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Money Girl

074 MG Quantitative Screening Tools

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Broadcast on:
11 Jun 2008
Audio Format:
other

Like what you hear? Help us out by writing a review at iTunes. Questions go to money@qdnow.com. Thank you!

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Card has no cash access and expires in six months. [MUSIC] Hi, this is Money Girl's guest host Andrew Horowitz from the Discipline Investor podcast. And today on Money Girl, we're going to learn how to find potential stocks to invest in with the use of a quantitative screening tool. Webster's unabridged dictionary states that the word quantitative can have varied meanings. For our purposes, we will look at only two, quantitative. The math definition is the resolving of problems by reducing the conditions that are in them to equations. The logic definition states that the tracing of things to their source and the resolving of knowledge into its original principles. So essentially, we're looking to utilize simple or even complex equations to find stocks that meet certain criteria through an automated system. In my book, The Discipline Investor, I provide a blueprint of using investment techniques that I call Quanta Funda Techna. The first part of that phrase is what we're going to focus on today, quantitative analysis. In the book, we go into the process in great detail, but today I'm going to give you a compressed tutorial and a lesson on how to use MSN Money's stock screening system. This is such an important component of investing that I dedicated an entire chapter to simplifying and explaining the process in order to make it easy to get started with investing right away. Yes, anyone can do it. Here's a quick clip from the audiobook that explains some of the basic principles. Quantitative analysis attempts to remove the emotional side of the process by means of filters, screens, and searches that are based on historical facts. Quants, those who ascribe to quantitative stock theory believe that active management, technical and fundamental analysis, are complete waste of time. In fact, hardcore quants would rather have a computer provide all of the stock picking recommendations, buying and selling and reporting instead of an actual person. For them, human interaction adulterates the process and causes degradation of the byproduct of their efforts. What is more, they believe that the active thinking should be used during the creation of the technique, not after it is put into action. This is simply because the screen or filter needs to maintain its integrity by keeping to the original methodology. Only then can success be realized. With that in mind, realize a compromise of methodologies is probably the better model for a disciplined investor. As you know by now, there are a host of tools that you need to possess in order to achieve success. Quant analysis is the tool that will help you filter through and condense all the potential stock candidates for inclusion within your portfolio. That's just a small sample from the book, but I think it does give you a better idea of what this process is all about. If it sounds complicated to you now, don't worry, because once you get the hang of the idea, the process is really kind of simple. What you need to do is to get your hands on a good screening tool to help with the process. The one that I recommend and use is by MSN Money and it's provided on their Money Central website. While you can use MSN Screenin for free, in order to make use of the advanced features, you'll need to have an MSN Hotmail or Passport account, which again is free, and after you've completed the quick registration, you can navigate to the MSN Money screening page. But we're ahead of ourselves. What exactly are screeners anyway? Screeners are set up to help separate and filter stocks based on your selections, which we'll call criteria. It's an unemotional way to filter through thousands of stocks to find a few that may be of interest for further research. In most screener systems, you can select one criteria, two, three, four, or however many you would like, each acts as an end variable, A and D. This means that in order for a stock to come through the filter, all conditions that you lay out must be true. As an example, if I were to say, I want to find the perfect shirt to wear tonight and I use a quantitative filtering system that I just happen to have built into my closet, I could enter these criteria. Number one, short sleeve, and number two, button up, and number three blue, and number four, less than two wearings. Now that should give me the exact shirt I'm looking for. What you won't get is that old red turtleneck handed down by grandpa erve. The variable and acts as a requirement. If we use instead a variable of or, we may have a similar outcome, but you would possibly get other shirts that you did not intend to get. Essentially, the end functions as a strict filter to get you as close to an exact match as possible. In the end, what you're really after is to find a stock that matches your specific set of data points. These can be related to the stock's price or, well, the balance or income sheet items, things that you believe will go into the recipe to make a good stock investment. In most screeners, in order to select these items, you can simply use a drop down list and select the key elements or be prompted by the system with a series of questions such as large cap or small cap, all time high stocks, or maybe even