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Four Ways to Beat the Market: A practical guide to stock-screening strategies to help you pick winning shares
Investors in stocks are faced with two major
How to find and interpret the most useful data from company accounts.
How to whittle down the list of thousands of public companies into a smaller pool of candidates for further research.
In Four Ways to Beat the Market, experienced financial journalist Algy Hall provides the solution to both problems and helps investors in their quest to pick winning shares.
The answer lies in stock screens.
Over a decade, the four stock screens described here outperformed the market by 242% to 388%. These stock screens are ridiculously powerful – but staggeringly simple.
Algy starts with four strategies for equity
Quality, Value, Income and Momentum.
He shows how to construct four stock screens and use data from company accounts, including common accounting ratios, to filter stocks on the criteria that each of these strategies is looking for.
And once the shortlist of screened stocks is produced, Algy explains how to use that shortlist as a basis for further analysis and research, before making an investment.
Along the way, Algy also reveals the logical and empirical basis behind Quality, Value, Income and Momentum strategies, to help investors understand why they work and give them the confidence that they will continue to work in the future. Many other hints, tricks and tactics for investors are revealed, to help investors spot the best stocks and avoid the duds.
With Algy Hall as your guide, discover the surprising ideas and stories that lie behind these strategies, while building the necessary know-how to improve your investment returns.
How to find and interpret the most useful data from company accounts.
How to whittle down the list of thousands of public companies into a smaller pool of candidates for further research.
In Four Ways to Beat the Market, experienced financial journalist Algy Hall provides the solution to both problems and helps investors in their quest to pick winning shares.
The answer lies in stock screens.
Over a decade, the four stock screens described here outperformed the market by 242% to 388%. These stock screens are ridiculously powerful – but staggeringly simple.
Algy starts with four strategies for equity
Quality, Value, Income and Momentum.
He shows how to construct four stock screens and use data from company accounts, including common accounting ratios, to filter stocks on the criteria that each of these strategies is looking for.
And once the shortlist of screened stocks is produced, Algy explains how to use that shortlist as a basis for further analysis and research, before making an investment.
Along the way, Algy also reveals the logical and empirical basis behind Quality, Value, Income and Momentum strategies, to help investors understand why they work and give them the confidence that they will continue to work in the future. Many other hints, tricks and tactics for investors are revealed, to help investors spot the best stocks and avoid the duds.
With Algy Hall as your guide, discover the surprising ideas and stories that lie behind these strategies, while building the necessary know-how to improve your investment returns.
- GenresFinance
252 pages, Paperback
Published May 16, 2023
6 people are currently reading
55 people want to read
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Displaying 1 - 2 of 2 reviews
June 26, 2023
This is one of the best investment books I've read. It's well written and is an easier read than many.
The stock screens are based on four investment strategies. Performance and all the stock selections for each screen are given for the 10 year period Algy worked on them while he was an Investor's Chronicle journalist. His quality screen stocks grew by 422% (net of 1.5% pa assumed costs) over 10 years from August 2011 vs 120% for the FTSE All Share index. Unfortunately the period covered by the performance data ends before 2022. However, the Investor's Chronicle is now publishing regular updates to the performance of these four and other stock screens. The performance figures might be flattered by the period starting when markets were recovering from the Great Financial Crisis and when shares in quality companies were available at bargain prices.
As investing is not a one-size-fits-all game, the book describes these different investment strategies, how they work and how screens can be used to better understand and implement the strategies. This provides the background for choosing the best numbers to screen for shares suited to each strategy.
Importantly Algy describes some of the potential pitfalls inherent with each of the four strategies. For example:
1. Quality investing grew in popularity over the decade the screen performance data covers. Valuations of many high-quality companies got very rich and as a result, small disappointments sometimes triggered substantial drops in share prices even if the underlying company performance still appeared impressive.
2. Value investing is normally at its worst when markets are selling off because value investing dynamics are exaggerated by periods of deep pessimism.
3. While dull, dividend paying companies tend to do less badly when markets fall, they trail during bull markets.
4. Momentum can suffer a whipsaw in performance when there is a sudden reversal in a market trend that the momentum strategy had been riding. Momentum strategies are most at risk when a bear market follows a bull market that had developed into a bubble.
The book describes how the accountancy treatment of intangibles is problematic. It can cause a company investing heavily in a growth strategy to report depressed earnings because the investment costs are taken upfront, despite the benefit being expected over years. For example, when a pharma company has developed a multi-billion pound blockbuster drug, the balance sheet will offer few clues to the investment it took to get there because the spending will already have been written off as day-to-day costs. The lightweight balance sheet will make it appear very little investment was needed to achieve vast profits. Conversely if a company puts the brakes on growth by lowering its investment in intangibles, it will seem earnings are taking off because costs will fall.
