What Works in the Stock Market

This is going to be another ongoing post that I will add to…

What Has Worked in Investing

I came across a couple of articles on what has historically worked when it comes to investing in the stock market…which investment methods generated the highest returns.  It’s pretty well known that smaller companies (ie small capitalization (small cap) companies) tend to outperform larger companies.  That makes sense.  But here’s some concrete evidence from Tweedy, Browne to support this:

What Has Worked in Investing by Tweedy, Browne Company LLC
What Has Worked in Investing is an attempt to share with you our knowledge of historically successful investment characteristics and approaches. Included in this booklet are descriptions of over 50 studies, approximately half of which relate to non-U.S. stocks.  Our choice of studies has not been selective; we merely included most of the major studies we have seen through the years.”

Catching Fall Knives

Another article I came across is a study done by The Brandes Institute that looks at the 3-year returns from an investing strategy centered around catching falling knives.  Falling knives, in this case, are stocks that have dropped 60% or more from high to low.  This article looks at a few things: domestic (U.S.) vs international falling knives; falling knives by sector.

Falling Knives Around the World by The Brandes Institute

“In “Buying the Wrong Stock for the Right Reason”, we examined the performance of falling knives in the U.S. stock market from 1986 through 2002. While the falling knives we identified did post a relatively high bankruptcy rate over the three-year period following their initial drop, they also outperformed the S&P 500 by wide margins.”…


Inspiring Quotes from Business Leaders

Every once in a while I come across quotes from business leaders or provocative thinkers that inspire me to do more.  I figured I would start compiling a list of quotes I come across and stash it away on this blog so I can reference it in the future if I’m in need of some inspiration.

Last night I was reading a great article on Sergio Marchionne, the CEO of Fiat Chrysler ($FCAU), a stock I owned for a little while and one I’m still contemplating buying ahead of the upcoming Ferrari IPO.  Sergio is a tremendously hard worker, reportedly putting in 100 hour work weeks.  He’s also well educated and speaks fluent Italian and English.  He’s a chain smoker and coffee drinker whose work ethic and lifestyle will probably put him in a coffin early.  But the best part of him is his blunt honesty.  His background isn’t in the auto industry which allows him to think more outside of the box than others in the industry yet also puts him at odds with a lot of people.

The New York Times wrote an article about him recently and part of it quoted his philosophy on how he runs FCA:

“I’ve always had this incredible sense of urgency,” he said. “I’ve always had this desire not to let things fester and to really seize the moment, because it’s serendipity.”

He paused. “You create the conditions for it, and it just keeps producing outcomes or opportunities for you to pick,” he said. “And if you don’t pick them, then it’s your own damn fault.”

Awesome stuff.

Good Investing Resources

For future reference I wanted to make a list of good resources that I use. This list is a work in progress and most likely will change over time.

Finviz (http://www.finviz.com)

Best stock screening tool I’ve found.  Great for screening for all kinds of things.  I’m sure you can find hundreds of screens that are reliable. My favorite screens that I have found to produce reliable winners are as follows (I use other screens as well all of the time):

Screen 1: High Growth (25%+ Rev Growth, Profitable, USA Only) – Ideal candidates for longer term holds; you can also remove the profitable part of it to find fast growers that may be under followed because they aren’t profitable.  I only search for USA listed companies because they tend to trade more reliably and are less risky.
Click here for list as of 5/28/15.

Screen 2: Down 30% Past Year, Above 200 Day Moving Avg (DMA), USA Only – Ideal candidates for turnarounds.  Typically a stock will move before the fundamentals of the underlying business start to improve. By looking for stocks that have risen above a longer term moving average, this screen finds stocks that are both anticipating improving fundamentals and reversing longer term downtrends.
Click here for list as of 5/28/15.

Screen 3: Down 20% in One Month, Profitable, Growing Revenues 10%+, USA Only – Ideal candidates for shorter term trades. These are typically stocks that are steadier stocks that got hit for short term misses on earnings that could bounce back. This one requires a faster trigger finger because if it is a temporary hit the stock most likely won’t stay down for long.
Click here for list as of 5/28/15.

You can obviously open up the list to non-USA listed companies.  I do this from time to time and probably should be more open to foreign listed companies.  I’ve found a few big winners overseas, including Baidu (BIDU) in September 2006, Nokia (NOK) in June 2012, Leju Holdings (LEJU) in 2014.

After going through these screens, I quickly flip through the financials to see how they’re doing. Below is a resource tool I use for looking at the 10 year financials of each company.

As a side note it might be a good indication of froth in the markets if you don’t find too many in Screen 2. I haven’t backtested this to be sure though.

Another useful tool I’ve found with Finviz is you can click on the tabs above the list of stocks in your screen for each of the following:

“Overview” – standard list of stocks in your screen

“Valuation” – shows the p/e, p/b, p/fcf and a variety of other stats for each stock in your screen

“Financial” – shows ROE, Dividend Yield, etc for each stock

“TA” – shows the chart of each stock

There are other tabs as well that you might find useful.

GuruFocus (http://www.gurufocus.com)

You can get access to the 10 year financials for free through Guru Focus. I pay for their screening service but you don’t need to do that. Here is a link to the 10 year financials for IACI, a company I hold as of May 28, 2015:

IACI 10 Year Financials: http://www.gurufocus.com/financials.php?symbol=iaci&Submit=Go

You can switch to the 10 year financials of other stocks by entering the ticker symbol in the box just below the chart at the top right.

Stockcharts (http://www.stockcharts.com)

You can get charts for the past 3 years through Stockcharts for free. If you want to go back further on your charts and be able to scroll back through date ranges in time then you will need to pay for their premium service.

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