selection based on fudamental data parameters

asr: seems this book examines the methods used for stock selection based on fundamental criteria ( earnigs growth , sales etcc. )

The book advises a reaction technique, dubbed STRACT to beat the market. It involves no prediction, it just reacts to the market and data. STRACT refers to three step reaction:


http://www.amazon.com/Beat-Market-Invest-Knowing-Stocks/dp/0132439786/ref=sr_1_1?ie=UTF8&s=books&qid=1258396663&sr=8-1

setup, -S
trigger, - TR
and the action. -ACT

It offers STRACT buy and sell setups. So if a stock meets certain scan conditions it qualifies for a buy and when it satisfies certain scan conditions , it triggers a sell.

asr: this Kirk is different than our Mr. K. It seems our Mr. K follows similar technique of STRACT ( setup , trigger and ACT ) may use little different parameters but basic is do nOT predict market ACT only on Market DATA . Here Mr. K setup is Stock screen machine SCM and has a detailed notes what to when it triggers , notes is written at setup time not when it triggers ( that was mentioned in the blog).

- we need to do same STRACT for OIL , currencies based on our VP back test result.


# For last 25 years the author has been following a "relative" approach to equity selection. Stocks are ranked either by relative value, relative earnings or relative strength. So when looking for value the author does not look at the value of company but as a relative value compared to all other stocks in the market.
# For ranking stocks by value the author uses the price to sales ratio. The logic being sales are comparatively difficult to manipulate compared to earnings. He uses price to sales ratio of last four quarters and compares it to previous four quarters a year ago. But instead of looking at absolute value, he looks at relative ranking of stocks using the ratio. The P/S ratio is very easy available information and all finance sites provide this information.
# For ranking stocks by growth the author uses change in earnings. Again he looks at last 4 quarters of earnings growth compared to previous year 4 quarters. But instead of looking at absolute value, he looks at relative ranking of stocks using the earnings growth rate.
# For measuring relative strength the author follows a approach similar to the approach outlined by Robert A. Levy in his 1968 article in Journal Of Finance:Relative Strength as Criteria for Investment Selection . Levy proposed using a ratio of closing price/131 day moving average to calculate price relative strength. The author uses 121 days instead of 131.
# Charles Kirkpatrick key findings about relative value based stock selection are:

* There is inverse relationship between relative price to sales ratio and relative price performance
* Stocks with relative value percentile of 17 to 47 have best chance of outperforming the market over the following three months
* Stocks with ultra low valuation (relative valuation below 7 percentile) have poor performance.
* Stocks with relative percentile between 87 and 99 are worst buy candidates.
* In a bear market the best buy candidates based on relative valuation are between 17th and 27 th percentile.
* The best sell triggers are above 57 percentile or below 7 th percentile during bear markets

# Charles Kirkpatrick key findings about relative earnings based stock selection are:

* Relative earnings growth is a poor criteria for selecting stocks ( IBD followers might find this news very disturbing!!!)
* Stocks with top 10 percentile ranking by relative earnings growth (or in other words stock ranked 90 % plus by EPS raning) perform poorly compared to market
* The authors research conclusively proves that using relative earnings to select stocks for future performance has no edge.
* Stocks with relative EPS percentile of 42 to 87 are good selection candidates for 3 to 6 month holding period.
* During bull market relative earnings is as effective method for selecting stocks

# Charles Kirkpatrick key findings about relative price strength based stock selection are:

* The most reliable technique for selecting stocks in both bull and bear market is relative price strength
* it does not work for short periods (below 3 month holding periods) and periods longer than a year
* relative price strength breeds more relative price strength and relative weakness breeds further weakness.
* Stocks with relative price percentile rank above 47 outperform market in next 3 month, but higher the rank the better

# Neither relative price strength nor reported earnings growth nor relative valuation has any predictive value 12 months in future.
# By combining relative price strength and relative value ranking the author creates a "bargain list" every week. The Bargain List Model is the heart of this book.
# Bargain List buy triggers:

* Relative price strength>=97
* Relative price to sales percentile>=17 and <=42
* Market cap>1 Million
* stock price> 10

# Bargain List sale triggers:

* relative price strength <52>
* relative price to sales percentile <=7 or >=67

# You can set this up in Telechart very easily. See my post about this:
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There are predominantly four investing styles followed by investors:

1. Value
2. Growth
3. Momentum
4. Arbitrage

When looking at books on trading , it helps to look at books by these investment styles. Growth investors invest in companies that are growing at above average growth rate. They are more focused on sales and earnings growth and willing to pay higher premium for such stocks.

Growth stock investors are high expectation investors as against value investors who are low expectation investor. The basic assumption behind growth investing is that the market will continue to reward a company growing faster than other companies. the key to success in growth investing is to identify early stage growth company and ride it till it is growing and abandon it before the growth slows down. Often growth investors are called patsies playing the greater fool game.

These are some of the books related to growth investing from my personal collection.

CANSLIM is IBD besed method
24 Essential Lessons for Investment Success: Learn the Most Important Investment Techniques from the Founder of Investor's Business Dail

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asr: some more reviews of books ( mostly fundamental methods )
can you learn from trading books
http://stockbee.blogspot.com/2008/12/can-you-learn-trading-from-books-part-1.html