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The AlphaKing Research
Project
The AlphaKing investment research
project was started in 1999 to answer once and for all
the age old question of what is the best way to risk
ones capital in the stock market. This was initially
done for the personal investment benefit of the
AlphaKing team, as we realized the importance of
investing in the stock market, though were unhappy with
the choices offered by the investment community. So we
went about reinventing the investment wheel, since there
really didn't seem to be a professional one we were
happy with. After 7 years of this quest, we believe
the results and lessons learned to be very meaningful.
Indeed, we know of no better way to invest ones capital.
History - over the long term - and a common sense
approach to finding workable solutions to common
investment problems - the stock market curve balls that
seem to come from no-where - are how we approached the
question of what works and what doesn't. While massive
in scope, below is a brief description of the 5
step approach used to build the AlphaKing Research
Project and portfolio strategies.
Step
1: Winning Investment
Elements
James O'Shaughnessy showed us how
to, and the wisdom of, isolating and combining
investment elements that had proven to outperform over
the long term, with his high relative strength and low
price to sales combination achieving a 24% annual return
from 1954 to 1996 (when the research was published in
"What Works on Wall Street.") Martin Zwieg showed us the
power of FED interest rate policy had on the financial
markets, also achieving a 24% annual return from 1966
through 1988 published in "Winning on Wall Street." A
simple combination of James O'Shaughnessy's portfolio
and Martin Zweig's Interest rate strategy returns 28%
per year.
So 3 proven investment elements -
high relative strength, low prices to sales, and FED
interest rate policy - work better than 1 or 2 alone.
The question becomes, what other elements are out there,
and would returns of 5 such successful elements being
combined be higher than the Shaughnessy/Zweig 3? And if
5 is better, what would happen if you isolate 10 such
successful elements and combined them? That was the
primary starting goal of the AlphaKing investment
research project.
The search for these elements
followed a 3 step approach: 1) Was there a common sense
logical reason why a certain element should outperform?
2) Was there historical evidence that certain elements
had outperformed in the past? 3) If the answer to both
was yes, then if one were to build a portfolio around
those elements (and combination of elements) and tracked
them in real-time would they outperform or flop in a bad
case of past performance not being indicative of future
returns?
The answer: 10K became 29.4K from
mid-1999 through mid-2005 for the AlphaKing base
portfolio, versus 10K becoming 8.9K for the S&P500,
and 10K becoming 7.7K for the NASDAQ. Thus a combination
of multiple fundamental elements do have significant
out-performance value, proving that fundamentals are a
great place to start the portfolio selection
process.
Step
2:Winning Chart Patterns
So basic combinations of proven
fundamental elements not only have outperformed
historically, but also in the up and down years of the
stock market bubble boom and bust cycle when tracked in
real-time in the AlphaKing base portfolio. The question
then becomes, can performance be improved upon by adding
non-fundamentally orientated elements? In 1999,
when we were putting the fundamental element
portfolios together, we began adding specific chart
patterns to the mix, to see if fundamentals and targeted
chart patterns would do better than fundamentals alone.
AlphaKing uses a quantitative scoring system to analyse
and quantify fundamental elements, and instead of
choosing the highest scoring stock - as was done to
build the test portfolio highlighted in Step 1 above -
these Winning Chart Pattern portfolios took the highest
scoring AlphaKing stocks that also had a specific chart
pattern. Thus, all stocks had great fundamentals (as
defined in Step 1) and the only addition was a specific
chart pattern element. The question was, do certain
chart patterns have out-performance value?
The answer: 2 specific chart
patterns emerged as out-performance leaders - which we
called Red and Blue - with AlphaKing Red turning 10K
into 44.1K from mid-1999 thru mid-2005, while AlphaKing
Blue turned 10K into 51.7K (while the AK Base portfolio
went from 10 to 29.4, the S&P500 10 to 8.9, and
NASDAQ 10 to 7.7) Thus certain specific chart patterns
do have significant out-performance value, and improve
returns above those portfolios built around great
fundamentals alone.
Step
3: Beta: friend or foe?
With a combination of winning
fundamental elements working better when used in
conjunction with favorable chart patterns, how could
returns be improved by the addition of other investment
elements? One obvious way was to check to see how
trading higher beta stocks effected
performance.
The answer: in mid-2001 the
AlphaKing GrQ/25 small cap high beta portfolio was
entered into the Marketocracy.com mutual fund
competition - as a beta leveraged version of the
AlphaKing Red and Blue portfolios - returning 25.8%
annual returns (without margin) from mid-2001
thru mid-2005 (chart below) placing #7 in the
mutual fund investment competition run by
Marketocracy.com on the long term (4 year) rankings out
of 70,000 competing strategies. All trades were
completed and tracked in real-time, following the rules
professional mutual funds must adhere to as set by the
SEC, and include commissions of 5 cents per share. Thus
beta leverage, when combined with a combination of
favorable fundamental elements and winning chart
patterns, does significantly enhance performance,
proving that beta is a trader's friend, and not a foe to
be feared.
