Tedthedog: it seems surprising that a relatively simple metric based on quarterly reported data would correlate well with short-term, i.e. four week, performance.
The factors change only during the first week of a quarter and remain the same for the entire quarter. So a stocks rank will stay the same for the entire quarter and will very likely remain in the same bin and be reselected for each of the following 4 week samples remaining in the quarter. I looked at the average hold time for the top bin and it was averaged over a year if I remember correctly. But as there was no penalty for trade friction it would not make a difference.
I just ran a simulation with trading friction from 1/1/2002 till present. Selecting the top ranked 45 stocks. The results are not particularly good. Only 12.45 CAGR (poor) with a 43.5% annual turnover (excellent low taxes) a max drawdown of 45.5% (9% less than the universe) 59% winners, 0.7 Sharp. Although this isn’t spectacular it is outstanding for one simple formula. Add a few simple additions like mungo’s “sanity test that their debt not be too high” and this could be the foundation for a nice screen. But I’ll stick with MI.

Mechanical Investing FAQ

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