Article on stock picking

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Article on stock picking

Post by Columbus » Wed May 23, 2018 6:45 pm

Hello everyone,

here is an article which I found interesting - it effectively questions the whole idea of passive investing claiming that simple rule-based stock picking will ensure better results.

The Holy Grail Investment Formula: Better Returns with Less Risk ... -less-risk

Basically, the author claims that "high quality" stocks will outperform "low quality" one, and by extension the whole market.
As criteria for quality he offers to use S&P Quality ratings or similar Valueline rating.

I think there is some major flaw in this argument but I can't pinpoint which one.
I suspect that the quality can only be assigned retroactively, based on past performance - so it's like saying the top 10% performing stocjs based on past experience would've been the best performers over the same horizon which was used for the ratings.

Wondering for the members of this community think.

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Re: Article on stock picking

Post by Ragnoth » Wed May 23, 2018 8:31 pm

There are at least a few issues here, some with the article itself and some with the underlying argument.

1) The article is fundamentally dishonest and switches measuring method in the middle.

They start off the article talking about "High Quality" stocks performing better as determined by S&P rankings (e.g., they grow faster in the long run). They then switch to "ValueLine" ratings when discussing how "High Quality" stocks don't get hammered as hard in downturns (e.g., they took less of a hit in the specific downturns studied). It's pretty apparent that these aren't the same thing... it basically says "good aggressive stocks do well in bull markets, and good defensive stocks do well in bear markets, so all you need to do is buy the good stuff."

2) Setting aside the obvious slight of hand, the article also refers to an unspecified "long-term" study with no information about how it was conducted.

It insinuates that long-term growth is maximized by holding "S&P Ranks B+ or better;" but it says nothing about when you actually are supposed to buy and sell these stocks (e.g., is it once a year, every time they publish a new rating, did you buy once in 1981 and hold indefinitely)? There are several ways you can play with the numbers after the fact and make a claim about superior performance... or if the number were completely opposite, you could make a similar sales pitch about buying under-rated stocks (when you create a narrative after the fact, it's easy to say "the winners won"). For all intents and purposes they may as well have picked two CAGR numbers out of a hat and used a few charts to show the bigger one was bigger.

3) They claim that you merely need high quality stocks that "Maintain outstanding financial strength;" "Possess a unique business model;" and "Are run by top notch people" is too simplistic.

These are general maxims that most value investors can get behind. Unfortunately, it can be very difficult to see these features ahead of time. Even worse, to the extent that you can see these features ahead of time, everybody else will as well and the price will get bid up. (E.g., Google might be a great company with all these features, but you pay more for shares on a P/E ratio because of it). You will find differences of opinion about the efficient market hypothesis and the continued existence of the small value premium... but suffice to say that the drastic differences in performance that the article discusses require you to be able to detect "financial strength" and "top notch people" more reliably than the market as a whole.


I'm sure other people can find issues with the article (e.g., past performance is no guarantee of future success.), but suffice to say that I don't find these types of sales pitches particularly compelling.

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Re: Article on stock picking

Post by Nate79 » Wed May 23, 2018 8:53 pm

Read the first sentence and that was enough. No need to read somebodies stock picking method article. They are a dime a dozen. Hundreds and hundreds of newsletters claiming to have the secret sauce to beat the market.

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Re: Article on stock picking

Post by Ki_poorrichard » Wed May 23, 2018 11:45 pm

Nate79 wrote:
Wed May 23, 2018 8:53 pm
Hundreds and hundreds of newsletters claiming to have the secret sauce to beat the market.
Most people just listen to the following stock picker -

"I'd be a bum on the street with a tin cup if the markets were always efficient." - Warren Buffett

But, can you really blame them for trying? Especially when the "Oracle of Omaha" says that it is so.

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