The software that I use to pick stocks, backtest, and create simulations is called Portfolio123. As always, follow the link to create a free membership or try out a extra long trial period of 45 days on any membership level (you can always downgrade to free on day 44 with the click of a mouse) since you came from this blog.
But some people get overwhelmed using the site with so many features and tabs. A three-part series will walk you through some of the basic ways you can use the site to independently be a superior investor that has the freedom of testing any idea he has.
A Brief Overview
After signing up for your free membership, you will have a header that looks like this:
What does it all do?
Portfolio – This is where you create portfolios with trading rules. It is the proof that your trading ideas work in the real world without the benefit of backtesting. You can look at the best portfolios to see what trading rules or stocks they have.
Ranking – Build and test a ranking system. Very advanced and more on this later.
Simulation – Test your strategy with separate buy and sell rules over the past 11 years. Incorporate hedging and various real world trading rules. This is as close as it gets to showing you how someone with $1,000 or $1 million dollars would have actually traded with constraints of an actual environment.
Screener – This is your starting point. Scan for stocks using famous strategies or build your own. What would Warren Buffett or Graham or Lynch or Greenblatt buy if they were a smaller investor like us? Choose from over 84 different types of screens.
Stock, ETF, Tools – Look up info on stocks or ETFs. Also under tools you get the macro view of the market as to value, earnings trend for the S&P 500 and more.
Pre-Defined Stock Scans
When you click on SCREENER there will be two options: saved screens and pre-defined screens.
For our purposes we will use Dividend Income. Watch in the Category column as some are for stocks and others are for ETFs.
Whoa, whoa, whoa! What is all this? Don’t worry about clicking a thing in the rules. At this point all you need to know is that these are the rules that make the strategy work. You can click the green button to turn it red (or vice versa) if you want to turn an individual rule on or off. From here we can do a few things. The first and most obvious is to find out what stocks are being recommended right now. To do that we want to click on the RESULTS tab. Make sure the date is the most current and click the RUN button to get a list of stocks.
From here we can do our due diligence to pick the best stocks on the list. But wait just a second – has this been a profitable strategy over time? To see that we need to click the BACKTEST button.
So here we can adjust a few parameters. Transaction Type is long since we are buying stocks. Price is Next Open. You can adjust the slippage. This is how much will be lost when we drive prices up from buying or down from selling. If we are a small time investor picking large and decent stocks you can lower this amount. I’ll kick it down to 0.2% for our purposes. Max Pos% is to prevent this system from putting 100% of your equity into one stock if only one good pick exists.
Next pick your start and end date. Just click on Max to the big picture and later we can use one or two years to see the most recent performance. One note, the simulations and portfolios include dividends but the screener does not. We will have to manually guess them in.
Rebalance Frequency is also very important. Will you buy and hold without ever checking your stocks? Rebalance frequency will dictate how often the program will check your stocks and only keep those in that meet all of the buying criteria. It will add and remove companies on the rebalance date. We will start with 3 months.
Now click Run Backtest.
The chart is the most visual part of this. The red line is how well our strategy performed (before dividends). The blue line is the S&P 500. While the market went up 10% in roughly 11 years, our strategy went up 239.2%. This works out to a compound annual growth rate of 11.97% before dividends or likely close to 15% after dividends.
Below the chart is a huge list of stats so you can see how well it performed in each 3 month period versus the market, how much turnover there was, and some other numbers.
I won’t get into this much here but advanced backtesting takes your strategy and runs it over hundreds of random entry points to see if it holds up over many time frames or if you picked an amazing entry point by fluke. I test this out by using a 3 month holding period (same as our rebalancing), the past 11 years of possible entry points, and we will buy every possible week. This will give us an average performance.
The test shows and average 3 month performance of 3.35% (before dividends) which would work out to over 4% after dividends. Our strategy is robust and has produced 16% annual gains using 3 month rebalancing periods with virtually any entry point in the market over the past 11 years. A bunch of other stats are included that I won’t get into.
More to Come Later
Using the SCREENER function is great as a starting point. But there are weaknesses since most have separate buying and selling rules. What about hedging, dividends, market timing, trading fees, and more? We should use the Simulation but more on that in another blog.
Portfolio123 is the most powerful stock screening / backtesting service out there for the retail investor. Don’t even get me going on Zacks Research Wizard as to the high price and lack of features with all sorts of bias. While it has a good interface, Zacks RW is little more than a dangerous toy that a serious investor should stay away from. P123 does take a lot longer to get used to but when you do – your investing will go from blah to wow!