How to consistenly lose the money on the stock market?

I have recently written about back-testing some fundamental investment strategy using GieldowyRadar stock scanner for the Polish stock market.

The results of the back-test were quite impressive (even if one should not believe in them too much), but can we do the opposite? Can we create a strategy that consistently loses money?

YES, we can! :)

Does your asset manager have a substantial stake in the fund he manages?

I first wrote about the Eurogeddon investment fund - the one betting on the collapse of the European Union - in February 2012. Now it is -62% down.

Source: analizy.pl

I was nonplussed by the simulations presented by the fund marketing team.

The execution strategy employed also seemed too much aggressive to me, especially taking into consideration the nature of the bet.

Nassim Taleb in his "Antifragile" book, stresses the importance of the convexity (i.e. a favorable assymetry) of the trades.

Convexity doesn't make you an automatic winner, but limits your loses and increases potential profits, when situation turns in your favor.

Otherwise, you risk turning your portfolio into a zombie with virtually no chance of raising up:

Many money / asset managers are not better in investing than monkeys, but usually they charge pretty step fees for their services.

Is there anything that can be done about it?

One possibility is to make asset managers to invest substantial part of their net worth into the funds they manage.

I am pretty sure they would be a little bit more careful with the investments they make... And it would not neccessarily diminsh the returns.

KGHM: hedging copper with the seagull

The 14H1 KGHM report mentions a copper hedging strategy called the Seagull.

Basically, it hedges part of the revenues (40,5k tons in H2 vs. 283k tons produced in H1, or less than 15%) against copper prices falling below $7,500 / ton.

Since the copper price was approx. $6,800 / ton on Friday, the Seagull was in the air:

(assumes no premiums)

Notes: see post about visualizing option strategies

Back-testing value investing

I have been recently playing with a fundamental stock scanner designed for the Polish market - GieldowyRadar.

This scanner offers a number of predefined strategies based on some gurus stock selection criteria and allows to back-test them over 7 years.

The best back-test results are currently produced by "the Warren Buffett" strategy.

The average annual return of this strategy is 29.3% vs. -1.85% for WIG index.

The strategy takes into consideration indebtness, EBIT profitability, cash/free cash flow ratio, return on equity and market capitalization.

The scanner makes possible to back-test your own strategies. Unfortunatelly, some more complex conditions - including some used in the pre-programmed guru strategies - are currently not available.

Still, I was wondering whether it is possible to beat the best guru strategy using the limited scanner's back-test functionality while keeping the criteria fundamentally reasonable.

The answer is - YES! :)

"Buy Cheap" strategy: 1014% over 7 years

Commodity prices and KGHM stock price

The stock price of KGHM is falling since the late August.

The KGHM moves follow changes in prices of copper and silver - two key KGHM products.

Source: stooq

Predicting commodity prices may be tricky, so let's focus instead on their past behavior in Q2 and - nearly finished - Q3.

Even though the prices of both copper and silver have decreased from the begining of Q3 till now, the average price of them actually increased - by 3% in case of copper and by 1,1% for silver.

Since KGHM reports its results in PLN, we should also take currency into consideration.

Because USD has strenghted in Q3, in PLN terms, copper price increased by 6.3% and silver by 4,4%.

black - Q2 prices and average

red - Q3 prices and average

                  Q2        Q3     Q3/Q2%

copper USD  309.0300  317.8600 0.03000000

copper PLN  938.0078  997.6208 0.06355287

silver USD 1965.0969 1987.2661 0.01128151

silver PLN 5965.5656 6232.2229 0.04469943

One additional element that may influence the KGHM Q3 results scheduled for publication in November, is the recently started Sierra Gorda mine production.

The effect of Sierra Gorda will be marginal in Q3, but should increase in the following quaters - posittivelly affecting both production and average cost levels.