Market Betting Strategy

I have developed a stock trading system that has consistently beaten the market. I think I can improve the system if I had the answer to a math question. I posted it here because the math is very similar to Blackjack betting strategy.

I apply several formulas to about 100 stocks. The formulas work better for some stocks than for others. The trades in some companies have a good average return but high variance while trades in other companies have lower return and lower variance. Some days my system indicates that I should invest in several stocks but somehow I have to choose just the best bets. Should I choose the high-return, high-variance bets or the low return, low variance bets? I have calculated the standard deviation of all the trade for each of the different stocks. Here are the results for some of the stocks:

Stock_Trades_Gain__Deviation
__A___28___6.23%___7.46%
__B___17___5.29%___3.64%
__C___11___8.00%___5.01%
__D___17___4.79%___4.25%
__E___28___3.57%___5.26%
__F____3___5.52%___1.03%
__G___18___3.87%___4.07%
__H____5___6.32%___2.40%
__I___32___4.31%___9.97%
__J___17___4.51%___5.83%

The data show the number of trades made for each stock, the average gain, and the standard deviation. The gains are only a few percent, but the stocks are traded quite frequently so this can add up to a very good annual return.

One more factor that compounds the problem is that I have made a limited number of trades for each stock, and that number varies from stock to stock. I need to find a way to combine the numbers for average return, deviation, and number of trades to come up with a way to rank the different stock so that I know which is the better bet when my system indicates that I should invest in several stocks.

One more problem that may be related to this is how to apply the Kelly criterion to these bets. Any ideas?

I think that Blackjack strategy could be applied to your high-risk versus low-risk problem in the following way:
High-risk, high variance stocks are equivelent to a large bet spread in Blackjack. This, of course, is the best way to go for the "long term". However, this also requires a much larger bankroll to bring the ROR to a reasonable level.
I think you will have to base your level of high-risk stocks on your bankroll and acceptable ROR. The question that needs to be asked is: What is the bankroll and ROR calculation for your given data? BJMath should be a good place for that.
P.S. Gonna share this system with us lowly Blackjack players when you're done? ;-)

I suppose it's possible that you were toning-down the jargon, but the first thing I would suggest is that you need to get yourself an investing book to familiarize yourself with financial terms.

I apply several formulas to about 100 stocks. The formulas work better for some stocks than for others. The trades in some companies have a good average return but high variance while trades in other companies have lower return and lower variance.

Hmm . . . are you familiar with the concept of Beta? Whether you realize it or not, that's what you're describing above. Each stock is assigned a Beta number that basically measures its volatility (variance) against the market. A Beta of 1 will follow the market closely, a Beta of 2 is a very volatile stock, while a beta of 0.5 is a very conservative stock. If you're numbers are correct, then I think you will find that you have only discovered the Betas of the stocks and you are probably have a weighted-average that slightly favors higher beta stocks.

Should I choose the high-return, high-variance bets or the low return, low variance bets?

Now, I'm no financial advisor, but it sounds like that decision is based on your goals. Again, working with the beta principle, a person in their 20s with years to save in their 401K might want more risk, which means a higher Beta. A 60 year-old who is only a few years away from withdrawing their money might want a really low, conservative Beta.

I need to find a way to combine the numbers for average return, deviation, and number of trades to come up with a way to rank the different stock so that I know which is the better bet when my system indicates that I should invest in several stocks.

I think this will answer itself once you answer the previous question.

Just my two cents.

Golf Cart

That's could be a remarkable achievement if you really can demonstrate that your system can consistently beat the market in any market condition. Though, in a bull market you would not want to do that (churning?) because of high cost of commissions for small gains when the stock is heading up for larger profits. Do you have knowledge of TA anf FA and does your system takes them into account?

How long have you done so? In what kind of market condition (bull, bear, non-trending? How much capital is required for your system or what's the minimum required? How fast is the turnover when you show 28 and 32 trades/transactions in some stocks?

Thanks for your response, but this has nothing to do with beta. The deviation figures that I listed are the standard deviation from the average gain from each stock trade, not the volatility of the stock compared to the market average. Most of the stocks I trade are non high-tech companies that are listed on the NYSE. The beta for my stocks is generally low. Also, My average hold time is about 7 days, so my age wouldn't matter with this system.

>>How long have you done so?

Since 1998.

>>In what kind of market condition (bull, bear, non-trending?)

All markets since 1998.

>>How much capital is required for your system or what's the minimum required?

Each trade should be for at least $5000 otherwise the commissions will eat you up.

>>How fast is the turnover when you show 28 and 32 trades/transactions in some stocks?

Average hold time is about one week.

