With the recent holidays in mind, let’s start off lightly with a short personal anecdote with which at least some of you will familiarize I’m sure.
Let me take you back to Christmas eve. The leftover turkey is neatly wrapped and stored safely in the refrigerator for tomorrow night’s dinner. The table is almost cleared, and I pour myself some leftover wine before taking a seat to watch a Christmas movie with the family.
And to my reassurance, Home Alone was reprogrammed on most of the television channels. Yet one certainty in these uncertain times! However, almost as certain is the fact that the next day’s Christmas party will be full of eager discussion on numerous topics, varying from light-hearted subjects such as culinary delights and works of art to more serious themes like politics or money matters.
In times of crisis, and certainly in the case of this pandemic, the latter seldom goes unnoticed. A nephew who recently started his finance studies speaks full of admiration about Elon Musk and his colleagues who, despite (or because of) the crisis, have managed to earn a considerable sum of money.
A bit further away, uncles slowly discuss whether they should engage in risky projects, invest in securities or bonds, or, just to be safe, acquire real estate? From the background, grandma reacts somewhat agitatedly that banks and other financial institutions are only embellished alchemy and that it is best to keep your money in a sock under your bed. Doubt strikes, where do I best keep my hard-earned pocket money?
In the next sections, I shall briefly introduce you, first to the concept of investing in general, and secondly, how fundamental stock screeners can help you do it properly. Sporadically, I will include Uncle Stock, an excellent fundamental stock screener I recently had the pleasure of trying out.
Why Should One Invest?
For those unfamiliar with the financial world, the term “investment” often gets quite a negative connotation. Investing is mainly linked to large companies, financial crises or even fraudulent bankers, but certainly not for the man in the street. However, each of us is an investor in the strict sense of the word.
After all, investing means a sacrifice of money, time or labor for a long-term goal. So whether it be studying, putting time and effort into healthy nutrition or acting within financial markets and intermediaries, they are all investments. However, it is usually the latter when it comes to investments, which is why we will limit ourselves to this category.
The initial function of financial markets is to allocate resources as efficiently as possible, both between people as well as spread across time. From this perspective, investments are undoubtedly interesting to make life easy and even desirable on a social level.
After all, how could people fund their home, start-up or scientific research without loans or investments? In practice, there are various options for making the processes within financial markets and intermediaries run as efficiently as possible, based on the different products that are traded.
The question can now be asked how efficient this constellation really is? Some experts claim on theoretical grounds that markets are always efficient and balanced, that prices are still representative of intrinsic values.
In this case, the profession of investment analyst would soon become obsolete. However, it is not unreasonable to assume that, like all things in life (excluding Christmas programming, of course), financial products are also partly uncertain and inefficient. Just think of certain behavioral factors such as overconfidence, herding, irrational expectations (among other theoretical and regulatory considerations) that lead to prices not being truthful.
This means that there must be opportunities for the investor waiting to be seized (or pitfalls that can be stepped into). Of course, how someone invests depends on his needs, preferences (risk-aversion, for example) and possibilities, and is therefore personal.
How do you get through this financial labyrinth safely and unscathed without extensive training, expensive investment managers or a good dose of luck? Well, that’s where fundamental stock screeners come into play.
Fundamental Stock Screeners
To spot and exploit opportunities in the market, it is necessary to make correct estimates of the value of various products. The best indicators of how financial products, and stocks, in particular, are performing can be found in the company data.
In order to access, aggregate and interpret these large quantities of data, fundamental stock screeners are indispensable. When you start your search for adequate stocks, screeners offer you the opportunity to filter companies based on the criteria you have chosen yourself.
For example, you can compile a query wherein companies must comply with a particular region, industry, market cap, revenue, Price to Earnings ratio, financial health, and many other indicators you want to include. With these results, you immediately get candidates you deem worthy of further inspection.
Of course, it should be noted that the screener is only as efficient as the person who uses it, so it is very important to have confidence in the variables you chose and the preconditions you set for them.
While extensive training is certainly not necessary, it could be useful, especially for the novice investor, to acquire some introductory knowledge on the subject. Given the large variety of accessible information on the internet nowadays, that shouldn’t pose many problems. Furthermore, Uncle Stock offers some key pointers on how to get started within a diverse set of blog posts.
Once you have created order within the large universe of stocks available by isolating your possible candidates according to your chosen criteria, it is time to put together a portfolio. Of course, screening is only the start of the process. It does not necessarily mean that stocks with specific characteristics that once performed the way they did are automatically the best purchase.
To dig in deeper, the analytical tools provided by fundamental stock screeners come in handy. Uncle Stock distinguishes itself by depth of analysis, providing 450 core metrics with additional derived metrics like averages, growth, CAGR’s and statistical indicators to bring the total amount of metrics to over 10,000 per stock! – all historical.
Also, it has international coverage. Now you have taken the time to take a closer look at your possible candidates, and you will be able to assemble a portfolio that suits you.
Now the question remains: will it beat the market? One of the most valuable features of stock screeners is backtesting. This tool consists of testing your personal strategy based on historical data, so you immediately get a good idea of what your strategy would have delivered if it were applied over this period. It is also possible to benchmark your strategy against well-known indices such as the S&P 500, Eurostoxx 600, Dow Jones, Nasdaq or Warren Buffet’s Berkshire Hathaway.
Uncle Stock provides an easy to use integrated backtest, where users can create a hypothetical portfolio and backtest based on historical data back to 2008. Several rebalancing strategies can be tried out, which comes in handy to optimize your trading strategy.
The backtest result also shows the deviation of the result. It provides a rough estimate of how predictable your return will be. Once you’ve mastered the basics of financial screening and the investing process in general, it is your turn to get involved!
Getting started
Hopefully, next time you arrive at a Christmas party, or any party for that matter, you will be able to make some good arguments in favor of investing in stocks wisely. As we all are investors in some way, the key is doing it deliberately.
For financial products, this might consist of research conveyed by fundamental screeners to spot opportunities and make intelligent decisions you could not make otherwise. And above all, it is essential to learn more about yourself, your goals, and your preferences in the process.
With its focus on market coverage, depth of analysis and user-friendliness, Uncle Stock serves as an exemplary guide through this exciting journey.