This is the season for investor conferences. Over the course of five to six weeks, TradeSmith will speak in front of a couple thousand investors. Some are TradeStops members and many aren’t members — yet.

This year, with the markets’ increasing volatility and all of the negative headlines, his message is very clear.

“Successful investors don’t just buy a random collection of stocks and hope they go up. They have rules in place — before they buy a single stock — to build portfolios that have the best chances at success.”

There are literally thousands of stocks to choose from, so what’s the best way to go about building and monitoring portfolios in TradeStops?

More than two years ago, TradeSmith and his research team began looking at ways to build portfolios using a number of the portfolios found in investment newsletters and elsewhere. He created a set of rules that became the basis of the Pure Quant tool found in TradeStops Lifetime and TradeStops Pro.

These are the rules to build world-class portfolios:

  1. Stay out of the Stock State Indicator (SSI) Red Zone.
  2. Keep the average Volatility Quotient (VQ) below 40%.
  3. Only buy if the trade is positive at time of SSI entry.
  4. Sort by those that have most recently entered the SSI Green Zone.
  5. The maximum number of positions is 20.
  6. The minimum number of positions is 10.
  7. Keep the portfolio risk-balanced at each step.
  8. Replace stopped-out positions with next buys.

These rules are built into the Pure Quant tool. But even if you’re not a Lifetime or Pro member, you can still use these rules to construct a great investment portfolio.

For today’s example, we’ll start out by using some of the billionaire portfolios that are part of the Billionaires Club. Access to these portfolios does require a Lifetime or Pro membership. We’re going to use the stocks owned by Warren Buffett, Carl Icahn, Seth Klarman, David Einhorn, and David Tepper. We’re going to assume that we have $100,000 to invest, and we’d like 20 stocks in our portfolio. It’s easy to enter that into the Pure Quant tool.

Pure Quant Portfolio Builder interface

When we click the “Run Research” button, we get a risk-rebalanced portfolio of the top 20 stocks that qualify according to the rules listed above. We can then save this as a complete portfolio by clicking the “Save as Portfolio” button.

Output from the Pure Quant Portfolio Buider

Now that we have this portfolio set up, we can begin monitoring it using the portfolio research tools in TradeStops.

The first thing we want to consider is how well the portfolio is diversified. We don’t want it to be too heavily invested in just one or two sectors. We’ll use the Asset Allocation tool for this.

Here’s the portfolio’s asset allocation according to sector. As you can see, the largest allocation is to the health care sector, but that is only 20% of the portfolio.

Asset Allocation according to Sector

The picture looks even better when looking at the asset allocation by industry. We have 20 stocks in the portfolio, and we’re invested in 18 different industries.

Asset Allocation by Industry
Lastly, we’ll want to look at the overall volatility of the portfolio itself. For this, we use the PVQ analyzer. PVQ stands for Portfolio Volatility Quotient. The PVQ is how we measure the correlation of the different stocks in a portfolio. It can be thought of as the normal volatility of the overall portfolio.

The PVQ is determined by the correlation between the different stocks in the portfolio. For example, gold mining stocks are risky and many have VQs in the 40% range and higher. A portfolio of only gold mining stocks will also have a high PVQ. The stocks within this particular industry tend to move up and down together.

The PVQ for this portfolio is extremely low, it’s well under 10%. The individual stock with the lowest VQ is Proctor & Gamble (PG) and it has a VQ of 10.5%. Because the stocks in this portfolio are in different sectors and industries, the correlation between these stocks is low.

Pure Quant Portfolio Builder interface

This shows how a well-diversified portfolio, with investments in different sectors and industries, gives you the best opportunity to succeed with a low-risk portfolio.

We’ll be talking about using these rules to build great portfolios during our next educational webinar on Tuesday, October 16, at 1 p.m. Eastern. Click here to register. Even if you can’t attend the event live, registering will allow us to send the recording of the webinar to you when it has been completed.


Tom Meyer
Education and Research Specialist, TradeStops