The Mechanical Investor

This a post by TPOTO on the TMFMI board. If only he would post here….

A friend of mine was disappointed with his returns from his mutual funds
over the past few years asked if there was a way he could develop and
manage a portfolio without resorting to complicated mechanized screens to
develop his picks, i.e., from just looking at the newspaper or
magazines summaries. Could he do any better? Order placing
on the computer was okay.

Also, he did not want to monitor or switch in and out of
stocks frequently. Once every other month was his max.
He had $100K to invest (10% of an already diversified portfolio)

The best I could do for him was going to the Friday edition
of the Investors Business Daily (IBD) newspaper once every
other month and go to the Weekend Review section which
lists about 120 top performing stocks.

Then look down the PE column and pick out the 20 lowest ones.
Hold for 8 weeks and then repeat the process.

ANY OTHER SUGGESTIONS?

Here are the results of such a plan vs. the S&P 500:

S&P                                   Low P/E
Annual % return   $   10,000          Annual % return    $   10,000
              7       10,700    1992            46.10        14,610
             10       11,770    1993            28.50        18,774
              2       12,005    1994           (4.60)        17,910
             39       16,688    1995            53.90        27,564
             23       20,526    1996            40.10        38,617
             28       26,273    1997            75.70        67,850
             35       35,468    1998           (2.60)        66,086
             18       41,853    1999            10.60        73,091
            -11       37,249    2000            45.40       106,274
             -9       33,896    2001            18.60       126,041
            -22       26,439    2002            21.40       153,014
             28       33,842    2003           101.00       307,559
             10       37,226    2004            32.00       405,978
              8       40,205    2005            39.80       567,557
             14       45,833    2006            18.90       674,825
              6       48,583    2007            33.00       897,517

Notes: varying the number of stocks held (from 10 to 20) or
the hold period (1 month to one quarter) still produces
strong results.

Results above are from the tradesim backtester.

Related Reading:

Rich Dad's Advisors: Guide to Investing In Gold and Silver: Protect Your Financial Future

Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics)

Psychology of Investing (4th Edition) (The Prentice Hall Series in Finance)

Real Estate Finance & Investments (Real Estate Finance and Investments)

Introduction to Econometrics, 2nd Edition (Addison-Wesley Series in Economics)

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