You just mention stocks with gains. It's hard to believe that you never pick a lame duck, especially in these days.
I personnally don't believe in short term trading,because this will just benfit your broker. Also your efforts are disproportionate compared to your benefits.
I would keep a stock until it has risen at least 30%. Like this, you keep commissions to a minimum and don't need to look at the share prices every day.
By the way, in this century all those who didn't hold any stocks have beaten the market consistently!:)

Francis Salmon

Do you have an understanding on the "Market Line Formula" developed by William Sharpe? This should help you. As a stockbroker, I believe what you are trying to do is very, very difficult. Impossible if you don't have a strategy for short positions, which is analagous to a card counter not factoring in a negative count. It is almost impossible not to beat the broad market when it is going down if you are continually getting into an out of positions. Why? Because you are not exposed to the total decline. If you wish to compare this to blackjack, then visualize a person sitting at a table that deals a perpetual negative shoe, but he only plays every other hand. He will lose, but he will not lose as much as the guy sitting next to him who plays every hand. Still he has "beaten the market",i.e., done better than the average person at that table. The opposite would hold true at a table that deals a perpetual plus shoe - you would make money, but you would make less than someone who held quality stock. Much less when you factor in capital gains. Since the market is about where it was in 1998, but had at one time risen to new highs, of course you have beaten the market. Give a trained monkey a buy and sell button and I assure you he will do the same thing.

>>"Since the market is about where it was in 1998, but had at one time risen to new highs, of course you have beaten the market. Give a trained monkey a buy and sell button and I assure you he will do the same thing."

I have always tried to keep my cash fully invested. I have not stayed away from the bear markets. What I need is the math formula that I asked for in my original post. If you don't have that then can I borrow your trained monkey?

You would have about the same luck as you would day trading. Once again, look up William Sharpe's market line formula.

A market betting strategy not geared to market trends (uptrend, downtrend, non-trending market) and not using the appropriate trading action (long, short or staying out) is a losing proposition.

Market trends are discernible to a large extent using TA (tech. analysis). And, FA (Fundamental Analysis) can help in selecting stocks on one's own criteria based on goals of returns.

In any case, no market system betting strategy can show success in all stock transactions.

Where are the losers in your betting strategy? What was the bottom line % profits made using your strategy?

Please no more of your analogies to blackjack and,in a negative shoe, playing every other hand and "beating the market". The objective in the market and blackjack is to make money---a profit if you will, not to lose less than others. Give me and the others on this board a break!

There are plenty of losers. If the SD is 10% and the average gain is 4%, that means that several trades in that particular stock have been money losers. Annualised return is about 40% which includes about 10% of the gains going to pay the brokers.

What I am looking for is an answer to the math question in my original post. Can anybody shed some light on this?

Double 21 - Go to the dictionary and look up the word "analogy". Bartleby said he has consistently outperformed the market. My point was not to say our objective in blackjack was to do better than others at the table. I was simply drawing an analogy between his system of investing and playing blackjack. This is a sight that devoted to blackjack, eh? Maybe I am wrong, but when I read through his data, my bullshit detector went off. Here is what I mean. According to his postings, Bartleby invests a minimum of $5K and holds his positions for an average of a week. At that rate, an initial investment of $5K that compounded at 6.23% weekly(Company A in Bartleby's posting) would be worth about $3.3 million dollars in five years, take that out over 5 more years and he would have more wealth that Bill Gates and Warren Buffett combined. Five more years and he will literally break every bank in the world. I'm not trying to give this guy a hard time or say that he is intentially lying, but his numbers are bad. As for you, hotshot, don't lecture me about what to post.

Bartleby - Call Warren Buffett and let him know your system. Berkshire Hathaway has only done about 24% annualized!

>>"According to his postings, Bartleby invests a minimum of $5K and holds his positions for an average of a week. At that rate, an initial investment of $5K that compounded at 6.23% weekly(Company A in Bartleby's posting) would be worth about $3.3 million dollars in five years"

The problem with you assumpion is that I can imediatly buy another stock when I sell the one I am holding. This is not the case at all. I try to keep as much cash invested as I can but on any given day there is less than 50% chance that the systems says to make a bet. On other days it may say to make 40 bets. That is why I need the answer to my original question. I want to make sure that the few bets I make on those big buy days are the best stocks on the list. On average, I make less than 3% per trade, and on the average I have been able to make my brokerage accounts grow by 40% per year since 1998.

Bartleby- You said you do not shy away from bear markets. You remain fully invested. Now you are saying that you are not fully invested? What is it? Either way your argument is flawed. As to your original question...go to YAHOO and look up the name William Sharpe. Through this you can find your the formula you are looking for. There is a concept in investing known as the "efficient frontier". William Sharpe (who I referred you to twice) won a nobel prize for developing this concept for portfolio management. Researching and understanding this concept will provide you with more understanding than you will ever get through an internet chat site. It will answer your question.

>>"You said you do not shy away from bear markets. You remain fully invested. Now you are saying that you are not fully invested? What is it?"

I always stay as invested as I can be. I call this "fully invested" but in practice my bankroll is about 1/3 in cash on the average. This varies from week to week but not from bull to bear. In fact, my system does lose money in bear markets but not nearly at the rate that the market does as a whole.

>>"Either way your argument is flawed."

I am not here to convince you. I am here to get an answer to my question. When I find the answer, I will move on. If someone on this board finds the answer, I will be glad to share my system with that person (privately).

Thanks for the tip about Sharpe. I will look him up.