In earlier posts, I asked if micro-cap value was enough different from small-cap value to justify an allocation specifically to it, see viewtopic.php?t=434358, and whether small-cap value was still a worthwhile addition to a mostly total market index portfolio, see viewtopic.php?t=435788. I have maintained a small allocation to small / micro-cap value for many years and have decided to continue to do so. Prior to fall-2022, this allocation was entirely through funds but there are few that invest in the smallest stocks. Beginning in fall-2022, I decided to transition some of this allocation from BRSIX to individual stocks based on the American Associaton of Individual Investors (AAII) success in maintaining a "Shadow Stock" portfolio of micro-cap value stocks. This post is my difficulties in implementing a similar portfolio. I am interested in comments on how I can address the difficulties that I have encountered.
Sorry for a long post, results and observations follow.
From October 25, 2022 through August 16, 2024, an investment in Bridgeway Ultra Small Market Fund (BRSIX, one of the few funds that invests in very small stocks) returned a little over 11%, about 6% annualized (Morningstar data). My attempt to transition from BRSIX to a similar portfolio lost about 6% annualized (assumes an initial investment in BRSIX that was sold to as needed to fund purchases of individual stocks).
When I analyze why my performance has been so poor, I have noticed three things:
1) there are a few stocks (TCS, GORV, DLA) that were sold out of the shadow stock portfolio that I continued to hold that have declined substantially. These stocks were losers when they were sold by the shadow stock portfolio but have become big losers. (My bad for not sticking to the sell rules.) Selling these stocks when the shadow stock portfolio sold them, would have reduced my loss to about 4% annualized.
2) there are a number of stocks (CMT, FRD, MG, LAKE, NGS, PKOH) whose price increased between the time that they were purchased by the shadow stock portfolio and the time that I had a chance to purchase them. I elected not to buy at the higher prices. All except CMT still met the criteria for purchase. (My bad for not purchasing the 5 at the higher, but still qualifying price.) Adding these 5 stocks would have reduced my loss to about 2% annualized.
3) I was too aggressive in trying to transition from BRSIX to the personal portfolio and bought some stocks that were already held by the shadow stock portfolio that, as a group, have underperformed the overall portfolio. Although these stocks did meet the purchase criteria, they did so because they had declined in price. The current rules at the AAII site for purchases do not include a relative strength requirement but previous versions did. Avoiding purchases of stocks that had poor relative strength would have improved my performance to a gain of about 2% annualized.
When I look at a slightly different period, March 11, 2022 thru August 16, 2024, the performance of a hypothetical portfolio managed according to rules incorporating the lessons learned as stated in the previous paragraph was approximately the same as BRSIX (~-4% annualized) with both trailing my best estimate of the performance of the AAII Shadow stock portfolio over that period (~+4% annualized). I'm not sure what the AAII Shadow Stock portfolio is doing that BRSIX or my hypothetical portfolio is not. (For comparison, micro-cap stocks in general, i.e., IWC, returned about -1% annualized over that period.)
One more observation, the performance of the new stocks added to the AAII Shadow Stock portfolio was much better than the continuing performance of the stocks that were already held by the shadow stock portfolio at the beginning of the period. (The performance of the stocks that were already held wasn't much different than the performance of micro-cap stocks in general.)
Sorry for a long post, results and observations follow.
From October 25, 2022 through August 16, 2024, an investment in Bridgeway Ultra Small Market Fund (BRSIX, one of the few funds that invests in very small stocks) returned a little over 11%, about 6% annualized (Morningstar data). My attempt to transition from BRSIX to a similar portfolio lost about 6% annualized (assumes an initial investment in BRSIX that was sold to as needed to fund purchases of individual stocks).
When I analyze why my performance has been so poor, I have noticed three things:
1) there are a few stocks (TCS, GORV, DLA) that were sold out of the shadow stock portfolio that I continued to hold that have declined substantially. These stocks were losers when they were sold by the shadow stock portfolio but have become big losers. (My bad for not sticking to the sell rules.) Selling these stocks when the shadow stock portfolio sold them, would have reduced my loss to about 4% annualized.
2) there are a number of stocks (CMT, FRD, MG, LAKE, NGS, PKOH) whose price increased between the time that they were purchased by the shadow stock portfolio and the time that I had a chance to purchase them. I elected not to buy at the higher prices. All except CMT still met the criteria for purchase. (My bad for not purchasing the 5 at the higher, but still qualifying price.) Adding these 5 stocks would have reduced my loss to about 2% annualized.
3) I was too aggressive in trying to transition from BRSIX to the personal portfolio and bought some stocks that were already held by the shadow stock portfolio that, as a group, have underperformed the overall portfolio. Although these stocks did meet the purchase criteria, they did so because they had declined in price. The current rules at the AAII site for purchases do not include a relative strength requirement but previous versions did. Avoiding purchases of stocks that had poor relative strength would have improved my performance to a gain of about 2% annualized.
When I look at a slightly different period, March 11, 2022 thru August 16, 2024, the performance of a hypothetical portfolio managed according to rules incorporating the lessons learned as stated in the previous paragraph was approximately the same as BRSIX (~-4% annualized) with both trailing my best estimate of the performance of the AAII Shadow stock portfolio over that period (~+4% annualized). I'm not sure what the AAII Shadow Stock portfolio is doing that BRSIX or my hypothetical portfolio is not. (For comparison, micro-cap stocks in general, i.e., IWC, returned about -1% annualized over that period.)
One more observation, the performance of the new stocks added to the AAII Shadow Stock portfolio was much better than the continuing performance of the stocks that were already held by the shadow stock portfolio at the beginning of the period. (The performance of the stocks that were already held wasn't much different than the performance of micro-cap stocks in general.)
Statistics: Posted by TomBH — Wed Aug 21, 2024 9:33 am — Replies 0 — Views 12