Screening 2.0 and beyond
Readers of this site have learned a bit about Screening 2.0 — the ability to use Internet tools (many of them, free) to recreate portfolios that conform to the investment criteria of history’s best investors.
Validea’s John Reese has done much of the research legwork on the subject and has produced a premium product to help investors create Peter Lynch, Ken Fisher, and Ben Graham portfolios (among others).
The magic of Greenblatt’s Magic Formula
One source I mention frequently is Joel Greenblatt’s Magic Formula. Greenblatt wrote about his investing magic in The Little Book that Beats the Market. He also provides investors with a free website to screen for the top ranking stocks that fit his criteria at magicformulainvesting.com.
Morningstar takes a look at Magic Formula returns in a recent piece. Here’s what they come up with:
We see that the formula posted approximately a 19.9% annualized return from the beginning of 1988 through Sept. 30, 2009. Over that time, the S&P 500 Index returned 9.4% annualized.
Not too shabby.
But as a frequent shill for the mutual fund industry, Morningstar feels the need to compare this market-trumping return to top performing mutual funds. And that’s when things take an interesting turn: The article’s author, John Coumarianos, sounds surprisingly introspective in his (near) critique of active fund management.
The market isn’t efficient, as the indexers say, but its inefficiencies are apparently not easily exploitable for some of the finest pros either–at least given how many of them currently go about investing, trying earnestly to predict future profits and discounting them back to the present. Perhaps managers outthink themselves or have too much confidence in their predictive abilities instead of relying on past results.
Why funds may perform so badly as a class
The author also cites the mutual fund structure, size, and the legacy nature of a fund portfolio — making it so easy for investors to buy and sell an already outdated model — as an impediment. Does this mean that portfolio mirroring a la kaChing and Covestor (where investors sync their brokerage accounts up to a professional investor’s portfolio model) has another leg up on the industry? The separately managed account model (SMA) which institutionalizes this mirroring process does have its benefits, including better tax efficiency (all stocks are held in investor’s name and cost basis is individualized) and transparency (stocks in the portfolio are held in brokerage account).
Stock screens allow investors to sort through lots of different stocks in search for only the ones that fit certain criteria. Investors looking for the next stock pick for their portfolios can use basic screening tools, available at both Yahoo! Finance and Google Finance. MSN recently retired its highly-regarded stock screening tools, leaving what’s freely available somewhat lacking.
Screening 2.0, something I like to discuss on the site, provides the same outcomes but incorporates more algorithmic know-how, some artificial intelligence (how do you deal with an infinite P/E one year?), better ability to backtest results, and preset criteria to match results of the world’s best investors.
I decided to piece together a list of some of the Internet’s best free and premium stock screening resources.
So, here goes:
- Validea: One of my favorites and started by author of The Guru Investor, John Reese. Validea is a premium service that tracks screens preconfigured with the investing criteria of history’s greatest investors, like Buffett, Graham, Peter Lynch, Ken Fisher, and more.
- Finviz: Lots of stuff going on here. IMO, the most powerful, free screener available. With fewer preset screens, Finviz is for more advanced investors who have specific criteria they look for in stocks. A whole lotta descriptive, fundamental, and technical ways to sort for new ideas.
- Manual of Ideas: Mentioned in my post from last week, Top 6 Ideas for Piggyback Investing, MOI has both free and premium screens like 10×45 Bargain Hunter, European Value Report, Equities and Tobin’s Q. These screens come in form of subscription newsletters (again, some free, some premium) with more analysis included beyond the output of the stock screens.
- AAII Screens: Blown away by how many screens the American Association of Individual Investors has on its website (you have to join AAII to access these screens). You can find growth and value screens with preset parameters (like IBD Stable 70 and CAN SLIM) as well as guru screens that look for specific investment criteria established by famed investors like Graham, Buffett, Dreman, Lynch, Zweig, etc.
- Zacks: Nice combination of some free screens (Earnings & Margins, Growth and Income) and premium screens (Zacks Rank 1)
- CNBC: lets users save custom made screens and also has a few prepackaged screens for free
- The Kirk Report: Couldn’t be remiss in mentioning the great screens Kirk puts together for subscribers to his service. He calls his screens, the Stock Screen Machine.
- The Motley Fool’s CAPS: Nifty free screener that incorporates the community’s CAPS ratings into the screens. Allows users to download results to spreadsheets.
- Old School Value: Nice site with numerous free screeners for all kinds of value investing
- MagicFormulaInvesting: Built by the man, himself — Joel Greenblatt, this is a nice free site to do basic screening for stocks that fit the criteria of the Magic Formula
- AlphaClone: Of course, this hedge fund slicer-and-dicer is a stock screen of sorts. This premium product (read my review here) allows users to identify the top performing funds, peer into their holdings and backtest their strategies.
Insider Buying/ Selling
- GuruFocus: Interesting free and premium offerings that track top guru buys as well as insider transactions. Can download results into spreadsheets for more analysis.
- StockFetcher: Nice premium screen for technical investors encompassing Bollingers, Candlesticks, Moving Averages, and more. Output is downloadable to Excel.
I am SURE I left really good tools out — let me know in the comments if you think I should include something I’ve missed.