Sunday, August 29, 2010

A filter

Here's a filter I saw on the MFI Yahoo group:

Try Jamie Gritton's backtester

Under "Screen Builder" enter the following inputs:

Market cap > $50 million (mcp > 50)
PE bottom 25% of companies (cpe bottom 25%)
ROA top 25% of companies (nin/tas top 25%)
Starting month = January
Holding period = 12 months
Timeliness = 1-5

The average annual returns for the period 1989 through 2009 are:

S&P 500, 10.8%
Little Book Table 6.1 plus updates from website, 21.7%
Gritton screen above, 19.0%

See if you can add/modify the screening criteria to achieve a higher return. 

A few of suggestions for better perspective: 

1.  In order to get apples-to-apples comparisons try to get about the same number of companies passing the screens.  In general, you don't want to compare screens that pass 5 companies with screens that pass 50 companies.

2.  Run 12 month screens starting in January, April, July and October and average the results.

3.  Run the opposite conditions to see the change from the top tier to the bottom tier.  For example,
cpe bottom 25% and nin/tas top 25%--> CAGR = 15
cpe top 25% and nin/tas bottom 25%---> CAGR = 9
I hope this is helpful.

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