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Mimicking the 1980s Value Line Contest

A letter from a reader:

Dear Mr. Merkel,

I am organizing an investment contest in my university and I want to do it properly. Can you provide me with data of stock divided into 10 groups based on volatility? I searched for it in Yahoo Finance, but if you have it compiled in a better way, it would be really helpful. 

Also, what do you mean when you say a minimum capitalization limit? Do you mean that the students should hold a certain amount of cash, that they are not allowed to invest?

Sometime in 1985-1986, [Corrected from 1983-1984 -- DM] Value Line held a contest where it asked participants to pick ten stocks, one from each of ten price volatility groups, ranked from lowest to highest.  Why such a contest design?  Well, with most stock picking contests, the winner picks a really volatile stock, it soars, and he is the winner by accident.  I say “by accident” because there were others with similarly volatile stocks that lost.

Forcing players to pick a portfolio of stocks, including less volatile stocks, creates a real challenge that resembles real portfolios.   Even though the contest will still run over 6 months[Corrected from 3-6 months -- DM], the luck component is substantially reduced, even though results over a short time horizon are highly affected by luck and momentum.

Well, I’ve created a file that divides the US-traded market into 10 volatility buckets for you, using data from a screening package.   Here’s the link.

3,589 stocks made the cut.  No ETFs, closed-end funds, etc.  No market caps below $100 million. No stocks with less than 3 years of trading history.  The market cap limit is there because really teeny stocks can fly, and skew the results.  And no, no cash is in the results, just the average returns of 10 stocks.

Here are the average price volatilities by bucket.  [Volatility is actual price volatility for 36 trailing months]

BucketAvg Price Volatility
115.04
219.80
323.28
426.67
530.01
633.69
738.16
844.38
954.21
10107.02

As for industries, the volatilities are what you might expect:

Ten Least Volatile

  • 1206 – Natural Gas Utilities
  • 1203 – Electric Utilities
  • 1209 – Water Utilities
  • 0512 – Fish/Livestock
  • 0506 – Beverages (Non-Alcoholic)
  • 0524 – Tobacco
  • 0715 – Insurance (Property & Casualty)
  • 0503 – Beverages (Alcoholic)
  • 0933 – Real Estate Operations
  • 0730 – S&Ls/Savings Banks

Ten Most Volatile

  • 0912 – Casinos & Gaming
  • 0930 – Printing Services
  • 0124 – Metal Mining
  • 0409 – Audio & Video Equipment
  • 0427 – Photography
  • 0969 – Schools
  • 0118 – Gold & Silver
  • 0803 – Biotechnology & Drugs
  • 0966 – Retail (Technology)
  • 0424 – Jewelry & Silverware

That said, such a contest would force some choices from both safe and volatile investments.

Smaller stocks are a lot more volatile than large stocks on average:

Mkt Cap Bucket

Average Vol Decile

100-300M

7.03

300M-1B

6.58

1-3B

5.36

3-10B

4.47

10-30B

3.90

30-100B

3.40

Over 100B

2.61

Finally, some countries are more or less volatile than others.  Of the 50 countries represented, trading on US exchanges, here are the most and least volatile:

Least Volatile

  • Colombia
  • Denmark
  • Panama
  • Philippines
  • Turkey
  • Belgium
  • United Kingdom
  • Chile
  • Switzerland
  • Japan

Most Volatile

  • Israel
  • Bahamas
  • Finland
  • Portugal
  • Russian Federation
  • India
  • Monaco
  • Greece
  • China
  • Argentina

Summary

My point in showing some of the divisions is to give an idea of ways to analyze and play the game.  You could also do it by momentum or valuation variables.  Momentum would probably work best in a short contest.

As for me in the early ’80s, I was a busy graduate student, so I looked at the stocks rank ed highest for Timeliness by Value Line in each volatility group, and selected the one for each group that I thought was the most promising.  As it was, I finished in the top 1%, but not high enough to win a prize.

Anyway, I think this is a great contest design, because it minimizes the ability of players to pick volatile stocks.  With ten stocks of varying volatility in the portfolio, stock-picking skill has a greater chance of being revealed.  Better would be a longer-term contest, but few have the patience for that, and players will argue that they should be allowed to trade, making for a more complex contest.






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One Response to Mimicking the 1980s Value Line Contest

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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