Mechanical Investing – Rely on the Numbers

Fire and forget investing. Sounds boring. Sounds dangerous. But it can be very profitable. The idea: screen for stocks using a set of defined, reliable and historically successful criteria, buy those stocks basically no questions asked, and sell them when they fullfill predetermined criteria — or no longer fulfill your buy criteria. The reason: we as humans tend to invest based on two factors, fear and greed. Utilizing a mechanical investing approach reduces and, hopefully, eliminates those tendencies from our decisions.

Nearly everything that I’ve read over the last year, whether it be Benjamin Graham, Nicholas Darvas or James O’Shaughnessy, either implicitly or explicitly, advocate this system. They do not refer to it as such; they do not tell you, usually, to go to MSN Money or Yahoo! or AAII and use a screener to find stocks. But they all establish fundamental and measurable (numerical) criteria for identifying possible winning investments.

So its easy, right? Guaranteed to make you rich? Turn $10,000 into $1,000,000 in less than three years? Allow you to retire early, work from home, travel to Hawaii or buy a 3,000 square foot winter house in Florida? No. Well, maybe for some fortunate soul out there it could. But you need to find the right criteria. Criteria that suits your investing style, your risk tolerance, and has an established track record with the potential for future profits.

After that, its easy. You utilize a screener (and there are some good free ones and some good expensive ones — and some bad free ones and, well, some bad expensive ones) in order to find only those stocks that meet your definition of potential winners. The key from there is to have your plan. There’s that word that shows up all over my site. It does no good to find winners if you don’t have a way to profit from them and to minimize risk. Believe me, I know… I’m living proof of failing to plan…

With mechanical investing, you could decide to rescreen and rebalance monthly, quarterly, bi-annually, yearly, or daily (if you are so inclined) simply based on passing/failing stocks. For example: if January 2 GOOG is a buy, per your screen, do it! Do it! Do it! If next month its a sell, sell (regardless of what you feel about the stock). Google may continue to skyrocket. But it doesn’t meet your criteria. It’s not one of your stocks. If you have a good screen, you’ll have other equities that will climb in February to replace GOOG.

In the end, your thought process is removed. Yeah, you’ve got to quell those thoughts that say, don’t sell, my stocks will still go up. You have to trust your screen. Easier said than done , of course. But, again, the point is to remove emotion from investing and just rely on the numbers.

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