The AlphaKing investment research project was started in 1999 to answer once and for all the age old question of what is the best way to risk ones capital in the stock market. This was initially done for the personal investment benefit of the AlphaKing team, as we realized the importance of investing in the stock market, though were unhappy with the choices offered by the investment community. So we went about reinventing the investment wheel, since there really didn't seem to be a professional one we were happy with. After 10 years of this quest, we believe the results and lessons learned to be very meaningful. Indeed, we know of no better way to invest ones capital. History - over the long term - and a common sense approach to finding workable solutions to common investment problems - the stock market curve balls that seem to come from no-where - are how we approached the question of what works and what doesn't. While massive in scope, below is a brief description of the 5 step approach used to build the AlphaKing Research Project and portfolio strategies.
James O'Shaughnessy showed us how to, and the wisdom of, isolating and combining investment elements that had proven to outperform over the long term, with his high relative strength and low price to sales combination achieving a 24% annual return from 1954 to 1996 (when the research was published in "What Works on Wall Street.") Martin Zwieg showed us the power of FED interest rate policy had on the financial markets, also achieving a 24% annual return from 1966 through 1988 published in "Winning on Wall Street." A simple combination of James O'Shaughnessy's portfolio and Martin Zweig's Interest rate strategy returns 28% per year.
So 3 proven investment elements - high relative strength, low prices to sales, and FED interest rate policy - work better than 1 or 2 alone. The question becomes, what other elements are out there, and would returns of 5 such successful elements being combined be higher than the Shaughnessy/Zweig 3? And if 5 is better, what would happen if you isolate 10 such successful elements and combined them? That was the primary starting goal of the AlphaKing investment research project.
The search for these elements followed a 3 step approach: 1) Was there a common sense logical reason why a certain element should outperform? 2) Was there historical evidence that certain elements had outperformed in the past? 3) If the answer to both was yes, then if one were to build a portfolio around those elements (and combination of elements) and tracked them in real-time would they outperform or flop in a bad case of past performance not being indicative of future returns?
The answer: 10K became 29.4K from mid-1999 through mid-2005 for the AlphaKing base portfolio, versus 10K becoming 8.9K for the S&P500, and 10K becoming 7.7K for the NASDAQ. Thus a combination of multiple fundamental elements do have significant out-performance value, proving that fundamentals are a great place to start the portfolio selection process.
So basic combinations of proven fundamental elements not only have outperformed historically, but also in the up and down years of the stock market bubble boom and bust cycle when tracked in real-time in the AlphaKing base portfolio. The question then becomes, can performance be improved upon by adding non-fundamentally orientated elements? In 1999, when we were putting the fundamental element portfolios together, we began adding specific chart patterns to the mix, to see if fundamentals and targeted chart patterns would do better than fundamentals alone. AlphaKing uses a quantitative scoring system to analyse and quantify fundamental elements, and instead of choosing the highest scoring stock - as was done to build the test portfolio highlighted in Step 1 above - these Winning Chart Pattern portfolios took the highest scoring AlphaKing stocks that also had a specific chart pattern. Thus, all stocks had great fundamentals (as defined in Step 1) and the only addition was a specific chart pattern element. The question was, do certain chart patterns have out-performance value?
The answer: 2 specific chart patterns emerged as out-performance leaders - which we called Red and Blue - with AlphaKing Red turning 10K into 44.1K from mid-1999 thru mid-2005, while AlphaKing Blue turned 10K into 51.7K (while the AK Base portfolio went from 10 to 29.4, the S&P500 10 to 8.9, and NASDAQ 10 to 7.7) Thus certain specific chart patterns do have significant out-performance value, and improve returns above those portfolios built around great fundamentals alone.
With a combination of winning fundamental elements working better when used in conjunction with favorable chart patterns, how could returns be improved by the addition of other investment elements? One obvious way was to check to see how trading higher beta stocks effected performance.
The answer: in mid-2001 the AlphaKing GrQ/25 small cap high beta portfolio was entered into the Marketocracy.com mutual fund competition - as a beta leveraged version of the AlphaKing Red and Blue portfolios - returning 25.8% annual returns (without margin) from mid-2001 thru mid-2005 (chart below) placing #4 in the mutual fund investment competition run by Marketocracy.com on the long term (5 year) rankings out of 70,000 competing strategies. All trades were completed and tracked in real-time, following the rules professional mutual funds must adhere to as set by the SEC, and include commissions of 5 cents per share. Thus beta leverage, when combined with a combination of favorable fundamental elements and winning chart patterns, does significantly enhance performance, proving that beta is a trader's friend, and not a foe to be feared.
