Surely with the power of computers we can pick winning stocks faster, more accurately than the traditional way? When I started my hedge fund, I employed fund managers and it quickly proved expensive. They were good, and that’s why they cost money. So I looked to replace them with computers – my little unpaid slaves. And it worked.
One algorithm (‘APSE’) has for the past ten years outperformed Warren Buffett and every other UK company fund manager too.
(I put this into Sharescope to create my own little Fintech Venture – ‘Alpesh Patel Special Edition of Sharescope’.)
So what’s the secret sauce? What’s the Piri Piri of stockpicking, the secret KFC herbs of my stock selection methodology?
Step one: Know what’s important – a little help from the Financial Times
In picking winning stocks, I had to first look at all the stock picking criteria from PE to ROCE and esoteric ones like price-cash flow. But what works?
This is where writing a weekly column on trading for the Financial Times came in handy. Every week I would spend about 12 hours researching developments over the past century to the present day in stock picking. You should not be surprised there is a heck of a lot of academic research on the subject. Five years of that and I had a good idea, plus my own experience from age 12 of investing on what will work.
Step two: Have a strategy – help from Bloomberg TV
But work for what period? What’s the strategy, to hold for a day, a week, a month? A year? My strategy, or rather one of them, was to pick for a year. So I came up with the idea of looking for undervalued growth stocks generating good dividends.
From my years co-hosting on Bloomberg TV and interviewing and grilling fund managers I recalled how some fund managers claimed to be ‘growth’ and others ‘value’ and others still ‘income’. So I thought, ‘why not all in one’?
Step three: know the importance of what is important – a little help from the Bar
As a trained Barrister, the two most important things you learn are that evidence is needed for everything and secondly, you only base your case one two or three key arguments – not every single argument you could make ie you learn the importance of what is important.
So you realise that PE has been more important than ROCE in stock predictions. But, how important? My next stage was to weigh the importance of each criteria. PE, revenue growth, earnings growth, cash flows all of these things you know are important but not equally so.
So like a lab professor I crunched numbers and worked many late nights to discover the DNA of stock outperformance.
Step four: after complexity, simplicity – help from Oxford University
When I was a Visiting Fellow in Business & Industry at Oxford University, lecturing on finance, one of my research topics was how to convey financial education more simply. After all we want to make it easy for people to learn and then do.
So I scored each of the stocks out of 10, based on the weightings of the various factors my research showed was important. You sort of see why my performance outdid Warren and every UK company fund manager don’t you!
Step 5: teach!
I love to teach, not just trade and manage money, so I then went on to create what are the best online bite-size courses on learning not just this, but more active trading too. For the first 30 readers there is a 50% off my most popular course, which happens to be on FX trading. Just visit www.trading-champions.com and enter the coupon ‘spreadbet – enjoy!
Alpesh