This is a major issue when constructing stock screens but Algy identifies some key numbers which are unaffected by the mismatching of intangible investment costs and benefits, in particular sales and free cash flow.
Also noted are cases where different ratios are better suited to certain situations. For example, comparing debt with total assets (gearing) or price to book value are sensible ratios for companies with a large asset base against which debt can be secured, such as property or utility companies. Whereas for companies requiring little investment to generate profits it’s probably better to compare debt with the amount of profit available to service it.
The value of tracking trends in ratios is also noted. For example, falling ROCE could indicate a business becoming lower quality whereas growth in gross margins could signal an improving competitive position. Rising net debt can indicate cash generation problems.
Another interesting point made is that combining lots of rankings can risk overcomplicating things and losing sight of the main objective of an investment strategy.
Some sector specific issues are noted. For example, the fact that everything turns down at the same time for house builders. Cash is harder to come by because selling prices drop at the same time as the number of transactions plummet. This requires working capital to be written-down. Banks lending against these assets, can then get nervous and stop advancing new loans. As things can go horribly wrong for house builders over a typical business cycle they are not quality companies because they're highly cyclical and overly dependent on external forces.
The stock screens are based on four investment strategies. Performance and all the stock selections for each screen are given for the 10 year period Algy worked on them while he was an Investor's Chronicle journalist. His quality screen stocks grew by 422% (net of 1.5% pa assumed costs) over 10 years from August 2011 vs 120% for the FTSE All Share index. Unfortunately the period covered by the performance data ends before 2022. However, the Investor's Chronicle is now publishing regular updates to the performance of these four and other stock screens. The performance figures might be flattered by the period starting when markets were recovering from the Great Financial Crisis and when shares in quality companies were available at bargain prices.
As investing is not a one-size-fits-all game, the book describes these different investment strategies, how they work and how screens can be used to better understand and implement the strategies. This provides the background for choosing the best numbers to screen for shares suited to each strategy.
Importantly Algy describes some of the potential pitfalls inherent with each of the four strategies. For example:
1. Quality investing grew in popularity over the decade the screen performance data covers. Valuations of many high-quality companies got very rich and as a result, small disappointments sometimes triggered substantial drops in share prices even if the underlying company performance still appeared impressive.
2. Value investing is normally at its worst when markets are selling off because value investing dynamics are exaggerated by periods of deep pessimism.
3. While dull, dividend paying companies tend to do less badly when markets fall, they trail during bull markets.
4. Momentum can suffer a whipsaw in performance when there is a sudden reversal in a market trend that the momentum strategy had been riding. Momentum strategies are most at risk when a bear market follows a bull market that had developed into a bubble.
The book describes how the accountancy treatment of intangibles is problematic. It can cause a company investing heavily in a growth strategy to report depressed earnings because the investment costs are taken upfront, despite the benefit being expected over years. For example, when a pharma company has developed a multi-billion pound blockbuster drug, the balance sheet will offer few clues to the investment it took to get there because the spending will already have been written off as day-to-day costs. The lightweight balance sheet will make it appear very little investment was needed to achieve vast profits. Conversely if a company puts the brakes on growth by lowering its investment in intangibles, it will seem earnings are taking off because costs will fall.
This is a major issue when constructing stock screens but Algy identifies some key numbers which are unaffected by the mismatching of intangible investment costs and benefits, in particular sales and free cash flow.
Also noted are cases where different ratios are better suited to certain situations. For example, comparing debt with total assets (gearing) or price to book value are sensible ratios for companies with a large asset base against which debt can be secured, such as property or utility companies. Whereas for companies requiring little investment to generate profits it’s probably better to compare debt with the amount of profit available to service it.
The value of tracking trends in ratios is also noted. For example, falling ROCE could indicate a business becoming lower quality whereas growth in gross margins could signal an improving competitive position. Rising net debt can indicate cash generation problems.
Another interesting point made is that combining lots of rankings can risk overcomplicating things and losing sight of the main objective of an investment strategy.
Some sector specific issues are noted. For example, the fact that everything turns down at the same time for house builders. Cash is harder to come by because selling prices drop at the same time as the number of transactions plummet. This requires working capital to be written-down. Banks lending against these assets, can then get nervous and stop advancing new loans. As things can go horribly wrong for house builders over a typical business cycle they are not quality companies because they're highly cyclical and overly dependent on external forces.
November 6, 2023
Phenomenal book!
Algy does a terrific job explaining everything from financials to a variety of ways of picking winning stocks; there is something here that most curious investors, both new and seasoned. I immensely enjoyed it, and I highly recommend it!
Algy does a terrific job explaining everything from financials to a variety of ways of picking winning stocks; there is something here that most curious investors, both new and seasoned. I immensely enjoyed it, and I highly recommend it!
Displaying 1 - 2 of 2 reviews