This how-to shows how to create a strategy in Equities Lab, and how to do some basic analysis of it. For humor value, we take the point of view of a children's book character, named Amelia Bedelia, who has no common sense. We have all felt this way some times.

How to Create a Good Investment Strategy

This article will cover how to create a strategy in Equities Lab and the basics of how to analyze that strategy. For the sake of humor, the point of view will be from the children’s book character named Amelia Bedelia, who has no common sense. We have all felt this way, especially when it comes to investing.

Create A Screener

A quantitative mutual fund is a screener.  We are channeling our inner Amelia Bedelia. This makes these books great to read aloud, along with this article, assuming you can stop laughing long enough to actually read it.

Name It

Screens without names are tough to find, so she names it after herself. Maybe she does have some common sense.

Choose a Size Segment

Small-cap stocks behave differently from large-cap ones.  Many mutual funds, therefore, filter on company size. Amelia does this, too — using her own special cutoffs.  When she’s done entering “4b < mc < 11.5b,” she hits return and then clicks on the green plus to get a new line.

Get Rid of Bad Earnings

If earnings are bad, they all must go.  Get rid of companies that make money.

Change the Dates to the Testing Period.

Chewing on her pencil as she works, Amelia decides to use 1998-2007 as her testing period.  To do this, she clicks on each date to change them.

Run the Backtest

The dates changed, and Amelia now clicks run to backtest the screener.

Use Industry Performance

Amelia sees that the line is too close to the pesky brown line. She wants her screener to be farther away from the brown line, not closer together. She clicks on the green plus or types “;” to add a new line.

Search for a Way to Rank Across a Cross-Section of Companies

Maybe buying companies in troubled sectors would help? She clicks on the tools menu to search for rank.

Click On the Search Box

As Amelia is poking around in Equities Lab, she finds a search box, and that search box looks handy.

Type Rank!

After she types rank into that search box, she sees the rank_across operator, which will do what she wants.  She can drag it into place, type rank_across in the original search box, or even type ra into the original box, or double-click the “rank_across” under the cursor.

What is She Ranking?

The first question is, what is she ranking? Here is the “change” of the closing price over 1 year (252 days).

What’s the Where?

The third argument takes things that aren’t worth ranking out of the ranking table.  Since Amelia doesn’t like earnings, she doesn’t want companies with earnings to be included.

Drag the EPS into the Where Box

She types “and” in the where box to include both the earnings and the market cap filter.  She then drags the “>” between the EPS and 0 into the first empty box below.  She could cut and paste it using ctrl X and ctrl V, but dragging is more fun for Amelia.

Drag the Second Condition

One gone, one to go.  She drags it, wondering whether she will get an and with only one condition, and if so, what in the world does that mean?

Click on the “Equities Lab” window

Filling in the red box

Amelia has to fill in this last red box.  She’s heard that companies try to control their financials, and that seems good. James Montier has a score that looks for these “manipulative” companies.  She could delete the box, but she’ll search for Montier instead.

Type Montier

Typing Montier gives her the formula, which she double-clicks on or drags.  Any value greater than two should do.

Click on the “Equities Lab” Window

Include Trading Costs

Type “kini” into the tools search box and double-click on Kini Trading Costs.  Double-clicking on a term with nowhere to go will create a new tab.  That’s just what she wants.  She does this.  The term being in your screener will ensure the correct trading costs are exacted.  A few tweaks were made offscreen, and her fund is ready to go!

Time to backtest!

She waits eagerly — is the green line going to be far enough from the red line?

Click on the “Equities Lab” window

Click on the “Equities Lab” window

See the results daily

She clicks the backtest table to see the returns as a daily return series.

Examine the results

She looks at the results, then thinks about exporting them to Excel.  Deciding against it, she looks at the backtest by time.

See the returns yearly

These returns can’t make up their mind.  Some years go up, and others go down.  This won’t do — the returns must all go in the same direction.  She goes to look at the report.

Pretty numbers

Amelia can see the negative sharpe ratio, the high standard deviation, the beta, and more.

Rebalance monthly

She clicks on trading rules to rebalance monthly.

Click on Rebalance Quarterly

Quarterly is not Monthly, so it must change.

Choose a monthly formula

The beginning of the month seems good.

Backtest again!

See the lower average return

Maybe this means the lines are further apart…


They are further apart.  Amelia’s work here is done. Edited by Jessica Cutter

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