(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:
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%.