Beware Of Automated Stock Screeners by Maj Soueidan, GEO Investing
Automated stock screeners are overrated, but on the surface they may seem attractive.
With over 20,000 stocks to choose from on U.S. exchanges and the over the counter market, it is natural to want to explore ways to reduce potential investment choices to the most ideal ones that meet your investment criteria. What better way to save time doing research than to throw a few data points into a spreadsheet and get a list of promising stocks to buy?
Unfortunately, nothing is a quick replacement for hard work. Hard work is your competitive advantage:
“I work about 70 hours a week, and my average competitor works probably 50 hours,” says the nearly white-haired 43-year-old Lynch. “So if I’m working 40% more a week than my competitor, I figure I ought to be able to beat him by 10%.” — Peter Lynch
Look Beyond Stock Screeners
While I do use stock screeners on occasion, it is only one of the items in my research tool war chest. I disagree with investors that believe screens are totally useless. Screeners can help organize the research process and serve as a decent starting point. When I started investing in the late 1980’s, I became overwhelmed with the amount of stocks to choose from.
At my youngest and most ignorant, I eventually decided that buying stocks at new 52-week highs would be the answer to all my problems. “If a stock is hitting highs, it has to be good,” I thought to myself. Therefore, I created a list of stocks trading at new highs over a several week span and tracked their performance. For comparative performances, I also created a list of stocks hitting new lows.
Market conditions were normal and I quickly realized that returns were dismal for each method and were not that different from one another. My notion that I would be able to sit back and collect cash without some hard work ended just as quick. I still used the “52 week high” list to reduce my investment universe, but I performed research on each stock by reading press releases, SEC filings, and managements’ letters to shareholders located in annual/quarterly reports. I kept a journal of all my notes on each stock to reference later. Eventually, I would call management for an interview. Surrounding the perimeter of my office were hundreds of annual reports, waist high. One of the first multi-baggers I stumbled upon in 1994 came from these annual reports. The stock was Wireless Telecom Group Inc. C (AMEX:WTT). I recalled a quote from Peter Lynch’s book, “One Up On Wall Street”, when I stumbled upon WTT.
“All else being equal, invest in the company with the fewest color photographs in the annual report.”
WTT fit the bill, with its black cover and razor thin paper in the body of the report with no glossy colors. I immediately nibbled at shares after reading the Letter to Shareholders in the annual report. I then bought a significant amount of stock after interviewing the Chairman and attending an investor meeting he hosted in Philadelphia, where I lived at the time. I remember leaving the meeting to find a payphone to call my broker with directions to “load the truck.” I have had similar experiences where meeting with management has deterred me from investments that would have went against me.
The Gaping Hole in Stock Screeners
This strategy of narrowing the stock universe by looking at new highs, followed by extensive research, is all I used for about for about 10 years to double my money every year. I eventually applied other screening criteria to the mix to find stocks before they reached new highs.
I would still research each stock to fill a big gap caused by a significant problem with stock screens: the data used to power stock screeners (especially earnings per share) can often be inaccurate or delayed causing you to miss great stocks or buy stocks that appear cheaper than they really are. To further fill this gap I began to read every earnings press release of every micro-cap stock.
When I am feeling bored, I will even go down the alphabet to do my research. Now, I understand that a choice of how much to use “robotic” screens will depend your time constraints, but I encourage every investor to take their research process beyond screens.
Stock screeners can always have a place in the investment process – just make sure you understand their limitations. Remember, nothing can replace the hard work required to find diamonds in the rough. It’s one of your competitive advantages you have over other investors who just rely on screens to make investment decisions, especially in the micro-cap space where data inaccuracy issues are prevalent.
Trust me, the harder you work, the easier investing will eventually become.