https://diyquantfund.blogspot.com/2019/01/...

First of all, wish everyone a Happy New Year 2019.

SG Portfolio
2018 was a year marked with big price swing for Singapore stock market. The year started with $STI(^STI.IN) rising to the decade high of 3611.69. Subsequently (and unfortunately) STI reversed and shed nearly 300 points to reach a local minima at 3340.55 in early February, fueled by the rising US Treasury interest rates and exodus of funds from emerging markets. For the next few months till mid June, the market whipsawed. STI managed to break another decade high to reach 3641.65 in May. As the trade war between US can China intensified, US Treasury rates continued to rise and emerging markets continued to weaken, the market caved in and from then onward, STI went on a steady decline until it hit a local minima of 2955.68 in late October, sending it very close to the bear market territory. Then it whipsawed until the end of the year to close at 3068.76.

This year, my SG portfolio did not perform that well as compared to the benchmark STI ETF (SGX:ES3). While I somewhat expected that a whipsawing market is not easy to trade with my trending following strategy, a slow steady decline is also as difficult. From the chart below, you can see that my total return whipsawed with the market but in a greater magnitude as the strategy preferred smaller cap stocks. Since the system buys on breakout, it was met with a lot of false breakouts as the market whipsawed and dropped slowly. The hardest hit stocks came from the O&G sector where they were caught in the recent plummet after a short breakout during mid year. Fortunately, the risk management component of the system which I now named as MATA (Market -wide Trend Analysis. Check out this post for more details) protected the portfolio from greater loss as it recommended the portfolio to stay overweight in cash for a large part of the year. In addition, position sizing also prevented concentration risk as a big part of the losses came from the O&G sector.

Here is the performance of the system. Total return since inception is 37.29% about 2 times better than STI ETF which has a return of 18.77%. For year 2018, the return is -17.19%. The great gains in 2017 and 2016 were able to cushion the loss this years. Just for comparison sake, the other time it had a negative yearly return was in 2008 with a loss of 25%. (Take note that calculation of 2008 return is based on back-testing as the system only went live in mid 2016). My US portfolio did much better than SG portfolio simply because when US stock market decline, it plunges so there are not a lot of false breakout and the system stayed more than 75% cash for some time (check out this post for my US portfolio performance https://diyquantfund.blogspot.com/2019/01/...).

By the way, if you have not noticed, I have reverted my calculation for total return to using absolute return instead of time weighted as I realized absolute return is more meaningful since it captures the cash components as well (and I was overweight in cash this year) while time weighted only captures the invested amount. It is also to be consistent with the calculation of my US portfolio return which has always been using absolute return.

Top 3 Stocks with the highest return
$Yongnam(AXB.SI) +23.91%
$Tuan Sing(T24.SI) +17.81%
$Japfa(UD2.SI) +10.35%

Bottom 3 Stocks with the lowest return
$Rex Intl(5WH.SI) -33.93%
$Alpha Energy(5TS.SI) -26.94%
$KrisEnergy(SK3.SI) -25.25%

US Portfolio
Year 2018 was a year of extremes for US stock market. All 3 indices, Dow Jones, S&P500 and NASDAQ hit an all time this year aa unemployment rate hit 50 years low in the backdrop of a healthy economy. It is also a year where all 3 indices went into correction territory with Dow Jones posting the biggest one day point drop (1175.21) in history in February. This year, Dow Jones also recorded the worse December since depression and NASDAQ went into bear market after 10 years of rally. Then on 26th December, Dow Jones staged the biggest 1 day rally of 1086.25 points in history. This year's market rout was attributed to the fear of trade war between US and China and the fear of Fed's over-tightening of interest rates which could lead to flattening of yield curve. What a volatile year!

For the year of 2018, Dow Jones recorded a drop of 5.63%, S&P500 a drop of 6,24% while NASDAQ a drop of 3.88%.

My US portfolio was flat for 2018. Yearly return was a slight decline of 2.47% while the benchmark SPY (incl dividend) posted a loss of 4.51%. I think the system has done well given that the portfolio is mostly focusing on small caps which tend to be more volatile. Total return since inception is still pretty solid at 69.79% while SPY return is 25.81%. Despite the large swing in prices and strong volatility, the system managed to catch a few big run up stocks such as Bovie Medical Corp and Nevsun Resources. Both made a stunning profit of 61% (check out their posts here and here). It was also fortunate that when the market went downtrend in 2 occasions in February and October, the system's risk management component MATA (Market-wide Trend Analysis. Check out this post) signalled a red flag and made the portfolio go heavy in cash. Hence losses were minimised despite a few stocks that plummet such as Kodak and Gran Tierra.

Top 3 Stocks with the highest return
Bovie Medical Corp (BVX) +61.49%
Nevsun Resources Ltd. (NSU) +61.17%
Harvard Bioscience, Inc. (HBIO) +25.32%

Bottom 3 Stocks with the lowest return
Eastman Kodak (KODK) -26.25%
Gran Tierra Energy Inc. (GTE) -19.46%
U.S. Energy Corp (USEG) -18.75%

What are the few important lessons I learnt in 2018?
1. Consistency is the key in systematic trading. There are good years and there are bad years. There are strategies that profit in bad market and some that will make a loss. After all, investing is for long term. Never change strategy just because it is not profitable for a single year or even a few losing years in a row. If you keep changing strategy just because it is not working for the moment, you basically do not have a strategy. If your strategy is back-tested to have an edge, stick to it. If the loss is within the model, there is nothing to be concerned about. Never try to add additional parameters just to make a year profitable as it may result in overfitting of the model. Every update or new parameter must be back tested thoroughly to work for at least 10 years of historical data before being integrated.

2. Risk management and position sizing are keys to avoid risk of ruin. It is fortunate that the system has a sound risk management component MATA. Despite being a long only trend following strategy and small cap heavy portfolio, it only went down by 17%. As the system only invest around 12% of capital per stock, it helped to avoid a single point of failure. For example, if I have put all my capital into Rex Intl, I would be down more than 33% for the year due to a single stock! Hence, never put all your eggs into one basket. In addition, as MATA recommended more than 50% cash for a large part of the year, the losses were controlled. That's why despite so many false breakouts, the yearly return managed to be kept at -17%.

What is my plan for 2019?
1. Continue to trade systematically and diligently to achieve abnormal returns

2. Look into a new shorting strategy. I realize this year I have a lot of cash not fully utilized due to the bad market. And I made it to #7 in the SGX Stock Challenge (check out this post) not because of my long strategy as the time frame is too short but because I 'shorted' STI based on MATA via DLC SG7xShort warrant. Perhaps a shorting strategy may help to turn a bad year into a profitable year! Of course it must be thoroughly back tested because shorting has more limitation and cost than long.

May 2019 be better year for everyone. Wish everyone a Happy New Year!

Remember to check out this post for my US portfolio performance for 2018 at https://diyquantfund.blogspot.com/2019/01/...

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19 likes
5 comments
diyquant

anyway for those who made losses this year, do not be disheartened, investment is a long journey. do not be disheartened by just 1 year or losses as long as you know what you're doing.

Appleman

When I see you made losses in 2018.. It tells me one thing.. Even the top traders/investors made losses in 2018.. So it is normal for ppl like me to make losses in 2018.. Hahaha.. Positivity

diyquant

Reply to @Appleman : haha wouldn't consider myself top trader. just trying to make better returns. anyway profit or loss, as long as in the long run can make profit that's all that really matters.

diyquant

Reply to @Spinning_Top : you are welcome =)


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https://diyquantfund.blogspot.com/2019/01/...

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