Got Good Stocks? Prove It!
by Kevin MatrasApril 27, 2012 | Comments : 0 Recommended this article: (0)
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It seems obvious but one of the keys to successful investing is to do what works.
Do what works. And don't do what doesn't.
The problem many investors have is how do you know what works and what doesn't?
This reminds me of an actual conversation I had with someone several years ago who was 'stuck' in a losing stock.
I asked him why he was still in it if it kept on losing money?
He said he didn't think it would go much lower.
I asked him if he thought it would have gone this low when he first bought it?
He of course said no.
I then asked him if he thought it would go up from here?
He said eventually, but probably not right away. He then added that it may still go down some more first.
I told him there are plenty of stocks going straight up. Why don't you get out of the one that's losing you money and get into a better one?
He said he didn't know of any better stocks to get into.
I then asked him: "what if you did know of a better stock to get into, would you do it?"
His answer of course was Yeah! But then he quickly added that he didn't know how to find 'better' stocks.
And that last comment said it all.
He was in losing stocks because he didn't know how to pick better ones.
But if he had a proven, profitable, stock picking strategy, he could.
So How Do You Know if a Strategy Works or Not?
The answer is backtesting.
But first you need a reliable way to pick stocks.
Don't be the guy who buys a stock because it was talked about on TV or because he got a tip from a friend.
Zacks is offering access to its most powerful screening tool, and it's preloaded with market-beating strategies that produce average yearly gains of +19.8%, +28.6%, +56.8% and +67.4%. Now you can zero in on the best stocks and even find out how a strategy will perform before you invest in its picks.
Plus, you'll get Zacks' top 5 valuation secrets that could change the way you invest forever.
Start with a stock screener.
Even if you don't use a screener now, most people still do their own 'screening' one way or another. They may hear that a stock has a certain Growth Rate, or a certain P/E Ratio, or Sales Surprise, or whatever.
They then find themselves listening for, or reading about, or surfing the Internet -- for stocks that meet this criteria.
Well, if you want to find stocks that meet certain criteria, you can find them quickly and easily with a stock screener.
But, just because you narrow down 10,000 stocks to only a handful doesn't necessarily mean that you've picked the best stocks on the planet.
You might have picked the worst ones.
But with backtesting, you can test your screen (i.e., stock picking ideas) to see how good (or bad) your screening strategy would have performed in the past.
- In other words, does your screening strategy generally find stocks that go up once they've been identified?
- Or does your screen generally find stocks that get buried once they've been identified?
This is good stuff to know.
With backtesting, you can see how successful your stock picking strategy has performed in the past, so you'll have a better idea as to what your probability of success will be now and in the future.
Of course, past performance is no guarantee of future results, but what else do you have to go by?
Think about it: if you saw that a stock picking strategy did nothing but lose money, year after year, period after period, stock after stock, over and over again, there's no way you'd want to trade that strategy or use that screen to pick stocks with.
Because it has 'proven' that it picks bad stocks.
Sure, it may turn around and start picking winners all of a sudden -- but it may also continue to pick losing stocks the way it always has.
On the other hand ... what if you saw a strategy that did great year after year, period after period, over and over again -- you'd of course want to trade that strategy.
Because it has proven to be a profitable trading strategy.
And while it may start picking losers all of a sudden (now that you're using it - right), it may also continue to pick winning stocks, just like it had been doing over and over before.
Don't get me wrong, just because you have a great strategy for picking winning stocks, it isn't going to preclude you from ever having another losing trade. On the contrary, even some of the best strategies 'only' have win ratios of 65%, 70% or 80%. (Not 100%.)
But if your strategy picks winners far more often than losers, once you find yourself in a losing trade, you can quickly cut your losses and feel confident that your next pick will have a high probability of succeeding.
And that's why someone should use a good screener and a backtester for picking stocks.
To get started, I'm inviting you to download our Research Wizard stock-screening and backtesting program for 2 weeks free. Enter your favorite criteria and out pops a list of stocks. Backtest it to see how it would have performed in various market conditions.
You're also welcome to take a free look at the stocks that come through some of our top-performing strategies, like the Filtered Zacks Rank, the R-Squared EPS Growth strategy or Big Money Zacks, which has been dubbed the Research Wizard's "Super Strategy". Since 2001, it has averaged a yearly gain of +67.4%.
Thanks and good trading,
Zacks VP Kevin Matras is our stock screening expert. He runs the Research Wizard and personally developed many of its built-in market-beating strategies.
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