Quantitative Screening Tools
Learn how to find potential stocks to invest in with the use of a quantitative screening tool.
Andrew Horowitz
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Quantitative Screening Tools
Today on Money Girl, we are going to learn how to find potential stocks to invest in with the use of a quantitative screening tool.
Webster’s Unabridged Dictionary states that the word Quantitative can have varied meanings. For our purposes, we will look at only two:
quan·ti·ta·tive
(Math) The resolving of problems by reducing the conditions that are in them to equations.
(Logic) The tracing of things to their source, and the resolving of knowledge into its original principles.
So, essentially, we are looking to utilize simple or even complex equations to find stocks that meet certain criteria through an automated system.
In my book, The Disciplined Investor, I provide a blueprint of using investing techniques that I call quantafundatechna. The first part of that phrase is what we are going to focus on today. Quantitative Analysis. In the book we go into the process in great detail, but today, I am going to give you give a compressed tutorial and lesson on using MSN Money’s stock screening system. This is such an important component of investing that I dedicated an entire chapter to simplifying and explaining the process in order to make it easy to get started with investing…right away. Yes, anyone can do it. Here is a quick clip from the audiobook that explains some of the basics:
Quantitative analysis attempts to remove the emotional side of the process by means of filters, screens, and searches that are based on historical facts. Quants—those who ascribe to quantitative stock theory—believe that active management, technical analyses, fundamental analyses, or any combination of these three approaches are complete wastes of time. In fact, hardcore Quants would rather have a computer provide all of the stock picking recommendations, buying, selling, and reporting instead of an actual person. For them, human interaction adulterates the process and causes degradation of the byproduct of their efforts.
What is more, they believe that active “thinking” should be used during the creation of the technique, not after it is put into action. This is simply because the screen or filter needs to maintain its integrity by sticking to the original methodology. Only then can success be realized. With that in mind, realize a compromise of methodologies is probably the better model for a Disciplined Investor. As you know by now, there are a host of tools that you need to possess in order to achieve success. Quant analysis is the filtering tool that will help you narrow down the list of potential stocks to include in your portfolio.
What Are Stock Screeners?
Once you get the hang of the idea, the process is simple. What you need to do is to get your hands on a good screening tool to help with process. The one I recommend is provided by MSN Money. While you can use MSN’s screener for free, in order to make use of the advanced features, you will need to have an MSN Hotmail or Passport account, which again is free and after you’ve completed the quick registration you can navigate to the MSN Money screening page.
But, we are ahead of ourselves. What exactly are stock screeners anyway?
Screeners are set up to help separate and filter stocks based on your selections, which we will call criteria. It is an unemotional way to filter through thousands of stocks to find a few that may be of interest for further research. In most screener systems, you can select one criterion, two, three, four, or however many you would like. Each acts as an “AND” variable. This means that in order for a stock to come through the filter, all conditions must be true.
As an example. If I were to say: I want to find the perfect shirt to wear tonight and I use a quantitative filtering system (that I just happen to have built into my closet), I could enter these criteria:
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Short Sleeve and,
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Button Up and,
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Blue and,
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Less than 2 wearings.
Now, that should give me the exact shirt I am looking for. What you will not get is that old red turtleneck sweater handed down by Grandpa Irv. The variable “AND” acts as a requirement. Of we use “OR” instead, you may have a similar outcome, but you would possibly get others that you did not. Essentially the “AND” functions as a strict filter to get you and exact match.
Use Stock Screeners to Match Stocks to Your Investing Goals
In the end, what you are really after is to find a stock that matches your specific set of data points. These can be related to the stock’s share price, balance or income sheet items, that you believe may be a good investment. In most screeners, in order to select these items you can simply use a drop down list and select the key elements or be prompted by the system with a series of questions such as; large-cap or small-cap stocks, all-time high stocks or those with recent drops, or the range of the P/E you find appropriate for your situation. Selecting screens in the MSN Money screener (my favorite) can be based on pre-determined criterion that allows you to focus on market capitalization, price to earnings ratios,volatility, revenue and profit margins. There are several of these pre-programmed in the system to get you started such as the Dogs of the Dow, SAPI Slugs, Reasonable Runaways and others with funny names.
Take your time when selecting screens. You want to make sure you’re comfortable with your choices and understand what each screening criteria means and the potential of the stocks it shows you. The MSN Money screener has definitions and basic guides to get you started.
How Much Should You Rely On a Stock Screener?
Alright, so you’ve started using screeners and your selected filters have turned up some good potential stocks to buy. Do you want to put all your investment dollars into that one screen result? The answer is no. When investing, the best portfolio is a diversified one. Remember, there are two ways to use these screens. One is to provide ideas for further research and the other is to use it as the system of investing. For example, S&P SAPI Slugs screen is based on the process of buying the top twenty stocks ranked by dividend yield from the filter. Hold on to these for one year and then rescreen them and rebalance annually.
[[AdMiddle]Now, after you have done the filtering or quantitative analysis, you might want go back and double-check fundamentals. Search for factors that might affect the stock’s future such as pending lawsuits, earnings changes, low reported levels of customer satisfaction, debt levels etc.
If you are really interested in this investment process, seriously think abut picking up a copy of one James O’Shaughnessy’s books. He is the master on this topic. My favorite is What Works on Wall Street, a bit technical, but good stuff anyway.
Cha-Ching …and that’s all for now. Courtesy of Andrew Horowitz, guest host of Money Girl’s Tips for a Richer Life. Thanks for tuning in to “Money Girl”. This is Andrew Horowitz sitting in for The Money Girl. I invite you to listen to my weekly podcast…The Disciplined Investor also available on iTunes. Be on the lookout for the first book from a Quick And Dirty Tips podcast! Grammar Girl’s Quick And Dirty Tips for Better Writing by Mignon Fogarty will be available wherever books are sold on July 8th. Reserve a copy now or preorder one from your favorite online retailer.
And be sure to check out my regular QDT podcast: The Winning Investor, offering Quick and Dirty Tips for beating the market.
As always, everyone’s situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.
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