes that perform well in different market environments. The spreadsheet also calculates risk-parity and minimum correlation weightings based on trailing volatility and correlation. There are a variety of variations that can be applied to this portfolio (moving averages, momentum, risk-parity weighting, additional holdings within each asset class, etc.). The buy and hold performance for 2013 is below, with a 10 month moving average system using the buy and hold allocated percentages-as opposed to equal weight-in the second graphic:

all season


all season 10 sma


High Yield Dividend Champion

The High Yield Dividend Champion portfolio invests in top rated dividend stocks from the Dividend Champion list compiled by David Fish. Valuation of dividend stocks is a concern headed into 2014, which will be addressed in the next Dividend Champion post. The portfolio returned close to 30% for 2013, in line with benchmarks:

dividend champion 2013


Graham Value Stock

The Graham Value stock portfolio was launched in 2013 and is intended as a lower turnover value stock portfolio. It was created using Portfolio123, which allows users to create and test stock and ETF portfolios. It will be updated again around the 15th of January.

It finished 2013 up 40%, outpacing benchmarks:

graham value stock 2013


Dual ETF Momentum

The Dual ETF Momentum strategy was launched in 2013 and was inspired by Optimal Momentum.  I backtested the strategy using Portfolio123 with a 4 week rebalance for 2013:

dual etf 2013

dual etf 2013 2

The 5+ year performance of the portfolio (12/15/08 to 12/31/13) is below:

dual etf 5 year

Finally, if you are a regular reader or have found some value in the site, please consider a donation. Everything I write on the site is done for free and the site is supported through advertisements and donations from readers. Please click on the Paypal link on the upper right hand corner of the site to make a donation.

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