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You may know a thing or two about Blackjackor Vingt-et-un, as the French, and supposed creators of the game, call it. But even if you've never played the game, or seen the movie 21, you're likely aware that people have developed clever methods for shifting the odds to favor the player over the casino. You also probably realize that these methods were developed through systematic testing. Having written a paper on card-counting methods in graduate school, I've reviewed the results of many of these tests, and I can tell you that some methods are clearly more successful than others. Needless to say, the strategies that work best are the ones most often used by professional card counters.
Since I'm somewhat of a betting man, I'll wager that if you're reading this, you're already an investor and probably have a large percentage of your net worth in the stock market. Perhaps you even actively trade stocks in your own accounts instead of using mutual funds or ETFs. So my questions to you are: 1) Is your stock picking strategy good? And 2) How do you know?
Maybe you've been actively trading your clearly defined strategy for over five years, have been keeping diligent trading records and are confident when you say that you've outperformed your benchmark by X% over that time frame. (Remember, if you can't beat your benchmark, what's the point?) Or maybe you don't have a good strategy because either you can't really explain it or it doesn't honestly beat the benchmark. The bottom line is you need to know what works and what doesn't, right?
So how do you do that? With backtesting! Backtesting is the process of assessing a stock-picking strategy by applying it to past data. The important facet about backtesting is that it actually shows you how a strategy would have performed if it had existed in the past. Backtesting also allows you to see what works and what doesntwithout actually risking your wallet. Of course if you were patient enough, you could paper trade for years to see if you had something and if you didn't, you could develop another strategy and paper trade for another several years. That might work in the thousand-year lifespan of, say, an elf, but life's too short for humans.
To do this accurately, you need a tool that replicates the data within the time frame in question. You're going to need to buy and sell stocks that no longer exist, access historical financial statements and prices, handle spin-offs and stock splits, and numerous other absolutely necessary features. You might say to yourself, "Nothing like that exists" or "Only institutional and professional money managers have access to that information". But I'm here to tell you that your thoughts are mistaken. This sort of tool does indeed exist for the individual investor, and its called the Zacks Research Wizard.
With the Research Wizard you can develop and backtest your investment strategies on over 10 years of data, which includes information from corporate reports, analyst earnings estimates, sales estimates and recommendations, and stock prices. You'll also be able to test combination strategies if you have multiple ideas.
Do you like to trade every week or are you more tax sensitive and trade monthly, quarterly or even less frequently? No problem. With the Research Wizard you can change your trading frequency or holding periods to fit your trading style.
However, to truly see if your strategy is worthwhile, you'll need to compete against a benchmark. RW offers you the opportunity to test your strategies against a few different benchmarks. You can actually discover what does and doesn't work, based on historical data. You will be able to select strategies proven to work over time and you can feel confident and assured in your investment decisions.
Here's an example keeping with the casino theme. Using RW, I built a strategy by selecting only those companies whose principal business is leisure services, specifically casino and gaming. My strategy also included only those stocks that are highly or moderately rated per the Zacks Rank. I then selected the five with the best Cash Flow-to-Price ratio, which measures your purchase value of cash generated from operations. Since you'll want high cash flows at a lower price, a high Cash Flow/ Price ratio is better.
This strategy was then backtested from 2001 2010 and the results show an average annual return of 34.5% compared to the S&P 500's 3.4%. Since this strategy, on average, outperformed the benchmark by 30+% per year, I'm pretty confident that I've got something here.
Here are the 5 stocks this strategy selected today (12/8/11):
(BYI - Snapshot Report) Bally Technologies, Inc.
Based in Vegas, Bally Technologies operates as a diversified gaming company, which designs, manufactures, operates and distributes gaming devices and systems. This company has a Cash Flow/Price ratio of 11%, which means for every dollar you pay for the stock, the firm is generating 11 cents in cash from operations.
(BYD - Snapshot Report) Boyd Gaming Corporation
Boyd Gaming operates 15 casinos in 6 different states. This stock looks like a good value buy with a Cash Flow/Price ratio of 38%.
(MCRI - Snapshot Report) Monarch Casino & Resort Inc.
This company operates a hotel/casino facility in Reno. The stock of this gaming company remains a fairly good buy based on its 14% Cash Flow/Price ratio.
(MGAM - Snapshot Report) Multimedia Games Inc.
Multimedia Games designs, manufactures, distributes, and maintains gaming machines and video lottery terminals. This company is rated "strong buy" on its Zacks Rank and also has a very good Cash Flow/Price ratio of 27%.
(PNK - Snapshot Report) Pinnacle Entertainment Inc.
Pinnacle owns and operates 7 casinos in 4 states. You could get some good cash flows for the price with the stock of this company with a CF/P of 19%.
Now it's your turn to use the Research Wizard yourself to create your own strategies. You'll be a better investor for it and your portfolio returns will illustrate this. Click here to learn more!