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Learning about Green Flags and their score

Green Flags

Now that we’ve gone over red flags, it’s time to look at the other side of the equation and learn about green flags.

In our previous article, we discussed that red flags don’t necessarily mean that an investment is going to lose money. Green Flags are the polar opposite from a red flag, but it still doesn’t guarantee anything. A company could have every green flag raised and still lose money over the time you hold it. However, green flags do indicate that a company is less likely to be a dud and increase your chances of long term success.

To see a list of green flags, you can go into the Explorer and search “Green Flags Score.”

There are ten total green flags, all tested. When testing, want to make sure that more than 50% of the positions taken on by each green flag results in a positive return, and that, when backtested, the screen performs up and to the right at least moderately close to the benchmarked S&P 500.

How effective is the green flag score?

Like everything else in the platform, rather than just write out how something performs we’d rather show you. To identify how well Green Flags work, we can go create a nice screen where we only want to invest in companies with a score of greater than 4. There are a number of names we would all recognize in this batch, and even more that we would have never known about otherwise.

Now, some of these companies have more green flags than 4, and it’s up to you to decide how many green flags you’d like your screener to look for. The same functionality that is used for our red flag indicators is used for our green flags so you are able to see exactly how many green flags are present, and what they are, simply by hovering over the ticker.

This is all fine and well, but showing the different flags is completely meaningless if they don’t actually beat the market over the past 20 years.

Thankfully they do. When screening for companies with a green flag score of greater than 4, we are able to absolutely crush the S&P 500. Better yet, we were able to achieve these results at a relatively low standard deviation – putting our Sharpe ratio at 0.227 vs. the S&P 500’s 0.149.

If we go back to our initial requirements for “what makes up a green flag” these results must follow certain rules. By that standard, 51% of companies inside of a green flag need to have given us positive returns, but when we dive into the positions table of our screen here, we notice that there is an almost 60% win rate for this screener.

The most important thing about the graphic above is that you don’t always win. It doesn’t matter how many green flags are showing when you open a position, there is always a chance that you are going to lose your shirt. The best thing you can do is increase your chances of success and invest as intelligently as possible.

 

Tyler McCain
Tyler McCain
A student of finance at Georgia State University, Tyler has had a passion for the world of finance for as long as he can remember. Joining the Equities Lab team in 2015 he attempts to juggle the perfect mix of school, work, and giving back to the community. When he isn't working at Equities Lab he can often be found helping teach programs at the Rosen Family Foundation - a non-profit that teaches financial literacy to middle and high school students.

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