Stock
Screeners – Great tools but the only first step in a journey
In
the last edition, I mentioned a book entitled, Big Safe Dividends.
It is supported by a web site which offers a regularly updated
screener. (You have to register free to access the site.)
This
led me to investigate other stock screeners.
The
Little
Book That Beats the Market
(John Wiley & Sons, 2010) by Joel Greenblat is another of the
Little Book series. It advances a simple but effective approach to
establishing and managing a portfolio. I recommend this book. Visit his web site to learn more.
I
was tempted, initially, to present a detailed discussion of selected
stock screeners based on various analytical methods. However, in
researching further, I came across a very interesting compendium of
75 screeners compiled by The American Association of Independent
Investors. (I recently joined the AAII in order to have more
complete access to the site's offerings.)
The
AAII maintains a very rich site. The section on screeners is
informative. For example, you can sort the screeners according to
various metrics such as performance over 3, 5, and 10 year intervals.
You can look at risk and compare their performance with a selection
of market indices during bull and bear markets and various time
intervals. In some parts of the site, you can look at the relative
performance of screeners based on broad investment styles.
Information on the relative risk of the style versus an assortment of
market indices is also presented. In assessing the screens, you may
wish to consider why some screeners performed better than others by
comparing the worst to the best.
One
of the methods based on Piotroski scores seemed to perform better
than most other screeners. I looked for a Piotroski screener which
includes Canadian stocks and found this (it includes listings from
Europe and the U.S. as well).
http://www.grahaminvestor.com/screens/piotroski-scores/
I
especially like the sorting feature which enables users to array
companies in various ways: alphabetical order, by sector, etc. Kudos
to John B Keown who pens The
Graham Investor: Intelligent Value Investing
blog. Unfortunately,
the last post in his blog is dated October, 2011. The screener is
still active. If you use it, you may wish to e-mail him to thank him
for his excellent work.
The
following article, Stock Screening With Walter Schloss,
provides a very nice synopsis of the approach adopted by one of
America's most successful investors. You could build up a nice
screen using these criteria and employ the methodology as part of
your due diligence once you have identified potential purchases.
http://www.aaii.com/computerized-investing/article/stock-screening-with-walter-schloss
For
more on Walter Schloss, read Walter Schloss' 16 Factors to Make
Money in the Stock Market. I'm going to revise my investing
checklist as a result of Piotroski and Schloss and may present it in
a future edition. (In a previous edition I commented on the value of
checklists.)
http://www.marketfolly.com/2012/10/walter-schloss-16-factors-needed-to.html
Screeners
are useful as screening tools to identify candidates for further
investigation. I generally use them to assist in the identification of potential companies once I have identified a sector of interest using a top down strategic approach.
In order to realize their full value, you must
undertake follow-up work to ascertain the “story” behind the
metrics of the stock screens. As noted in earlier editions of The
Financial Passage Maker, it is advisable to have a checklist to
assist with your evaluation of potential acquisitions. The checklist
should be consistent with your investment style (see The Little
Book That Beats the Market). Over time, I have developed two
checklists: one for growth stocks where I seek capital gains; one for
dividend stocks.
I
thought of developing one for speculative investments, but here
again, this work has been done. In this regard, there's no better
book than Reminiscences
of a Stock Operator
by Edwin Lefevre: John Wiley & Sons, 1994. I revisit it every
three years or so ... it's that good. The book is themed on the
experience of one of the most famous speculators in America in the
1920's and 1930's. The essence of Jesse Livermore's approach is set out
here (an excellent site): http://www.jesse-livermore.com
Never
before have investors enjoyed such wide access to investment tools
and sources of information. However, with this wealth of data and
information, why is it then, that most investors (including most
“professionals”) under perform the market?
- Most have very short time horizons and are unduly influenced by monthly/yearly swings in the market;
- Most do not have the patience to wait until “undervalued” stocks are finally recognized by Mr. Market (this is the case especially with the value approach);
- Many are seduced by fads (e.g. the dot com mania; housing; uranium; exotic ETFs ... tulips) and party on to financial oblivion i.e. they think they are “investing” instead of speculating, which is an entirely different game;
- Many, especially institutional investors, are torpedoed by institutional constraints e.g. personal performance measures such as quarterly/yearly gains or losses on managed portfolios sometimes cause portfolio managers to act in strange ways;
- Some institutional investors are over confident. Further, expressions of self doubt or hesitation in such a competitive environment do not fit in well with the prevailing culture of aggression;
- Many overeducated investors cannot think out of the box. It seems as if the level of one's formal training equates inversely to one's ability to recognize patterns which don't fit one's preconceptions. I mentioned this in an earlier edition where secretaries outperformed highly educated mining geologists in a pattern recognition game;
- The 24/7 financial news system creates undue “noise” which can influence susceptible individuals. Many of the “bingo callers” who blight the airwaves are not much more than lacquer-haired bimbos and bimbettes ... some of them may be good at interviews ... others may have a persona based on outlandish personal attributes ... but most of them are poor investors – otherwise – why would any person (other than a narcissist) turn up for work each day in such a crazy environment?); and,
- In the final analysis, most people do not have the philosophical grounding and discipline to develop and follow a system (all great investors comment on this).
My advice:
- Accept personal responsibility for your financial well being. You alone will act in your own self interest. Others will generally put their interests before yours.
- For the equities component of your portfolio, you may wish to give serious consideration to investing in pure market indices via ETFs. You will outperform most active investment vehicles over time and the outrageous management fees and other charges associated with mutual funds will not erode your returns. Anyone can do this. For more information, read this interview with John Bogel. http://www.advisorone.com/2012/09/25/how-john-bogle-really-sees-etfs
- Read all you can about various investment approaches and determine those approaches which best fit your constitution. For example, if you are not prepared to go against the herd, the value approach is not for you – best to invest in market indices.
- Be prepared to work: become financially literate; invest time in learning and monitor your investments. Those “magical” systems which promise outlandish returns with little effort are usually the products of shysters seeking to line their pockets.
- Prepare checklists to assist in the initial identification of potential stocks and your subsequent follow-up investigations (the checklists may be different). I maintain a “watch list” of potential acquisitions in order to get a “feel” for the market and also, to provide a list of replacement candidates for shares sold. This lessens the temptation to jump in quickly with new purchases.
- Develop a “life plan” to provide a context for things financial. That way, you will be more motivated. I have devoted a lot of space to this topic in previous editions.
- Know yourself.
- Exercise discipline and stay the course.
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