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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 254100  
Subject: Re: Does this stuff work ? Date: 2/13/2013 8:58 AM
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I hope this makes the process clear enough for you to try it.

I'll stand by my remark about look-ahead bias.

Your comment about Kazakhmys was interesting & puzzling. First, yahoo finance doesn't show it on any US market, just London, Hong Kong, etc. So such a stock wouldn't be investable by 99% of us. I think I found it, though, from your description of the price action. That chart is nothing that I would touch.

Second, you say you sold it at 18% profit in 22 days. But I don't see anything in your posted rules that says to sell it. Looks to me that you just do things ad-hoc.

You then start buying again from the bottom of the market.
Sure. That's easy to say. Every beginning investor knows that you should sell at the top and buy at the bottom, so what's hard about making a ton of money?
The only way you know that you are at the bottom is AFTERWARDS, after the market has gone up from that bottom. But when you are there, you don't know if the market goes down or up from there. That's why these beginning investors who thought it was so easy lose their shirt.


Are you sure they don't recover? Except for a few disasters that has not been my experience and, contrary to popular belief, modelling has demonstrated the very significant benefit of rebuy on 50% loss.
This is astonishing to me. All I can gather from this is that your experience must be extremely limited.

Yeah, I'm pretty sure that in general they don't recover. Just thinking about it: In general, a stock doesn't lose 50% for no reason. The company has to be doing really bad. Given the fact that the company did so bad, what is the chance that they suddenly turn around and double? Sure, it occasionally happens. But in general, losers continue to lose and winners continue to win. That's the case for sports teams, countries, and businesses & stocks.

Now, just thinking that something is so doesn't mean that it is so. You need to look at actual data, since reality trumps theory.

So I went to my favorite backtester, stockscreen123, and created a "price crash" screen. My standard filters for volume, price (no penny stocks) and liquidity, then screened for 52 week price loss of 50%. Holding period of 4 weeks, Jan-1999 thru Feb-2013. Maximum of 50 stocks, ranked by yield.

Results:
Annualized Return: -12%
Sharpe Ratio: -0.5
Total return: -85%

So, yeah, I'm pretty sure.

Looking deeper into the backtest results, I can see how you could fool yourself into thinking this is a good strategy.
If you look at a good period, you get some eye-popping returns. 195% 125% 60% 40% These are all 4-week returns! Yummy!!

But most of the period you get returns like -15%, -35%, -84%.

I've seen this movie before, and I know how it ends.
You come up with a great theory, look only at data that supports that theory, look only at a time period where that theory works --- and subsequently get crushed by reality. Oh yeah ... and poo-poo people who try to warn you that you are headed for a cliff.

Been there, done that.
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