Mechanical Stock Picking

Mechanical Stock Picking uses stock screeners to build portfolios that have proven to consistently provide superior performances.

In Invest like the Best, James O’Shaughnessy showed that portfolio’s performances are driven by its factors (Capitalization, Growth, Valuation, Relative Strength...) rather than by the individual stocks forming the portfolio.

That is: 2 portfolios with similar factors but formed with different stocks will have similar performances over time.

It is then not necessary to spend lots of time analyzing stocks to build your portfolio. You can just use a stock market screener to quickly pick stocks that exhibit the factors of successful investment strategies.

Flexible Stock Picking

Once your screener has highlighted a list of stocks, it is best to buy most - if not all - companies passing the screen. This is to ensure that your portfolio will indeed exhibit the required successful factors such as low Valuation or High Relative Strength.

Now, if you remove few stocks from your screener's result, don’t think that you’re doomed. If a Mechanical Stock Picking strategy is too rigid to work, it's probably best not to follow it.

It is best to use strategies that do not require too strict adherence: for instance strategies that require few criteria or those with fairly large number of stocks (>20).


You may even slightly modify some screening criteria from existing strategies.

To illustrate:
  • In What Works On Wall Street, James O’Shaughnessy showed that mechanical stock picking works not only with 50 stocks, but with 25 or 10 stocks as well.

  • In How to Retire Rich, he showed that his famous Reasonable Runaways screen - which is based on Price/Sales - works as well if you use Price/Earnings instead.
     
This proves that for your stock picking to be successful, the key is not to religiously follow every criterion of a strategy but to build a portfolio whose factors are reasonably similar to it.

Stock Screening Pros Go back to Top

Easy, Fast, Powerful: it is impossible for you to analyze the 10.000+ available companies but a screener can quickly highlight the ones of interest,

Can put in place stock picking strategies that consistently beat the Market.
Why reinvent the wheel? We know the strategies that are consistently successful, either through backtesting¹ or through guru’s track records².

Stock screening allows to easily and consistently pick stocks according to these superior investment strategies.
    ¹ James O’Shaughnessy’s What Works On Wall Street is the reference for backtested strategies and is highly recommended.

    ² John Reese’s The Market Gurus includes descriptions of many guru’s strategies including Warren Buffett, Peter Lynch, Martin Zweig, David Dreman, William O’Neil’s CANSLIM….

Stock Screening Cons Go back to Top

Only Quantitative criteria: this is the major stock screener's weakness touted by Analysts or Investment firms who then recommend you to buy their (expensive) reports containing many qualitative or other non quantitative information.

Now, qualitative factors that do not translate into quantitative ones are not very useful. If a company’s superior quality does not translate into greater growth, profits, higher share price or any other quantitative measure widely available in screeners, then there is little chance that such company will be a successful investment.

Therefore screening exclusively based on quantitative criteria makes sense. You may from time to time select a company with negative yet non quantitative factors. These are the exceptions rather than the norm. You will lose more by 2nd guessing a screen.

How to build Mechanical Stock Picking strategies Go back to Top

Here are suggested steps to build Mechanical Stock Picking strategies adapted to your situation:

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