Testing Your Resolve
by David Forrest (DavidF@fool.com)
Bronx, NY (January 22, 1999) -- In a most excellent message board post, our friend "ProphetWise," a.k.a. Nathan, threw caution to the wind on the Workshop Board and said:
I know, over time, these screens backtest well. Still, there is the fear of sticking with the screen when all other evidence says, "Get Out!"
Nathan is talking about the recent volatility in the stock market and the absolute beatings stocks like Yahoo! and other Internet-related companies have suffered. The responses to Nathan were fairly unified in their theme and best summed up by Bohr, who writes:
These are... mechanical screens indicating potential for improved returns, but certainly not assurances of isolation from the market's gyrations. I expect volatility in the market and the screens.
Too true. I summarize these various posts because I want to impress upon people who follow the Workshop screens that it's generally an all-or-nothing proposition. In other words, you can't second-guess the screen, otherwise you blow the whole notion of unemotional investing to pieces.
We pay homage to many of these screens because they have achieved certain backtested success. It's not bad enough that we have "past performance is no indication of future results" working against us, but if you second-guess the screen and thus lose the only real foundation you have for investing in screens to begin with, you're playing with fire.
I can't say whether following mechanical models is appropriate for you or not. What I will tell you is that with any investing endeavor, you had better be prepared to spend some time understanding the logical underpinnings to some of these stock screens. Is it momentum based? Large-cap screen? Value? If you don't know, you're in trouble. Sux2BeU sums it up best:
Don't follow blindly, folks. We are passionate about our tools... because we know them, both their good parts and bad. We know when they'll fail us, but we also know when they will do well.