We at AAII have encouraged investors to follow disciplined, research-based approaches since our founding in 1978. Our A+ Investor Grades are an example of this.

Each grade is based on quantitative data. The specific grade assigned (A–F) is determined by percentile rankings. I walk you through the components underlying our Value, Growth, Momentum, Quality and Earnings Estimate Revisions Grades in this issue’s cover article. Though the stock grades themselves are only available to A+ Investor and AAII Platinum subscribers, all AAII members can see most of the grades’ components or easily calculate them by using the data provided in the Stock Evaluator on AAII.com.

The transparency we provide differentiates the A+ Grades from many other rating systems. There is no black box algorithm running in the background. In creating each grade, we pored through academic research. Value and momentum have long been documented as factors associated with portfolio outperformance. Our Quality Grade combines elements from several academic papers, including research into the persistence of earnings and identifying the risk of bankruptcy.

We then looked at industry research and spoke with practitioners. This influenced which components were included and excluded. Even the performance of our own AAII Stock Screens played a role, as can be seen with the Earnings Estimate Revisions Grade.

Finally, we took a step back and asked ourselves whether the components of each grade made economic sense. Any backtest can find a random combination of criteria that worked well over a certain period. Coincidences happen. The components underlying each of our grades complement each other. For example, using the price-to-sales (P/S) and price-to-book-value (P/B) ratios together makes sense because some companies are asset-light while others are asset-heavy.

The grades work well with each other too. Price momentum has been shown to work well with value investing. Quality helps you to identify growth stocks with the financial strength to keep growing. Earnings estimate revisions can lead you to stocks whose businesses show signs of performing better than analysts previously expected.

Most importantly, the A+ Grades and their underlying components can help you adhere to a disciplined, research-based approach.

Wishing you prosperity and good health,