Expert: Paul Henneman - 6/8/2006

Question
Perhaps like many readers of this site, I have little time (or skill) for analyzing stocks and am looking for a backtested stockpicking strategy that will give strong returns without too much risk (inasmuch as that is possible). Your ValuEngine website looks like it has several strategies that may actually fullfill this fantasy of mine.  I am attracted to the ValuEngine Newsletter for its simplicity and great returns thus far (~12 months).  However, before I put (very) hard-earned money into a new strategy, I prefer to see longer-term backtests of the strategy if possible (I am still skittish and stinging sharply from ‘00-‘02).  It would seem that the method used to pick the Newsletter stocks, as you described to someone here on 3/6/06, could be easily backtested.  

So my first question is, would it be possible for that Newsletter backtest data to be posted either here or on the Newsletter website?  Obviously, the longer the backtest the better, preferably through both "growth" and "value" periods (say, back to 1990?).   Whatever the results are, it would help potential investors know what they are getting into and would surely put more of them at ease (and thus probably encourage subscriptions!).

Also, could tell me what are the 11 sectors used by Mr. Stokes in diversifying the Newsletter portfolio?

Finally, kudos to you on your extensive (and non-selfserving) answers to the beginning investors here.  I am sure it helps many.  (I am happy to ask some questions that may help plug your fine ValuEngine service, not that it needs it.)

Thanks very much for your help!


Answer
Thank you Greg for your questions!
We do have some backtested strategies on ValuEngine's main website, www.ValuEngine.com. They can be found by clicking on the 'Benchmark Portfolio' link on the left side navigation bar. Keep in mind that the results do not include trading costs, but as you can see are very good.
For the newsletter, we have decided not to post backtested results. The problem is that many find backtesting 'unreliable'. There are many ways to backtest a strategy, and ValuEngine goes to great length to preserve the integrity of the strategy going back in time. But many firms do not do this, and simply pick the best stocks, or modify the strategy back in time to achieve good results. So we have received criticisms in the past for posting backtests. Really the issue is understanding what a backtest is, and how it was conducted. Issues that confuse many individual investors. So our decision for the newsletter was to post only actual performance, and build a history going forward.
As you say, the history this past year has been fantastic. I should mention that performance this month has been very bad, a big pull back along with the rest of the market. The overall picture, being up 56% in one year before this months pull back, is still very good. But had you invested last month for the first time, you would probably not be a happy camper.  So the strategy can be a bit volatile (but generally less volatile than the overall market).  Many would consider this a good time to get in, at a much lower overall market level than just a month ago.
The backtests that we did run during the development of the newsletter indicated about a 25% average annual return. So a pull back is actually to be expected after such good returns for the past year.
As for sector designations, we use the Thomson Financial sector designations. They are:
Basic Industries   
Capital Goods   
Consumer Durables   
Consumer Non-Durables   
Consumer Services   
Energy   
Finance   
Health Care   
Public Utilities   
Technology   
Transportation   

I hope this helps! Please do not hesitate to follow up with me if I can be of any further service,

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.ValuEngineView.com
www.VEInstitutional.com
www.VEReports.com