HH A Universal Theory Of Stock Market Investing

Tenet 9: It’s better to rank than to screen.

When employing computer-based tools to pick stocks to invest in, ranking systems offer more flexibility than screening systems. A screening system excludes a wide range of stocks that fail on a single measure, while a ranking system keeps more possibilities in play.

Tenet 10: Factors are best chosen by backtests.

Backtesting is a useful tool to test a stock-picking strategy, but it must be robust. A backtested strategy that is too closely aligned with historical data may have little predictive power. Moreover, every factor used in a backtest must have a logical explanation. Backtesting can too easily become data-mining, which is useless for out-of-sample success. But simply using a factor without backtesting it can lead to unintended results, and backtesting is an invaluable tool for looking at how a factor has worked in the past, and for refining factors to best reflect the disparities between investor confidence levels and likely future company performance. And finding those disparities is the key to successful stock picking.

CAGR since 1/1/2016: 41%.

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Disclosure: My top ten holdings right now: ZIXI, ARC, GSB, CTEK, KTCC, PERI, HALL, OSIR, CRNT, NTWK.

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