Mechanical Investing

(Prices are as of April 16,2012)

Mechanical investing is selecting stocks based on defined criteria or a screen and neglecting all other factors. An example would be investing in stocks that have ROE higher than 20% or stocks that has Prices below BV.

Today I am going to show you a mechanical selection developed by the Motley Fool, they called it the Foolish Four approach.

Foolish Four Approach is done in three easy steps:

  • Ranking all the stocks in the index according to dividend yields from highest to lowest.
  • Rank the top 10 stocks by price from lowest to highest.
  • The top 4 will be your investment choice.

Now let’s apply it in real life.

You can determine the composition  of the PSE index here:

www2.pse.com.ph > Stock Quotes > PSEi

Rank the list by Dividend yield


Extract only the top 10 as shown below:

Rank them by price and obtain the top 4:

We will revisit what will happen in these stocks 6 months from now.

A year ago I tried the approach and it appears to be successful. Please see below:

The PSE index composition as of December 31, 2010


Ranked by dividend yeild:

Ranked by price:

Results:

The Foolish Four Approach exhibited a gross weighted return of 26%. In order to properly assess whether it is a good return or not, we should compare it with the PSEi’s performance. In the illustration above, the Foolish Four outperformed the index by 5%.

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