those with recent significant drops, or even the range of the priced earnings you find appropriate for your situation. September is a great month for planning. We start thinking about the rest of the year, whether it's back to school, big year-end work projects, holiday plans or travel, planning ahead is crucial in life, especially when it comes to what happens when you're gone. Getting life insurance may sound daunting, but policy genius makes the process a breeze. With policy genius, you can find insurance policies that start at just $292 a year for a million dollars of coverage. Some options offer same-day approval and avoid unnecessary medical exams. Policy geniuses' technology lets you compare quotes from America's top insurers in just a few clicks to find your lowest price. It's the country's leading online insurance marketplace. And if you ever need help or guidance, they have an expert license support team to answer your questions, handle all the paperwork, and advocate for you throughout the process. It's never too late to plan ahead. Go to PolicyGenius.com or click the link in the description to get your free life insurance quotes and see how much you can save. That's PolicyGenius.com. Introducing Wendy's new saucy nugs. The nugs you love covered in your favorite sauces. So no matter what flavor you're craving, Wendy's has you covered. Grab Wendy's new saucy nugs today. Open till midnight or later. Participating U.S. Wendy's hours may vary by location. Not everyone gets b2b, but with LinkedIn, you'll be able to reach people who do. Get a $100 credit on your next ad campaign. Go to LinkedIn.com/results to claim your credit. That's LinkedIn.com/results. Terms and conditions apply. LinkedIn. The place to be. To be. Selecting screens in the MSN money screener, my favorite, can be based on a predetermined criterion that allows you to focus on things such as market capitalization, price to earnings ratios, volatility, revenue, and profit margins. There are several of these pre-programmed in the system already to get you started such as the dogs of the Dow, sappy slugs, reasonable runaways, and a few others with funny names. Take your time when selecting screens. You want to make sure you're comfortable with your choices and understand what each screening criteria means and the potential of the stock it shows you. The MSN money screener has definitions and basic guides to get you started, so you started using screeners and your selected filters have turned up some good potential stocks to buy. Do you now want to put all your investment dollars into that one screen result? The answer is a definite no. When investing, the best portfolio is a diversified one. Remember, there are a couple of ways to use screeners. One is just as a filtering system to find some stocks that you want to further research. The other is to use it as the investing process. For example, the SMP sappy slug says that you buy the top 20 stocks ranked by dividend yield that come out of the screen, hold onto these for one year, and then re-screen them and re-balance annually. Now, after you've done the filtering or the quantitative analysis, you might want to go back and double check on the fundamentals. You want to look for factors that may affect the stock's future, such as pending lawsuits, earnings changes, low reported levels of customer satisfaction, debt levels, et cetera. If you're really interested in this investment process and want to learn a lot more, seriously think about picking up a copy of any one of James O'Shaughnessy's books. He is the master on this topic. My favorite is what works on Wall Street. It's a little technical, but it's good stuff. While this topic may be a little confusing for the beginning investor, I think once you practice a little bit with a screener, you'll get the hang of it, go play with the MSN Money Screener and see what you think. Chaching, and that's all for now. Thanks for tuning in to The Money Girl. This is Andrew Horowitz sitting in for The Money Girl. I invite you to listen to my weekly podcast, The Disciplined Investor, also available on iTunes. And if you want to be more successful with your investments, download my best-selling audiobook from iTunes, The Disciplined Investor, essential strategies for success. And don't forget, there's more information in the transcript of the show notes on QDnow.com. While you're there, why not get your 30-day free trial of Go To My PC by clicking on the ad or the link to GoToMyPC.com/podcast. That's GoToMyPC.com/podcast. Be on the lookout for the first book from a quick and dirty tips podcast. Grammar Girls, quick and dirty tips for better writing by Minyong Fargiti will be available wherever fine books are sold on July 8. Reserve a copy now or pre-order one from your favorite online retailer. As always, everyone's situation is different, so be sure to contact a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only, and is not intended to be the substitute for seeking personalized professional advice. Thanks for listening. Having your degree online doesn't mean you have to go about it alone. At Capelli University, we're here to support you when you're ready. From enrollment counselors who get to know you and your goals, to academic coaches who can help you form a plan to stay on track, we care about your success, and are dedicated to helping you pursue your goals. Going back to school is a big step, but having support at every step of your academic journey can make a big difference. 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