The 2018 Active Value Portfolio

Written by

Jae Jun

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What You’ll Learn

  • Updated rules for this year’s portfolio
  • A look at what the original 2018 portfolio would have been
  • The updated 2018 portfolio starting Feb 1

Are you ready to see the 2018 list?

Rules have changed somewhat, but mostly similar to last year’s.

Since it’s already February, I’m going to switch things around a bit this year. I’ll display 2 portfolios and see whether the original untouched portfolio will do better than a mix of the various high ranking stocks across the Q,V,G universe.

The Rules

The rules for the original Top 20 Action Score stock portfolio will remain the same.

But the rules for the version that you get to follow along with me will be based around the concept Lester introduced in INVEST1000.

Here are the rules for the portfolio. The strike-through text refers to the rule I used in last years portfolio.

  • No changes until end of the year, UNLESS a company is bought out and needs to be replaced. This is the big change. Instead of just buying and holding for one year, the portfolio will be more active this year. It’s going to follow the methodology that Lester use in his INVEST1000 portfolio. I won’t be replacing stocks every month, but a close eye will be kept and if a company has run up too much or stop losses are triggered, the stock will be replaced.
  • 20 stocks @ $5k each for a $100k portfolio
  • A & B grade stocks from each of the factors. Instead of only going for a list of A grade Action Stocks, I’ll also be mixing in a few A grade stocks from Q,V,G or a combination of them.
  • No OTC stocks due to many people not wanting or being able to buy them (nothing wrong with OTC stocks though) Some OTC stocks will be added provided that it isn’t too difficult to buy.

The Action Score Portfolio

If you started at the beginning of the year, the Top 20 list looks like this.

2018 Top 20 Action Score Stocks

Now the one that I’ll be applying active value investing to will be this one. The starting date is Feb 1 and we just had our first -2% day in two years, so everything starts negative.

2018 OSV Active Value Portfolio

2018 OSV Active Value Portfolio

I’ll be tracking and updating the above portfolio in the Portfolio Tracker of Old School Value. This way, I’ll be able to manage it like a live portfolio so as to replace stocks where needed.

For now, the portfolio values look like this.

Average Portfolio Valuation

Average Portfolio Valuation

And with the 2% drop last week, the current winners and losers are as follows.

Questions About Building the Portfolio

Let me address some questions that are bound to come up.

1. “Why create another ‘human made portfolio” when you showed how the original top 20 2017 portfolio far exceeded your selected version?”

A couple of points for this one.

The first is that by mixing in high scoring stocks based on various factors (e.g. best Q+V, V+G, Q or even just G), it diversifies the portfolio.

I’m talking from a small sample size based on my personal returns and a few other OSV Insiders, so take it for what it is. The stocks that I would personally never have considered or known about were some of the best performers.

Stocks like QEPC, WNC or RHT were pleasant surprises.

The second point is that, by taking an active approach to replacing, returns are improved.

I’ve avoided increasing turnover, hence the 1 year buy and hold. But run some backtests with shorter holding periods and the returns are always higher.

I’m not advocating for monthly portfolio turnovers. I actually find it a hassle to trade and I don’t like fees racking up either. The goal is to book profits to lock in profits or cut losses to protect the downside.

Take AOBC as an example. It ranked high in the year, but kept running into headwinds. It ended the year down 40% or so. Stop losses would have forced AOBC to be sold.

There’s another common belief that stop losses shouldn’t be used in value investing because the more something falls, the cheaper and more you should be buying.

Not with 1 year portfolios.

Sure a stock can recover given enough time. AOBC could rebound back, but how many drop 30-40% and recover within a year?

2. How are the stocks selected?

Stocks are selected based on the Action Score. All stocks are either A’s or B’s.

B grade stocks are mixed in because these stocks are the high rankers for one or two of the QVG factors.

3. When are stocks sold?

There’s no hard and fast rule and this is where it gets cloudy.

Since I’ll be using the Old School Value portfolio, it’s going to be easy to keep track of how the stocks are doing. Last year before we released the portfolio feature, everything was done manually or via a spreadsheet. Made tracking tedious and I didn’t bother to keep up with the holdings.

This time around, it’ll be there front and center and I’ll be able to watch for when it degrades in performance.

The basic concept is that if a stock falls to a C or D, it’s on the chopping block, especially for the stocks where stock price is also falling with it.

On the flip side, if the grade falls due to the stock price being extended, I’ll

  1. book small profits and
  2. let it ride

4. What if I can’t buy enough of a stock?

For members, you can download the full Action Score database and filter by market cap if you have liquidity requirements. Because our system doesn’t care about the size of a company in the ratings calculations, many small caps rise to the top. This is because there are more $100M companies growing at 40% than larger peers.

In any case, if you are unable to buy a full position, it is best not to chase.

Set your order and let it fill. There are always sellers. If you end up with a partial order, split up the position with something else.

E.g. if I was buying QEPC again and I only got $2000 and it ran up 30% before I could buy more, I will spend the remaining $3000 of the position in stock #21 in the list.

5. Why are financials included in this year’s list?

Originally, the following sectors were not included in any of the portfolios.

  • financials
  • utilities
  • metals
  • commodities
  • ADR’s

In this year’s list, financials and ADR’s are included.


Ignoring financials and ADR’s turned out to be very costly. In fact, some of the best performers were actually financial ADR’s. Refer to the chart below and you can see why ignoring financials is a costly mistake.

2017 Performance by Sector

2017 Performance by Sector

Summing Up

  • Portfolio building rules have been updated.
  • Active value portfolio management will take place with the 2018 version so this one won’t be a buy and hold for 1 year.
  • Rather than an all A grade stock portfolio, I’ve added some stocks that rank highly for Q+G, V+G or Q+G.
  • The ending portfolio will look different as the year goes by.
  • No frequent trading will occur.

Here’s to a great 2018.

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