Leverage in the forms of beta has worked well - significantly improving performance of our great fundamantals/great chart pattern combination - though as the chart above shows in the earlier bear market years of 2001 and 2002 such an approach comes with some significant down-side volatility on the bear swoons. Please note that all AlphaKing portfolios tracked in the test to answer questions of how specific investment elements effect performance were 100% invested at all times, with no adjustments made for the action of the stock market. These were simple tests to see how specific elements reacted to the ups and downs of the stock market when pitted in head to head competition against other known investment elements, as well as other investment strategies, to see which investment elements work, which don't, and which combination of investment elements works the best overall.
With a collection of winning fundamental elements, and winning chart patterns, proven to achieve and maintain significant out-performance with the AlphaKing Red, AlphaKing Blue, and AlphaKing GrQ/25 Small Cap portfolios, the question becomes: what would happen to returns if we added an active defense designed to prevent portfolio losses during stock specific, and general stock market bear corrective phases?
With stock market valuations on the high end of their historical norms, with the demographic profile of the industrialized world set to add potentially depressive forces onto the economy as the massive baby boomer generation starts to retire, with the potential for the bursting of a speculative housing bubble, with government deficits increasing day by day, and inflationary forces rising as the US dollar succumbs to financial reality of excess liquidity, an active and proven portfolio defense is an absolute must if investors are to survive what should be a very turbulent investment world going forward.
In late 2002 these stock-specific defensive money management triggers were added to the AlphaKing portfolios and tested in real-time, with the performance of the GrQ/25 small cap portfolio shown below in a chart set at a time when the money management defensive system was added.
Results following addition of defensive money management system:
AlphaKing Red now becomes 54.3K versus 44.1K for the 100% invested at all times portfolio
AlphaKing Blue now becomes 53.1K versus 51.7K for the 100% invested at all times portfolio
AlphaKing GrQ/25 moves into 4th spot on the Marketocracy 5 year rankings, with a compounded annual return of 25.8%, with year to date 2006 performance of 21.5%, beating the S&P500 53% of the time on a daily basis, 57% weekly, 62% monthly, 70% quarterly, and 93% yearly since inception.
(Starting value of 10K)
So far the AlphaKing Research project has uncovered that seeking stocks with great fundamentals, when used in conjunction with specific targeted chart patterns, along with targeted beta leverage, while using active defensive and offensive money management techniques, provides the most investment return with the least amount of volatility than any individual investment element alone. The question is: can we improve performance even further by aiming to adjust trades directly in-line with the overall stock market trend, rather than leaving individual stocks in the portfolio to fend for themselves?
Using the trend-following active defensive and offensive money management techniques we found to work well for individual stocks as outlined in Step 4, we found that the NASDAQ achieved annual compounded returns of 13.8% long only, and 19.2% long/short since 1973 thru year-end 2005. The Hit Rate was 51%, with annual profit of 16.6% on winners, versus a 3.4% loss on the failed trades, with an average of 3.1 trades per year.
The question is: if we used those NASDAQ signals to time entry and exit of the AK Red, Blue, and GrQ/25 winning portfolios, what would happen to returns?
AlphaKing Red now becomes 57.4K
AlphaKing Blue now becomes 151K
AlphaKing GrQ/25 becomes 95.4K
Versus 8.5K for the S&P500, and 5.5K for the NASDAQ.)
(Starting value 10K, 2000-2005, using opening price the day after a signal is generated.)
Thus linking trades to the overall stock market trend leads to greater profits than allowing stocks to trade independently.
Great fundamentals, when used in conjunction with specific targeted chart patterns, along with targeted beta leverage, while using active defensive and offensive money management techniques on individual stocks once entered, while timing portfolio entry and exit based on stock market trends has proven to provide maximum returns with the least amount of volatility in the AlphaKing Research Project so far todate.
We have combined all of these features into a single indicator we call the AlphaKing Trading Indicator, accessible for at www.alphaking.com, which provides trading signals and fundamental ratings on over 4200 stocks. We also provide a 30 day free trial of our Model Portfolios for those traders and investor looking for more structured help in their investing, providing 3 proprietary portfolios designed around results of the AlphaKing Research Project: Index - for those traders and investors looking for a simple one trade approach to diversification, as well as those trading mutual funds in their 401K retirement accounts - GrQ/8 Hedge Fund - which trades stocks both long and short, depending on stock market trends - and the GrQ/25 small cap portfolio - which trades long only. We have partnered with www.FolioFn.com so that any investors wishing to trade our portfolios can do so for a one time total annual commission cost of $199 - allowing up to 200 traders per month - removing one of the stumbling blocks to trading larger portfolios.
The AlphaKing Research quest to improve upon the above findings through targeted research continues, and our primary goal continues to be the search to find the ultimate investment strategy, and we believe we have taken giant steps down that very important investment road by the discovery of the AlphaKing Trading Indicator
Results are tabulated using the opening price the day following a new trading signal, and exclude commissions, dividends, or interest paid on cash balances during sell periods. Stock prices highlighted in blue are temporary - using the end of day quote the day a new buy or sell signal is generated - with the final price adjusted the following trading day when the opening price is available. Past performance is no guarantee of future success
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