I was asked whether I could increase the frequency of my signals in the database recently. The short answer is “NO.” I thought I could just send my reply with a blunt (often confused with “rude”) one word answer and a link to a previous post because I was certain I had written on this topic before. After reading through a lot of my old posts, It turns out that I’ve not really addressed the frequency of my signals except for brief and vague comments. So thanks to Alan, I’ll finally spend some time on this very important topic.

The answer to why I do my signals weekly has two primary components. The first is practicality and the second is portfolio management.

Practicality - I am one person. I probably cover more stocks than any other single person. As I have previously mentioned on this blog, my analytical work is not an algorithm or black box program like many quants. I actually look at each stock at least once every week. I use my own experience, judgment and human intuition and I use my own techniques of both fundamental and technical analysis. All of this takes a lot of hours as you might imagine. From Friday’s weekly close until the following Monday’s open when the market is stopped, I have sufficient time to do everything I do for this site and still have time left over for a regular life to enjoy the company of others, perform my responsibilities as an adult, spend time appreciating nature, and do all the things that most people like to do on weekends. During the week, when the markets are moving I just don’t have the time to do any more than the site administration work to update the signals (that usually takes me from Monday until Tuesday) and then general research during Wednesday through Friday.

In 2001 and early 2002 when I started testing out some of my theories with HEDGEfolios, I toyed around with daily signals. Doing this was a great benefit because it forced me to become very efficient and the challenges I experienced contributed greatly to modifying my portfolio management and the techniques I use. However, the daily signals were so consuming that even at my best, I could only do 500 stocks per day and I had no life balance - it was pretty close to 18 hours per day, every day and I knew that would not be healthy or sustainable. Just doing the research to make signal changes used up all my time but doing the administrative site work to update the data is also time-consuming. Doing that every night regardless of the number of signal changes would take me about as long as it does now for weekly updates and I don’t have 28 hours in a day. I had a crazy goal of covering approximately 4000 stocks and I just couldn’t do it with anything more than weekly frequency. As a practical matter, doing signals more often is not physically or emotionally possible for me.

I believe one of the biggest reasons HEDGEfolios has consistently outperformed while still covering between 3,000 and 4,000 equities is that I do not overreact to something on Tuesday that gets reversed by Friday. By not responding to every sensationalized story in market coverage, I am able to reduce (not eliminate) unnecessary trades. More importantly, I don’t drive myself crazy. I have a discipline that says no changing of signals during the week and consequently, I don’t get sucked in to the panic moments. There is a downside and I cannot deny it - it is painful to watch one of my signals be correct on Monday, a little incorrect on Wednesday and a big loser by Friday. This inaction would be unacceptable in my opinion for someone else that has a different personality. The day-trader would be devastated and yet, a long-term investor would likely be okay with it and look at it as an opportunity to average-down. I am in between and due to some of my other portfolio management theories, the tradeoffs make my forced inaction on blowups tolerable for me.

Each investor or trader must understand the frequency that works for them and know how to be disciplined about it. Do not follow or adopt my frequency unless it happens to be your own. There are many reasons why people should ignore my work and the mismatch between their trade frequency and mine is just one of them. If I have an UP signal that gets whacked by Wednesday, make your own decision on what to do on Wednesday - don’t wait to see what I do almost a week later when my next signals are updated.

Portfolio Management - Trading frequency is one of the most personal subjects for any investor and trader. It depends on many factors such as your non-market obligations and personality characteristics that determine how you handle various trading stresses. Warren Buffett is calm as a long term investor - how calm do you think he would be if he was forced to trade something at least once per hour? Conversely, how would a day-trader feel if you told him he had to sit and watch 5-minute trading bars but could only make a trade once per month? Every person’s portfolio management preferences are a result of many factors and for me, trading frequency has a large impact. It’s important to know who you are and what kind of life you want before you figure out the right trading frequency. If I only covered 20 stocks like most analysts, I could certainly do daily signals, probably even twice-a-day signals. But I wouldn’t be able to enjoy my life as I do now and since my portfolio management theories have been based on covering between 3000 and 4000 stocks, weekly fits my personality and needs very well.

We all know the importance of reducing transaction costs and hence, turnover. The turnover stats on my signals with daily analysis was slightly above 1200% per year! That is not only ridiculously high but it will ruin performance. During 2004 and 2005, weekly analysis resulted in total (long and short) turnover around 200-300%. With all the market volatility in the past two years, it was approximately 375% in 2006 and 430% in 2007. Worse yet, 2008 is on track to exceed 520%. My technical analysis formulas are modified to reduce sensitivity to reduce the temptation of more frequent trading and despite all that focus, I am still putting out turnover ratios that make me sick. Certainly, if I was to measure all my portfolio management goals - the area where I would give myself the worst grade would be reducing trade frequency. If I didn’t mind massive turnover, I’d have less of a problem with higher frequency signals. As it is, my portfolio management theories have a goal of longer duration trades, not shorter.

There is a balance that you must maintain between trading frequency and performance. I don’t advocate day trading for myself or for others. I also don’t advocate buy-and-hold or deciding to dollar-cost-average once per month. In fact, I have tested out my technical and fundamental analysis techniques using monthly data to see whether it might be better than the daily or weekly options. I was not happy with the results and emotionally, I felt out of sync and I didn’t enjoy doing what I do. When I evaluated the three trading frequencies I found that daily signals had unacceptably high turnover and lower performance statistics and monthly had much better turnover data but subpar performance as well. The best fit for my style is weekly. Look at my performance statistics and their consistency over the 4 years this site has been online for all to see. Doing weekly signals is a big part of the results at HEDGEfolios and it is so integral to many of my portfolio management theories that I suspect a change would not be advantageous to my performance or how much I love doing what I do.