Moving on: Making the Investools setback become an opportunity

Investing Strategy Research OptimismFrom your communications and my own feelings, I know I speak for many of our blog’s followers and club members that there has been a great deal of grief over the death of Investools.  I say, “grief,” in the literal sense because anger over the loss of 100s of hours of investment into the Investools education is mostly gone to waste. We haven’t looked kindly on TD Ameritrade’s decision to kill the platform in the same way a mom and pop hardware store feels when Walmart comes into town.  There is true anger as a phase of grief to be had there. But we are starting to see a light at the end of the tunnel. It will cost a new investment of time but there is a good possibility it may pay for itself with even greater returns than Investools had to offer.

Investools status inside TD Ameritrade

Our first strategy was to be a squeaky wheel and protest TD Ameritrade. Maybe they made a miscalculation to how many of their customers they would upset and how it would affect their bottom line. We wanted to “be heard” in hopes TD Ameritrade would place a greater priority on moving the Investools features over to their Think or Swim (TOS) education and platform.  TD Ameritrade has said that they do intend on moving a number of features over in the next six months.  How many of those features and how quickly they are moved over is yet to be seen.

A temporary fix

At the time of this post, a month and a half after Investools was terminated, we have been able to adapt our investment approach to another platform somewhat.  It was a quick and dirty approach given that sitting in cash would be the worst option to do while we figured things out. I greatly feared the opportunity loss in this market if we waited to learn a whole new system. Part of the grief experienced last month was the realization that we couldn’t magically make dozens of hours appear to learn a new system quickly.

The toolset we’ve temporarily adapted is Phil Town’s RuleOneInvesting.com. You can read the review/Investools comparison here. To our Investools readers, keep in mind that we never used Investools exactly the way it was taught.  You may find the comparison lacking compared to the way you used it.  At Investing Adventures, we used a blended strategy of momentum and value investing.  This is why Phil Town’s ability to sort by intrinsic value (sticker price) is very useful to us.

The temporary methodology uses both FinFiz’ Screener and Rule #1 Toolbox.  First, we FinFiz to screen for the performance stocks that met our parameters. Of those stocks, we were able to narrow the list down even further at RuleOneInvesting.com’s Toolbox. We buy stocks with the biggest margin of safety and a high “Rule #1” rating (which often correlates to an Investools’ Phase 2 score).  Of the approximately 16 stocks purchased this month (in our paper trading account at Market Watch), we have seen good returns close to what we would have expected with our original Investools method.  Six weeks of success doesn’t necessarily mean it will have long-term good returns.  We have confidence, though, since the underlying investment strategies are generally proven ones.

Looking forward: What’s the best investment strategy?

While looking at different systems for their similarities to Investools, I’ve slowly become open to the idea of learning a whole new strategy.  We’ve bought ourselves some time by finding the temporary fix described above. Learning a whole “new system” wouldn’t mean there wouldn’t necessarily be some overlap between Investools. But it would let go of trying to force a different system’s foot to fit the Investool’s Cinderella slipper.

By the same token, I wouldn’t I blindly go with TD Ameritrade’s education without finding some backtesting proof to their methodology.  I often see that many brokers’ education focus on Efficient Market Theory. Those teachings tend to guide an investor to diversification rather than taking advantage of the strategies that can give them an edge. That’s fine. Let them convince the masses that it’s true. Meanwhile, we’ll scoop up all the undervalued stocks and outperform the indices.

While searching for some backtesting evidence of different systems, I found The American Association of Individual Investors (AAII).  This seems to me to be the holy grail of testing investment strategies from the most unbiased way.  Per their website:

AAII has been developing, testing and refining a wide range of screening strategies for nearly two decades. Many of the screens follow the approaches of popular investment professionals, while others are tied to basic principles of investing. These approaches run the full spectrum, from those that are value-based to those that focus primarily on growth, while most fall somewhere in the middle.

The educational purpose of these stock screens is to highlight what works—and what doesn’t work—when selecting stocks.

