Moneyballing My Stock Screens

As you read this article, you'll probably find yourself enjoying my elegant prose and witty personality. If the timing is right, my humor may even cause you to shoot soda out of your nose and onto your keyboard.

While that's all well and good, the most important issue is whether you can trust my stock recommendations. Indeed, how do you know you can trust any financial advice out there, whether on the Internet, on television, or at a cocktail party?

In most places you can't, because there's very little accountability in the financial world. What if every time Jim Cramer told you to buy or sell a stock, he also mentioned, "My accuracy on these picks is 45%, and you'll beat the S&P by about 0.91% before transaction fees, on average, if you follow my recommendations"? You might view his advice a little differently, eh? (This is actually what he's averaged over about 5,500 of his picks we've logged in Motley Fool CAPS.)

But we're trying to do things differently here at the Fool by scoring every article that espouses a strong opinion on a stock. We call it a CAPScall, and it's as simple as adding either a thumbs up or down on our personal CAPS pages. David Gardner explains the concept in more detail in "Moneyballing the Financial World."

Screens
I'm going to be taking things to a new level with my Rising Star screens, however. I run the following screens with accompanying articles monthly:

Screen

Looks for:

Stock That Meets the Test

7 Signs of a Winner Stocks with traits of past winners SeaDrill (Nasdaq: SDRL  )
Foolish 8 High-risk, high-reward small caps MercadoLibre (Nasdaq: MELI  )
Modified Foolish 8 Small and mid caps with reasonable valuation LSB Industries (NYSE: LXU  )
Corporate El Dorados Best stocks for the long haul Abbott Laboratories (NYSE: ABT  )
Safe High-Yielders High-yielders you'd actually want to buy Eli Lilly (NYSE: LLY  )
Next Home Depot Promising negative free cash flow stocks Zipcar (Nasdaq: ZIP  )

I've always stated that my screen results do not provide a list of mechanical "buys" but are rather a source of great ideas for further research. However, I think it would also be incredibly useful to know how the screens would perform if every result was a "buy."

For instance, the independent American Association of Individual Investors, or AAII, has backtested a wide variety of screens. My Modified Foolish 8 screen has had average annual returns of 14.3% from January 1998 through November 2011. The S&P 500 averaged 1.8% annually over that period.

That's an outstanding performance that really shows the great promise of stocks passing that screen. I strongly recommend further research into the individual companies that pass it, but we're really stacking the odds on our side by knowing this screen produces many long-term outperformers.

However, other than the original Foolish 8 (which is also doing well), I don't have data on any of my other screens.

This will change with in 2012, however, as I will enter the results for all of my screens as a CAPScall. As the calls build up, we'll know which screens are performing well and which aren't. We can discount, or even dump, the poor performers and concentrate more on the high performers.

If you're interesting in keeping up with my screening adventures, simply follow me on Twitter and keep an eye on my discussion board.

The scoring fun will all start with my "7 Signs of a Winner" screen on Jan. 2. This page is the blank palette. I can't wait to fill it in!

Fool analyst Rex Moore likes screen doors on a submarine. He owns no companies mentioned here. The Motley Fool owns shares of LSB Industries, Abbott Labs, and Zipcar. Motley Fool newsletter services have recommended buying shares of Abbott Labs, Zipcar, and MercadoLibre. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 28, 2011, at 5:00 PM, colleran wrote:

    I am familiar with back-testing from my days as a mechanical investor. I gave up on it after losing most of the money I invested. I should note that I started in late 1999. I don't see how using metrics for stock picking is substantially different from that. You say that it is a starting point for picking stocks. OK, how do I pick from the stocks in the screen? Do I use other metrics, do I look at the sector the stock is in?

    I don't see how any moneyball approach to investing would yield anything different than the screens I tried in my MI days. Starting a new screen and seeing how it does, in my mind, does not predict the future.

    You could do the same thing by using the CAPS rating as a screen along with other metrics. Would this be the way to go?

    I really don't know the answer. I am interested in the question.

  • Report this Comment On December 28, 2011, at 5:32 PM, LouisFBrooks wrote:

    I added your forum to my favorite just to follow along with how this works out. I think it is a great idea.

    Thanks,

    --louis

  • Report this Comment On December 30, 2011, at 9:47 AM, papsrus wrote:

    Love these screens. ... LXU looks attractive at these levels. Opening a 1/3 position now and will look for a little pullback from December bounce to add.

    Paps

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