Mechanical Investing - Stock Selection on Autopilot
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There are a lot of different mechanical investing strategies out there. I would suggest that the most popular of these strategies is one I have written about before - Dogs of the Dow. There are also a couple that have been created by the guru of mechanical investing, James O’Shaughnessy. O’Shaughnessy has written a couple of books on the subject, most notable of which are What Works on Wall Street
My experience with mechanical investing is that it is much harder to actually implement than one expects. For example, in the O’Shaughnessy screens, an investor is required to purchase 50 stocks to properly implements the strategy (this is to reduce individual security risks). The costs associated with this is huge ($9 round trip in and out of a stock X 50 = $450 in commissions) as well as the initial starting capital that is required so that commissions do not eat all your gains (i.e. to keep commissions at around 1% you will need a minimum of $25,000). In addition, O’Shaughnessy suggests that an investor use a couple strategies to help balance risk.
Although I know how important it is to keep emotions out of investing, when push comes to shove it can be much more difficult. I have found that I am much better at doing this when I have selected my own securities rather than having a screen do it for me. I think the reason is that with a screen, there is a feeling of no control which make me feel uneasy. I have no input into the stocks selected and need to “hope” that the screen works. When I choose a stock, I have put my own analysis into it and feel more comfortable about my decision - more control. I know my own analysis is no guarantee, but the screen provides no guarantee either. I want to have more control.
My belief is that if one wants to take all emotion and decision making out of investing, then a passive index based investing strategy is the way to go. The index does the investing for you, and your only involvement will be making sure you don’t panic when the markets tank!
3 Comments on this post
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Mr. Cheap said:
Apparently people feel safer in a car then in an airplane for the same reason (they’re in control behind the driver’s wheel). Of course, flying is actually safer then driving…
I’m not sure if the same is true for buying stock or not.
September 2nd, 2007 at 12:57 pm -
KCLau said:
Emotion is the hardest thing to control in life. That’s why it is worthy to pay professional to handle our money.
September 7th, 2007 at 7:34 pm
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