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Customizing Screening Criteria

 

Objective

First, you should have a clearly defined objective for the kind of companies you want to find.  The objective in the Define Screening Criteria window is to set the conditions (criteria) to search for your companies.  This definition will filter the database for the kind of companies you seek. 

Until you are proficient with defining criteria statements, you will want to use the pre-defined criteria as a basis for your statements.  The results of your screen will be displayed in a report that can be sorted and individual companies can be viewed and ranked.

 

Defining Objectives

The search for companies is based on the criteria statements used.  Criteria for the companies should define the characteristics of interest to you.  These criteria will vary depending on your investing objectives.  Here are some examples of search objectives:

1.   companies in a particular industry or industry group

2.   companies of a particular size (small, medium or large capitalization or sales)

3.   companies with the highest income (dividend)

4.   companies with the best management (through consistency in growth, profitability, or invested capital)

5.   the fastest growing companies

6.   companies whose recent results exceed the average of the industry, industry group, or whole of the database

7.   the best performing industries

8.   companies that meet NAIC investment criteria

Although we don't advise it, aggressive and knowledgeable investors could search for:

1.   possible turn-around situations

2.   potential buy-out candidates

3.   short selling situations

The capabilities of the MyStockProspector.com program are very extensive.  Your knowledge defines the criteria to discover companies appropriate for your type of investing.

 

Using Pre-defined Criteria

The pre-defined (beginner) criteria (PDC) items can be used as starting points for new criteria.  We suggest that you review the pre-defined criteria lists to understand how each achieves its objective.  You can then modify pre-defined criteria and specify variations to suit your purposes.

 

Building a Report

In the Report window you select items and set weights to include in your report.  Although it is possible to select all items for the report, we suggest that you include only items that are meaningful to your search.  Including all items tends to clutter your report and may confuse rather than clarify prospective selections.

 

Methodology

The process of searching for possible investing prospects must begin with a clear understanding of what to look for.  This goal must be uppermost in your mind if you are to be successful in defining meaningful reports and criteria.  The most difficult part is to convert an investing objective into a series of appropriate statements.  With MyStockProspector.com there are two major steps.

1.   Defining screening criteria:  a set of criteria statements to choose from a large database of potential companies a select few for subsequent analysis.

2.   Defining a report:  a set of data items that helps identify the companies with the characteristics you seek.

This section of the manual will identify a process to help in your definition of searches.

 

Setting Investment Objectives

You must have a clearly defined investment objective.  Without this key ingredient, you will not necessarily accomplish the results that you want from your search. 

Objectives can be set according to basic company characteristics such as growth, quality, value, and safety.  These characteristics can be combined to set a broader objective.  It is practically impossible to have a company excel in all categories.  Generally, a fast growing company will be quite volatile (less safe).  Similarly, a quality company will rarely be on sale (low value).

Recognizing such trade-offs will enable your searches to yield more reasonable results.

 

Notable Investors

A way to start looking for investment possibilities is to look at individuals who have achieved success or have studied approaches that show promise.  Here are a few notable investors whose ideas may help identify searches for you.

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Benjamin Graham

Benjamin Graham is the author of "The Intelligent Investor" and co-author of "Security Analysis".  These books are considered investor classics and are often referred to by individuals like Peter Lynch, Warren Buffet, and John Templeton.  Graham's books are for investors wanting to be challenged by concepts and ideas beyond NAIC's investment methods.

Some of Graham's screening suggestions include low valuation (PE and price/book value), low debt, and consistent growth in EPS and dividends.

Peter Lynch

Peter Lynch is a highly regarded stock market investor who ran the Fidelity Magellan Fund for 13 years.  This was the top-ranked general equity mutual fund in the US.  $1000 invested in 1977 was worth $28,000 when Lynch quit in 1990. 

Lynch's advice is to "invest in what you know".  Work is required to research companies and find those that have the best growth possibilities. He suggests investing in good companies in out-of-favor industries and then patiently waiting for the market to realize that these companies are very good value, thus driving the price higher.  He says that you can beat the market by ignoring what the herd of professional investors is doing.  Also, you have the benefit of no restrictions on what you can do.  You only answer to yourself. 

Some things he looks for are low valuation (PE and PE/EPS growth), low debt and high cash flow.

Warren Buffet

Warren Buffet was born in Nebraska in 1930.  He lives there now, one of America's richest people, with a net worth of more than $9 billion.  He amassed this fortune from investments in the stock market, starting with $100 in 1956.  Mr. Buffet is particularly known as the CEO of the Berkshire Hathaway holding company, which operates like a mutual fund.  There are investors who buy one share of this company in order to gain information about what Mr. Buffet is doing and thinking, as he expresses himself through the annual report and the annual shareholders' meeting.

Buffet is characterized as a value investor.  He does not pay attention to what the stock market is doing.  He studies the facts and financial condition of a company, considers the value of its prospects, and buys it when it is at a fair or bargain price.  Buffet never invests in companies he cannot understand.  He says that this is why he stays away from technology stocks.

He indicates that consistent EPS growth and high profitability and ROE (return on equity) are keys to quality companies.

James O'Shaughnessy

James O'Shaughnessy's book 'What Works on Wall Street" assesses investing methods by testing them with historical data.  The results seem to indicate that value and growth characteristics have merit.  However, he stresses that no one method is successful over prolonged periods.

Suggestions from his book include looking for established and larger companies, preferably leaders in their industries, with high dividend yields and cash flow and consistent 5-year earnings growth.

 

Summary

You can see that these notable investors share similar strategies.

1.   Invest in what you know.

2.   Do your homework to understand the company's situation.

3.   Buy when the company's price presents good value for your dollar.

Some other strategy suggestions include finding companies with a small institutional following, looking for insider buying, and checking for positive share buyback policies.