AAII’s website has a stock strategy screen to evaluate investment strategies and list the companies that pass each screen. Check it out here: http://www.aaii.com/stock-screens

Here’s what is interesting about the AAII Stock Screen.  It allows one to sort the performance of the investment strategy based on the price gain of using the strategy over the short and long term.   I can see that if someone had been using the “MAGNET Simple” method during 2017 to date, he/she would have enjoyed a 72.6% return!  But if you look at the strategy over the last 10 years, it only returned 10.6% (albeit double the benchmark of the S&P 500’s 5.2% return).

Contrast the MAGNET Simple method with Top 30 Up method and you’ll see that the 10 year return is almost double MAGNET at 19.6% while the 2017 to date is only 15.5%.  I’m not sure what the “inception” column represents.  It’s possibly the “nearly two decades” referenced in the AAII’s website.

So although the 72.6% return seems attractive, an investor should certainly only concern themselves with strategy performance over the long term.  10 years should suffice to be meaningful enough.  So, who ends up on top and which one should we pick?

Looking at the top strategies 10 year performances, I see:

Investment Strategy10-Year % GainCategory
Benchmark: S&P 500 5.2%
Est Rev: Top 30 Up - Introduction to the use of earnings estimates. 19.6%Earnings Estimates
Driehaus - Classic momentum approach that seeks out stocks that are rapidly rising in price with the belief that the rising price will attract other investors. 17.5%Growth With Price Momentum
Stock Market Winners - A screen that tries to interpret and apply successful trading rules in the real market environment. 17.1%Growth & Value With Price Momentum
Price-to-Free-Cash-Flow - An exploration of the basics of cash flow analysis and the implementation of a price-to-free-cash-flow screen. 16.7%Value
O'Neil's CAN SLIM Revised 3rd Edition - How to implement William O’Neil’s revised CAN SLIM approach to screen for fast-growing stocks. 16.6%Growth With Price Momentum

Sorting by inception, even though I’m not sure if the definition means inception of the strategy or the screener, I see that the Est Rev: Top 30 Up and  O’Neil’s CAN SLIM shows up again:

Investment StrategyInception % GainCategory
Benchmark: S&P 500 5.2%
Est Rev: Top 30 Up - Introduction to the use of earnings estimates. 24.1%Earnings Estimates
Est Rev: Up 5% - Introduction to the use of earnings estimates.24.1%Earnings Estimates
Piotroski: High F-Score - A study of low price-to-book-value stocks to see if it's possible to establish basic financial criteria to help separate the winners from the losers.23.2%Value
O'Neil's CAN SLIM - An approach that combines both fundamental and technical factors to seek out companies with strong earnings and price momentum. 22.7%Growth With Price Momentum
O'Shaughnessy: Tiny Titans - O'Shaughnessy tries to predict the future using historical long-term trends. 22.2%Value With Price Momentum

You can visit http://www.aaii.com/stock-screens to see the full list including other durations and a Risk Index evaluation.

Looking forward: What’s the best investment strategy for you?

In the above tables, I listed the investment strategy categories. Given two similarly performing strategies, I believe that it makes sense to pick a strategy that agrees with your philosophy or previous training.  I’m partial to Value and Momentum strategies.

For me, one of the most important criteria is the time investment to perform the analysis each month. I’m a big believer in the Pareto Principle, aka the 80/20 rule.   One of the biggest reasons I was a fan of Investools is that it only took four hours a month to analyze. With those 4 hours, our club has consistently outperformed the S&P500 averaging about 17% over the long run. I wouldn’t invest my time into a strategy that gave 3% better gain at the cost of 20 hours more a month!  I’m looking forward to finding out which one of these top methodologies requires the least amount of time to perform each month.

What’s next?

First, we will continue to invest using the FinFiz/Rule #1 Toolbox momentum/value strategy while researching what tool is the best fit for our club’s investors.

At the same time, the Investing Adventures club members will research the price, difficulty, risk index, education duration, and monthly time commitment for each of the top performing strategies. We will post our results in a future article.

We would appreciate hearing from all of you along the way.  Do you have any experience with any of AAII’s top-rated strategies?  What is the most important features of a strategy for you?

Subscribe to our newsletter to be notified when the results are posted in the form on the right-hand side of the website pages.  We respect our followers and will keep your email private.  Unsubscribe anytime easily with the link at the bottom of the newsletter emails.

 

One Reply to “Moving on: Making the Investools setback become an opportunity”

Leave a Reply