Interpreting AAII Screens

Comments on “How to Best Use Stock Screens to Build a Portfolio,” by Matt Markowski, in the June 2022 AAII Journal:

Interesting discussion on using screens. In reference to the guru screens, I note that you also give one-, three-, five- and 10-year performance figures, which seem confusing given that the screen is not the guru’s actual portfolio—and the number of frequent changes in stocks that appear week to week in a given guru’s screen adds to that confusion. Is there a particular portfolio that accounts for the annual gains or losses?
—Frank H. from Massachusetts

AAII editors respond:
Frank, the guru screens are our interpretation of the strategies. Performance of the AAII stock screens is calculated every month based on buying and selling the stocks that pass the screen at the month-end closing. The price gains only (dividends excluded) for the portfolios are tracked, and factors such as commissions and spreads are ignored. The reported performance is therefore unachievable even in a best-case scenario, but for our purposes all approaches are subject to the same conditions and procedures. The goal of tracking the performance of the screens is to help gain an understanding of how each approach reacts in different market conditions. More information can be found at www.aaii.com/stockideas/faqs.

Using the VIX

Comment on “Measuring Market Volatility Trends With the VIX,” by Brian Haughey, CFA, FRM, CAIA, in the June 2022 AAII Journal:

Trying to predict price changes in individual stocks is outside my risk profile. The Rule of 16 was helpful in making the probabilities clearer. However, this sentence caught my interest on the potential utility of S&P 500 index (five-day) moving average crossovers: “While some traders watch moving average crossovers of the S&P 500 to make buy and sell decisions, on occasion crossovers in the VIX can provide earlier signals, particularly after sell-offs.” AAII should invite Haughey back to expand on the utility of these crossovers as a timelier indicator of overall market level trends. I find data trends and comparative data much more useful “advice” than constantly changing static quotes and offsetting opinions.
—Barry J. from Texas

Holding Dividend Stocks

Comments on “Solid Long-Term Results From the Weiss Blue-Chip Dividend Screen,” by Jack Gilleland, in the July 2022 AAII Journal:

Geraldine Weiss’ approach is intriguing, especially her approach to buying. But I wonder whether it’s better just to hang on to the stock as long as its fundamentals are sound. If you sell, taxes will come out of your proceeds. I would imagine that dividend yields tend to drop across the board in a bull market, so when you sell, you’re likely to be left with fewer stocks to choose from. As a buy-and-hold investor, I’d prefer to retain the stock and keep receiving the dividends unless and until the company turns into a dog.
—Robert A. from North Carolina

If stocks are held in a brokerage account, one possibility would be to take the dividends as cash when stocks are overvalued, reinvest the dividends when the stocks are undervalued and buy more stocks with the cash accumulated when stocks are undervalued.
—Conrad L. from Texas

While interesting, this strategy seems like a lot of work for a small number of relatively low-yielding investments. Requiring a current ratio of 2 times would be a limiting factor. I was also not sure if the graph showing 10-year growth included reinvested dividends, which I do myself.
—Harold F. from California

Bond Returns

Comments on “The Benefits and Risks of Short-Term Bond Funds,” by Matthew Bajkowski, in the July 2022 AAII Journal:

For the average middle-class investor, bonds and bond funds are basically garbage investments. I’d rather keep my money in cash or similar liquid investments that offer the opportunity to buy quality growth and value stocks and quality real estate investment trusts (REITs) at a discount during market volatility and downturns.
—Jack J. from Illinois

Are the category grades solely based on portfolio returns? They seem inconsistent. For example, in Table 3, short government bond exchange-traded funds (ETFs) SCHO and VGSH have identical one-, three- and five-year returns, but their separate grades are different. They are listed as tracking the same index.
—Paul S. from Oregon

AAII editors respond:
Paul, the short government category had just seven ETFs as of the end of June. The returns for all seven funds are close. The grades are assigned based on percentage rank so small differences—even those obscured by rounding—are leading to different category grades being assigned. The grades are helpful for comparing funds, but it is good to look at the actual returns as well.