Superior returns One question facing investors is how to achieve superior returns over the long-term.
One option, which can save time and inject much-needed focus and discipline is to use stock screening and data mining tools as part of your armoury.
The reason there is so much interest in stock screening is that, if implemented intelligently, the evidence suggests that it is one of the surest ways of consistently 'beating the market'.
For example, Warren Buffett, the most successful investor in the world is best known for his distinctive, disciplined and systematic approach to investing, which is based on the thinking of two other 'greats' - Benjamin Graham and Philip A.
Fisher.
As Buffett puts it, 'If the business does well, the stock eventually follows'.
UK investment guru, Jim Slater, author of the 'Zulu Principle' and best known for the 'low PEG approach' to picking growth stocks is similarly highly disciplined.
He believes that 'almost any intelligent system works' and prefers to combine multiple criteria in order to beat the market.
His favoured criterion is a low PEG (price-earnings growth factor), which is a forward-looking earnings based ratio.
Essentially, it is used to identify stocks that are on a low multiple of earnings in relation to their forecast earnings growth rates.
By way of illustration, a company with forecast earnings per share (EPS) growth of 20% on a multiple (price-earnings ratio) of 10 would have an attractive PEG of 0.
5 (10 divided by 20).
Conversely, a company with forecast EPS growth of 10% on a multiple of 20 would have an unattractive PEG of 2 (20 divided by 10).
On the face of it the latter would look much less attractive in terms of its valuation.
Stock screening, for example, enables you to focus on all those companies with a PEG of less than or equal to 0.
5, i.
e.
only those that appear to be lowly priced in relation to their forecast earnings growth rates.
Clearly such stocks then require further investigation.
It also makes good sense to build a 'safety net' around this main criterion.
For example, other criteria could include searching for shares on relatively low multiples, with cash flow per share in excess of EPS (i.
e.
to help avoid creative accounting) and positive relative strength (i.
e.
positive share price performance compared to the market as a whole).
Back-testing Buffett's approach has been consistently successful and has significantly outperformed over the long-term as evidenced both by his investment vehicle Berkshire Hathaway over the last 40 plus years and by independent back-testing.
For example, back-testing conducted by analysts at Standard & Poor (S&P) used a version of a Buffett stock screen and found that between 1995 and January 2003 it would have returned 207% compared with 77.
7% for the S&P 500.
Jim Slater's Zulu Principle approach has also been 'back-tested'.
The results have been published by Merrion stock brokers in Dublin, Ireland.
Between 1994 and 2004 Merrion found that over nine and a half years a 'Zulu Principle' portfolio could have delivered compound per annum returns of 24.
5% (excluding costs) compared to just 4.
4% compound per annum for the UK FTSE All Share index.
One of Merrion's main conclusions was that this quantitative, disciplined and systematic approach removed much of the subjectivity and emotion from investment decisions, such as the urge to jump on the latest bandwagon, emotions that investors often find the hardest to control.
As Warren Buffett puts it 'what is needed for successful investing is a sound investment framework for making decisions and an ability to keep your emotions from corroding that framework'.
When coupled with other qualitative research, an intelligent disciplined approach to stock picking should enable you to systematically stack the odds in your favour and lead to success over the long-term.
How do I do stock screening? Quite clearly, therefore, the evidence for using stock screening is compelling.
So, which are the best tools available and how much do they cost? An easy starting point is to type in keywords, such as "stock screening" and "data mining tools" as part of a keyword search in Google and other web-based search engines.
This will deliver details of free and paid for data mining and stock screening tools available to the private investor.
It is worth also checking in financial publications like Barron's and I would recommend that you also check with your stock broker and financial adviser first before making a final decision and taking out a subscription to a stock screening service.
Personally, I pay about $25 a month for a UK-focused market-leading stock screening tool, which I find completely indispensable.
One option, which can save time and inject much-needed focus and discipline is to use stock screening and data mining tools as part of your armoury.
The reason there is so much interest in stock screening is that, if implemented intelligently, the evidence suggests that it is one of the surest ways of consistently 'beating the market'.
For example, Warren Buffett, the most successful investor in the world is best known for his distinctive, disciplined and systematic approach to investing, which is based on the thinking of two other 'greats' - Benjamin Graham and Philip A.
Fisher.
As Buffett puts it, 'If the business does well, the stock eventually follows'.
UK investment guru, Jim Slater, author of the 'Zulu Principle' and best known for the 'low PEG approach' to picking growth stocks is similarly highly disciplined.
He believes that 'almost any intelligent system works' and prefers to combine multiple criteria in order to beat the market.
His favoured criterion is a low PEG (price-earnings growth factor), which is a forward-looking earnings based ratio.
Essentially, it is used to identify stocks that are on a low multiple of earnings in relation to their forecast earnings growth rates.
By way of illustration, a company with forecast earnings per share (EPS) growth of 20% on a multiple (price-earnings ratio) of 10 would have an attractive PEG of 0.
5 (10 divided by 20).
Conversely, a company with forecast EPS growth of 10% on a multiple of 20 would have an unattractive PEG of 2 (20 divided by 10).
On the face of it the latter would look much less attractive in terms of its valuation.
Stock screening, for example, enables you to focus on all those companies with a PEG of less than or equal to 0.
5, i.
e.
only those that appear to be lowly priced in relation to their forecast earnings growth rates.
Clearly such stocks then require further investigation.
It also makes good sense to build a 'safety net' around this main criterion.
For example, other criteria could include searching for shares on relatively low multiples, with cash flow per share in excess of EPS (i.
e.
to help avoid creative accounting) and positive relative strength (i.
e.
positive share price performance compared to the market as a whole).
Back-testing Buffett's approach has been consistently successful and has significantly outperformed over the long-term as evidenced both by his investment vehicle Berkshire Hathaway over the last 40 plus years and by independent back-testing.
For example, back-testing conducted by analysts at Standard & Poor (S&P) used a version of a Buffett stock screen and found that between 1995 and January 2003 it would have returned 207% compared with 77.
7% for the S&P 500.
Jim Slater's Zulu Principle approach has also been 'back-tested'.
The results have been published by Merrion stock brokers in Dublin, Ireland.
Between 1994 and 2004 Merrion found that over nine and a half years a 'Zulu Principle' portfolio could have delivered compound per annum returns of 24.
5% (excluding costs) compared to just 4.
4% compound per annum for the UK FTSE All Share index.
One of Merrion's main conclusions was that this quantitative, disciplined and systematic approach removed much of the subjectivity and emotion from investment decisions, such as the urge to jump on the latest bandwagon, emotions that investors often find the hardest to control.
As Warren Buffett puts it 'what is needed for successful investing is a sound investment framework for making decisions and an ability to keep your emotions from corroding that framework'.
When coupled with other qualitative research, an intelligent disciplined approach to stock picking should enable you to systematically stack the odds in your favour and lead to success over the long-term.
How do I do stock screening? Quite clearly, therefore, the evidence for using stock screening is compelling.
So, which are the best tools available and how much do they cost? An easy starting point is to type in keywords, such as "stock screening" and "data mining tools" as part of a keyword search in Google and other web-based search engines.
This will deliver details of free and paid for data mining and stock screening tools available to the private investor.
It is worth also checking in financial publications like Barron's and I would recommend that you also check with your stock broker and financial adviser first before making a final decision and taking out a subscription to a stock screening service.
Personally, I pay about $25 a month for a UK-focused market-leading stock screening tool, which I find completely indispensable.
Source...