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Backtesting the Revised MAGNET Stock Screens

July 18, 2015

One of the benefits of quantitative stock screening is that it helps to remove emotion from the equation by defining minimum criteria that a stock must meet in order to pass the screen. If you only invest in stocks that pass a stock screen, you remove the chance of investing in stocks that you may have personal interest in but that do not have the “winning qualities” defined in the screen. In order to invest in a stock methodology with confidence, however, it helps to have an idea of how it has performed over varying market cycles. While past performance is not a guarantee of future performance, backtesting allows us to see how a strategy would have hypothetically performed in the past.

AAII membership gives you access to a collection of more than 50 stock screens, where you can view the hypothetical performance of stock investing strategies starting, in most cases, in 1998. Most of AAII’s stock screens are backtested over a period that begins at the end of 1997, with hypothetical portfolios invested in the stocks that pass a given methodology on an equal dollar basis and rebalanced at the end of each month, with buys and sells assumed to be made at the month-end price. For that reason, as well as the fact that our backtesting results do not take into account transaction costs such as commissions and bid-ask spreads, our reported results are not achievable by individual investors. However, since we follow the same procedure for all screens, the backtesting results provide a basis for comparing how the approaches may perform over time and over varying market conditions.

MAGNET Complex and MAGNET Simple are two investment methodologies tracked in the Stock Screens section of AAII.com. They were developed by Computerized Investing editor Wayne A. Thorp, CFA, and based on the book “Magnet Investing” (Next Decade, Inc., 2000) written by Jordan Kimmel. Kimmel, chief investment officer at Investview Inc., developed the Stock Selection Process, a proprietary stock selection model that was one of the first to blend elements of value, growth and momentum. Thorp’s August 2009 article, “Adapting the Kimmel Approach: AAII’s Simple and Complex MAGNET Screens,” is available here.

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