Constructing Winning Stock Screens
Over the years, we have studied the works of many famous and successful investors.
Our goal has been to learn from the winning strategies and techniques of investment legends, modern day investment professionals with a proven record of long-term success and even prominent academic research on investing. We have found that it is easy to come up with a list of meaningful screening criteria, but building and applying a cohesive set of criteria can be challenging.
In this article
- Defining a Clear Objective and Approach
- Primary Screening Criteria
- Secondary or Conditioning Screens
- Monitor Your Holdings
- All Screens Are Preliminary
- Value Screening
- Growth Screening
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Screening is the application of quantitative criteria to a broad universe of stocks in order to narrow the list down to a few companies. It allows you to focus your attention on a smaller but more promising group of stocks. It also forces you to use a consistent framework to decide which stocks to add or remove from your portfolio. Discipline is a common trait shared with the successful investors that we have studied. It is too easy to let our emotions such as greed, fear and even pride take over the decision-making process and ignore the rational side of investing.
We illustrate how these approaches can be translated into a series of practical rules or screens that our members can use to build stock portfolios. AAII’s Stock Investor Pro and the Stock Screens area of AAII.com have over 50 different approaches that you can follow. But how do you pick an approach that is right for you, and how did we construct the mix of criteria that make up each screen? This article provides an overview of the stock screening process and illustrates how to design or select a stock screen that makes practical sense.
It is best to look at screening as a multi-stage process:
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