Over the years a handful of investors have become well known for their skills at consistently identifying portfolios of stocks that “beat the market.” These include such well recognized names as Warren Buffett, Peter Lynch, David Dreman, Martin Zweig, John Neff, and William O’Neal. The interest of individual investors in trying to duplicate the performance of these market marvels is high as witnessed by the overwhelming volume of books in the popular press that deal with investor success stories and how to duplicate their performance. Financial advisors get wealthy from providing advice and so do authors of investment books. Trying to duplicate the performance of these authors is a daunting task very few can master.

Stocks AAII stock screens

A recurring issue is if there is an easier and less expensive way to try to out-perform the market, especially for the average investor. In this article, we evaluate one approach that is of very low cost and available to anyone with some time at the end of each month to rebalance their portfolio. Specifically, we analyze the performance of a number of screening techniques identified and offered by the American Association of Individual Investors (AAII), a nonprofit investment education organization based in Chicago. Through their Website (www.aaii.com) and several print publications, AAII attempts to educate individual investors and offers a number of tools to help investors build wealth. One of the tools offered is stock screening. AAII screens stocks to create 61 portfolios designed to take advantage of popular investment techniques. Regarding the screening process, AAII states:

The AAII Stock Screens area allows you to tap into the investment styles, ideas and methodologies of over 60 promising investment luminaries. Collectively, 91% of the Stock Screens we featured have beaten the S&P 500 since we introduced this popular membersonly service.

We want to point out that AAII does not recommend that their members blindly follow any of these screens but that they should be used as a starting point for further analysis. Even after acknowledging their caveat, the claim that 91% of their screened portfolios beat the S&P 500 is a strong statement that certainly deserves further scrutiny. In this article, we examine this assertion and perform additional analyses comparing the performance of these portfolios to alternative benchmarks. We specifically address seven questions:

1. Do 91% of these screens beat the S&P 500 index as claimed by AAII?
2. Do these screens beat their best-fit index?
3. Do these screens beat the S&P 500 index on a risk-adjusted basis?
4. Do these screens beat their best-fit index on a risk-adjusted basis?
5. Do these screens beat the S&P 500 index when commission costs are included?
6. Do these screens beat their best-fit index when commission costs are included?
7. Do these screens significantly outperform the S&P 500 and their best-fit indices?

In the following section, we review prior literature relevant to the issues addressed in this research. Later sections describe the stock screens followed by AAII, describe the general
financial characteristics of the screened portfolios, evaluate the performance of these screens, and present the results of our analyses. The final section summarizes our findings and conclusions.

2. Prior research

This article contributes to three areas in the finance literature. It contributes to the broad, related areas of market efficiency and behavioral finance, and in addition, it has a narrower
focus, contributing specifically to the literature examining the ability of practical investment strategies to beat the market. Although this latter area is admittedly tied into the market
efficiency debate, it also has practical implications for individual investors and is thus the primary focus of this review.

Put simply, the theory of market efficiency states that market prices fully reflect available information. Although market efficiency was long upheld as “fact” in the academic community

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