I've decided on some specific rules and parameters for a new experiment that includes small cap, value and momentum factors. Since the fund's assets are $4200, I find it appropriate to have "42 is the answer" as a theme for the fund. Call it "the 42 small/value momentum fund", I suppose.
To avoid penny stocks and those that don't trade very often, two criteria will be used:
stock price over $4.20
volume over 4200 trades/day
The stock screening tool I use has a category "under $250M market cap", so I will use that to keep the experiment focused on small cap stocks. These stocks are especially small, so "micro caps" is probably a better description.
Mutual funds cannot reveal this level of detail. Other stock market participants who know what a large fund is about to do will "front run", or buy the stock first. Then they sell those stocks at a profit to the fund that has revealed too much detail. Early on, Vanguard's S&P 500 fund experienced this, which is probably why it actually has about 506 stocks. Fortunately, a fund that only buys $1000 worth of stock that trades thousands of times per day isn't going to have much market impact.
The formula for the fund will mix value and momentum. Value will be represented by price/book, with a lower number representing a "value" stock. Momentum will be represented by 12 month performance. Where possible, I will manually check (12 month minus last month) to decide if a few stocks are close in performance.
After screening for small size, I will screen for momentum until only 42 stocks remain. The screen takes the performance of the S&P 500 over the past 52 weeks, and screens out stocks without a certain level of performance. I might see too many stocks beating the S&P by +20%, and too few beating the S&P 500 by +50%, and use a setting between those numbers to get the 42 stocks with the most momentum.
From this list of 42 high performing stocks, I will pick the stock with the highest performance and the lowest price/book. I will take the stock with the most momentum, and of the top 42 stocks, the stock with the most value.
Then I form a list of 42 value stocks using price/book as the criteria. Maybe too many stocks have price/book under 2.0, and too few stocks have price/book under 0.5, so I will have a setting between those numbers. From the list of 42 value stocks, I will pick the stock with the most performance and the stock with the lowest price/book.
Overall I will have 4 stocks. One stock with momentum, one stock tracking value, and two stocks tracking a mixture of value and momentum. Note 4 stocks is not a portfolio: it's very concentrated. Although I avoid penny stocks ($4.20 minimum stock price), deep value micro cap stocks are very risky and could go under, costing the fund -25% of it's assets each time it happens. I will avoid any stock that trades "on the pink sheets" or only on the OTC market.
Since this experiment tracks small cap, value and momentum I think a "smart beta" or "multi-factor" fund will need to be it's benchmark. I will need to research that and come up with a benchmark by Monday. I might also track the S&P 500, even though it's a totally inappropriate benchmark for a micro-cap value/momentum fund. The level of risk is not comparable.
The fund will start with $4200 in assets, and each trade costs $2. Every 21 trades costs 1% of the fund's assets, which is why I prefer 42 days between possible trades (6 weeks) rather than monthly or more often. In addition, value stocks might not change as often, so that could also lower the expenses of the fund. I plan on displaying exact amounts used in buying/selling as part of this experiment.
I plan on starting this experiment Monday, February 19.