Sharpest Triple (short)

Turns the sharpest signal combination from our study of 792 U.S. bankruptcies into a portfolio. A bet is placed only when three things coincide: the company has declared that previously issued figures can no longer be relied upon, the auditor reports substantial doubt about its ability to continue as a going concern, and current liabilities exceed total current assets. Historically that triggered just under nine times a year; 52 percent of those stocks lost at least 30 percent within three months — against 11 percent for stocks matched on price, trading volume and distance from their 52-week high. At most a tenth of the portfolio per position, never more than half committed at once, no more than five bets side by side. A position is closed as soon as it moves 25 percent against us, and after three months at the latest — beyond that, the study finds recoveries dominate. Four out of five of these companies survive the year; this is not a bet on bankruptcy but on the price path after the cluster.

This portfolio bets on falling prices: it borrows shares, sells them and buys them back later. If the price rises, it loses.