.GrQ/25 .M100 .S&P500 .NASDAQ .DJIA
Step 4: Winning Money Management
Techniques
Leverage in the forms of
beta has worked well - significantly improving
performance of our great fundamantals/great chart
pattern combination - though as the chart
above shows in the earlier bear market years of 2001 and
2002 such an approach comes with some significant
down-side volatility on the bear swoons. Please note
that all AlphaKing portfolios tracked in the test to
answer questions of how specific investment elements
effect performance were 100% invested at all times, with
no adjustments made for the action of the stock market.
These were simple tests to see how specific elements
reacted to the ups and downs of the stock market when
pitted in head to head competition against other known
investment elements, as well as other investment
strategies, to see which investment elements work, which
don't, and which combination of investment elements
works the best overall.
With a collection of
winning fundamental elements, and winning chart
patterns, proven to achieve and maintain significant
out-performance with the AlphaKing Red, AlphaKing Blue,
and AlphaKing GrQ/25 Small Cap portfolios, the question
becomes: what would happen to returns if we added an
active defense designed to prevent portfolio losses
during stock specific, and general stock market bear
corrective phases?
With stock market
valuations on the high end of their historical norms,
with the demographic profile of the industrialized world
set to add potentially depressive forces onto the
economy as the massive baby boomer generation starts to
retire, with the potential for the bursting of a
speculative housing bubble, with government deficits
increasing day by day, and inflationary forces rising as
the US dollar succumbs to financial reality of excess
liquidity, an active and proven portfolio defense is an
absolute must if investors are to survive what should be
a very turbulent investment world going
forward.
In late 2002 these
stock-specific defensive money management triggers were
added to the AlphaKing portfolios and tested in
real-time, with the performance of the
GrQ/25 small cap portfolio shown below in a chart set at
a time when the money management defensive system was
added.
.GrQ/25 .M100 .S&P500 .NASDAQ .DJIA
Results following addition of defensive
money management system:
AlphaKing Red now becomes 54.3K versus
44.1K for the 100% invested at all times portfolio
AlphaKing Blue now becomes 53.1K versus
51.7K for the 100% invested at all times portfolio
AlphaKing GrQ/25 moves into 7th spot on
the Marketocracy 4 year rankings, with a compounded
annual return of 25.8%, with year to date 2006
performance of 21.5%, beating the S&P500 53% of the
time on a daily basis, 57% weekly, 62% monthly, 70%
quarterly, and 93% yearly since inception.
(Starting value of 10K)
Step
5: Stock Market Trends: friend or
foe?
So far the AlphaKing Research project
has uncovered that seeking stocks with great
fundamentals, when used in conjunction with specific
targeted chart patterns, along with targeted beta
leverage, while using active defensive and offensive
money management techniques, provides the most
investment return with the least amount of volatility
than any individual investment element alone. The
question is: can we improve performance even further by
aiming to adjust trades directly in-line
with the overall stock market trend,
rather than leaving individual stocks in the portfolio
to fend for themselves?
Using the trend-following active
defensive and offensive money management techniques we
found to work well for individual stocks as outlined in
Step 4, we found that the NASDAQ achieved annual
compounded returns of 13.8% long only, and 19.2%
long/short since 1973 thru year-end 2005. The Hit Rate
was 51%, with annual profit of 16.6% on winners, versus
a 3.4% loss on the failed trades, with an average of 3.1
trades per year.
The question is: if we used those NASDAQ
signals to time entry and exit of the AK Red, Blue, and
GrQ/25 winning portfolios, what would happen to
returns?
Answer:
AlphaKing Red now becomes 57.4K
AlphaKing Blue now becomes 151K
AlphaKing GrQ/25 becomes 95.4K
Versus 8.5K for the S&P500,
and 5.5K for the NASDAQ.)
(Starting value 10K, 2000-2005, using
opening price the day after a signal is
generated.)
Thus linking trades to the
overall stock market trend leads to greater profits than
allowing stocks to trade independently.
Conclusion
Great fundamentals, when used in
conjunction with specific targeted chart patterns, along
with targeted beta leverage, while using active
defensive and offensive money management techniques on
individual stocks once entered, while timing portfolio
entry and entry based on stock market trends has proven
to provide maximum returns with the least amount of
volatility in the AlphaKing Research Project so far
todate.
We have combined all of these features
into a single indicator we call the AlphaKing Trading
Indicator, accessible for free at www.alphaking.com, which
provides trading signals and fundamental ratings on over
4200 stocks. We also provide a 30 day free trial of our
Model Portfolios for those traders and investor looking
for more structured help in their
investing, providing 3 proprietary portfolios
designed around results of the AlphaKing Research
Project: Index - for those traders and
investors looking for a simple one trade approach to
diversification, as well as those trading mutual funds
in their 401K retirement accounts - GrQ/8
Hedge Fund - which trades stocks both long and
short, depending on stock market trends - and the
GrQ/25 small cap portfolio - which
trades long only. We have partnered with www.FolioFn.com
so that any investors wishing to trade our
portfolios can do so for a one time total annual
commission cost of $199 - allowing up to 200
traders per month - removing one of the stumbling blocks
to trading larger portfolios.
The AlphaKing Research quest to improve
upon the above findings through targeted research
continues, and our primary goal continues to
be the search to find the ultimate investment
strategy, and we believe we have taken giant steps down
that very important investment road by the discovery of
the AlphaKing Trading
Indicator.
Kevin Wilde, Chief Trading Strategist,
AlphaKing.com | 
