It isn’t uncommon for one of our users to call us up and ask for help. There have even been times when I will help a client at their site to get them up and running, along with follow-up information. In the past two years of working in this industry, I have noticed one major theme among every person (myself included) when it comes to screening for potential investments – we are all far too selective.
What do I mean by that?
Well, when we go in to start building a screen, we all have the idea of the “perfect” company. This shrunken worldview is just our individual preferences, but it can minimize our potential to make good investments. We go in and build these long screeners that are typically not very complex, eliminating far too many companies from the investable universe and shrinking our opportunities. Screens like this become common –
There are nine total lines in this screener, so the question becomes, how many stocks do you think this screener returns?
The answer is 7. This screener returns a total of 7 companies. Now, it appears that these businesses are pretty solid. All have everything we are looking for, but with such a small universe, we don’t have anything to compare. If this is what you are basing your portfolio on, you likely aren’t getting any significant diversification. And with only seven choices, you could end up jumping into an investment head first without doing any due diligence.
On the flip side, we have built a screen in which most long-term investors would have an interest. They have a high Piotroski score, low Beneish score, affordable closing price, high-Value score, high volume, offer dividends, are making money, increased in price over the past year, and are not in volatile industries. It appears that these companies are solid picks, but how does it perform over the past few years?
In short, horrible. This “perfect” strategy left you hanging, netting you around 25% in the past five years. Even worse yet, you were taken on a complete roller coaster ride with this strategy. You didn’t have any options, and that’s where you went wrong.
The next question you need to ask yourself is whether or not every one of these lines really benefits your screen. How many lines are redundant? How many harm performance and eliminate your potential investment options?
What did we get rid of and why?
Our nine-line screener has now been cut down to four lines. It’s much more manageable, and we now have room to test different rebalance periods, trading rules, trading costs, etc. Especially since we are now returning 111 companies – giving you way more potential investments.
But, how does it perform?
Going over the past 17 years, we completely crush the market with only 4 lines. I don’t think we will invest in every single company within the 111 companies, but it gives us more options for finding that perfect investment.