When each week's TSM list was invested in a folio (each averaging 24.3 stocks) and these folios were then held for 33 days before selling, 32 such folios produced 25 winners with an average return of +2.23 percent.  The component stocks produced 488 winners and 288 losers (15 winners and 9 losers per weekly folio) with an average return of 2.60 percent over the 33 days  A $100k account grew to $114,588 for the year (better than the $108,503 of the S&P 500).  Complete trade documentation can be found here.  Note, this is a very conservative approach that is far less exposed to individual stock miss-steps (like the Russian government's sudden tax liabilities imposed on VIP).  The folio approach doesn't provide us the return of its individual stock plays because cash enters the market on a dollar-cost-averaging basis; it fully deploys over five weeks following re-entry after a stop loss exit.

Short Term TSM Trades:  Each day 0 to 5 trades are described in the Daily "Before the Bell" TSM Report.  This watch list of stocks has passed through the triple screening criteria.  Trades are chosen based on technical criteria: breakouts, multi-day pullbacks, or new 21-day lows.  Trade management criteria are included for each trade as well.  In each case, a buy point and three sell points are identified.  If the trade plays out perfectly, one-half the position (500 shares) is sold when price rises $1 above the buy point, and the stop for the second half is then raised near the buy point. As the trade develops further, a two-day trailing stop is used till eventually the second 500 shares are sold.  TASR, trade # 134, was the most profitable example, a trade that returned 35.2 percent over 20 days. 

Should the trade go bad (and about 40 percent will), the first half of the position (500 shares) is sold at the technical stop loss point, then the second 500 shares at the 7 percent final loss point should price continue to fall.  The idea is to take 1/2 profits quickly and reset the stop-loss point so a position with a $1 profit never runs into a loss, then let the second 1/2 profits run as high as possible.  Conversely, the max loss is ideally limited to 7 percent for 1/2 the position and less for the other half.  Occasionally, larger loses do develop because of opening gaps.  The distribution of returns is shown in the following chart.  The 233 trades resulted in 58.4 percent wins with an average return of +0.97 percent over 9.1 days (39 percent annualized). 

              Profit = (# Trades)*(Shares per Trade)*[win rate*(average win) - loss rate*(average loss)]
                       =   (233)     *      (1,000)           * [   0.5837*($2.17)       -        0.4163*($2.14)               =                                          $87,549

Successful trading is all about finding an approach that makes sense, being disciplined enough to follow the plan, and executing it over and over again.  Here, one could improve profit by (1) making more trades, (2) trading more shares, (3) increasing the win rate, or (4) increasing the average win amount.  This approach will return about 60 percent in a range-bound market.  In a market with a strong bullish trend, the return rate will be much greater.

Long Term TSM Folio Trades:  Folio investing is longer term oriented, utilizing more stocks (better diversification with less risk), and requiring far less time.  Folios, in effect, allow one to set up a mutual fund based on TSM stocks, hold as many as 150 stocks in three folios, make 600 trades monthly (even for partial shares), and all at a cost of $39.95/month (even cheaper plans are available).  Link here for further information.

Though several approaches might be used, and a hybrid method utilizing combination of short-term trades and longer-term holding of TSM stocks is described in TSM Methods, the approach described here holds each set of TSM stocks over a ~33-day period.  To get started, one divides his investment capital into five equal lots (described here as lots A through E).  On Thursday morning (after the new Wednesday evening set of TSM stocks) one initially invests $20,000 (assuming a $100,000 account) equally among that week's TSM stocks.  The next week, another $20,000 is invested in a new list of new TSM stocks, many of which carry over from the previous week.  In effect, repeating stocks overweight in the account.  During 2004, 776 TSM stocks were identified in 32 TSM folios of which only 160 were unique (each stock averaged appearing in 4.84 TSM lists). Find the 2004 TSM folio trade history here.

This approach continues until lot E stocks is invested in the fifth week, then in the sixth week, lot A stocks would be sold and the money reinvested in new lot A stocks.  Because of the dollar cost averaging and diversification in each folio, stops need not be set at 7 percent limits.  If at any time, the account loses 3 percent from its highest balance, all lots are immediately sold; TSM stocks continue to be paper traded, but trades are not taken again until the first month following a month of positive returns.  For example, in week two, the account dropped to $97,000; both lots A and B were sold, and the account remained in cash until week 9 (2/26/04) produced a positive return.  Our initial investment this time was $97,000/5 in week 10 (3/04/04).  Following this approach, 32 of the 49 weekly TSM lists were invested with 25 proving profitable (averaging a 2.23 percent return over 33 days where S&P similarly treated produced +0.86 percent).  The $100,000 account grew to $114,588; 776 TSM stocks were purchased with 62.9 percent winners and averaging a +2.60 percent return.

The folio approach offers much greater diversification, and it's an approach not as impacted by one stock turning bad.  The following charts show the distribution of returns and the frequency of stock participation.

This folio approach allow us to take another look at the profit potential of individual TSM stock trades.

                           Profit = (# Trades)*(Shares per Trade)*[win rate*(average win) - loss rate*(average loss)]
                                     =   (776)     *      (20)              * [   0.629*($3.85)       -        0.371*($3.99)      ]
                                     =                                          $14,610

In summary, the TSM trading approach produced a 58.4 percent win rate and the folio approach a 62.9 percent win rate.  The key, again, is trade management discipline.