Equities Lab Speak the language of the market

Equities Lab “Speak the language of the market”

What's the problem? "Individuals run into rat holes when trying to invest" Using Money managers Invest in Mutual Funds Invest in ETFs Day Trading Following News • Most professional money managers are great at sales – not great at investing • You lose money to overhead and fees • As a type of investment, mutual funds have badly underperform the rest of the market for 20 years. • Better then any of the other options but … • Very correlated with the overall market. • Can be subject to the Ponzi effect. • Despite very good tooling, most day traders do not make money. • Takes a large investment of time. • Reading news has been proven harmful to investing performance (Tversky, Montier, et al) • No way to understand ideas behind the recommendations, beyond reading the sales spiel

What's wrong with the current tools? "In other words, why are we special? " To our knowledge, every competitor has one (or more) of the following Achilles's Crippled Scope Limited UI Bad Data • If you only know the price, P/E, and Market Cap of a company, it is very hard to do any meaningful analysis on it! • (To be fair, most of these tools were actually designed for day traders, not fundamental investors) A choice between inscrutable names, or condescending wizards. Only supports very simple queries (“PE” > “ 50) Limited (if any) tools to visualize your data No way to monitor your investments • Survivorship bias • Companies that went bankrupt simply disappear, so strategies that pick high risk companies all look great… • Restatement bias • Lookahead bias

Equities Lab's Data "Somebody fed us too much cat food" 24, 000 stocks 800+ fields per company in the present Going back each year and each quarter to 1995 Point in time data No survivorship or lookahead bias Calculate your ratios your way Financial statements and more Cash flow Income statements Balance sheet Use your data Excel export Heat maps Scatter charts A great way to fill disks up Price data Macroeconomi c data

Equities Lab’s UI “The cat’s meow” Intuitive monitoring of current investments Powerful visualization tools allow you to easily analyze the market Flexible expression editor finds the stocks you want to buy

OK, you're sold, now what? • Find an existing screen – Watch it work – Why does it work? • Look at the picks • Examine the formulas – Make it better for the last 8 years • Return on invested capital for the win – Try something that doesn't work • Positive momentum does not enhance returns – Listen to the market • Use the IWM score to avoid rocky patches

Watch it work • Great Value Score Top 10 – Finds stocks that generally are undervalued – Sorts them by the quality of their income statement – Takes the top 10 -ish • Nearly the performance of the S&P 500 from 2012 onwards – Impressive for a value screen, as the current environment is not kind to value stocks – More volatile

How it screens • Restrict the set of stocks being considered – These conditions are for investability and appropriateness – These conditions may be shared among many screens – No penny stocks, etc • Match the desired conditions – Value score makes this a value screen – Varies by screen – Main driver • Rank the survivors – Of the value stocks we get, take those with the nicest income statements – Adds significant performance – Can make screens more fragile – Increases turnover

The magic of scores • The Value Score and Income Statement score both count the number of conditions which are true – Value score wants the stocks to be in the cheapest third for • • Price to sales P/E Price to cash flow Etc – Income statement score wants as many of • Increasing income • Income greater than cash flow • etc • This leads to more flexible screeners – No stock is perfect

Sprinkle in some ROIC • See that it fails – Plot a variable • ROIC – See each position's return and roic, and scatter chart them • The middle outperforms the edges • Add rank roic between 25 and 75 • Profit!

How do I do this? • Sign up for Equities Lab – https: //www. equitieslab. com • Normally the membership is $600/year ($50/mo) – Discounted link for $400/year with annual charges to the credit card • https: //www. equitieslab. com/checkout/? rid=p 8 QCw. J • Questions? – Email support@equitieslab. com, and we'll happily anwer them. • Find this slide deck on https: //www. equitieslab. com/aaiislides 2020/