If I want to get your rating on a stock my broker recommends (Facebook, for instance), how do I do that?

There are two ways to get our rating in this situation. You can enter Facebook’s ticker symbol (FB) where our user input form asks for a ticker. Or you can enter “Facebook” in the box that asks for a company name.

How does your stock screener work?

Our stock screener allows users to filter the universe of stocks we rate according to a variety of criteria. These criteria include:

  1. Rating. Users may input integers between 1 and 10. When a 10 is entered, our search results display only companies whose likely returns rank in the highest 10% of the companies we rate. Entering a 1 gives the user companies whose likely returns rank in the lowest 10% of the companies we rate. Leaving this box blank allows companies of all ratings to be returned.

  2. Editors’ Picks (EP). Seeking Alpha’s editors designate research articles of special merit as Editors’ Picks. Users may select “exists” in this box to focus their searches on companies mentioned in recent Editors’ Picks. Clicking on icons displayed in the EP column of search results brings users to these articles on the Seeking Alpha site. 

  3. Long Ideas (LI). These are Seeking Alpha articles that recommend purchase of specific stocks. Users may select “exists” in this box to focus their searches on companies mentioned in recent buy recommendations. Clicking on icons displayed in the LI column of search results brings users to these articles on the Seeking Alpha site. 

  4. Short Ideas (SI). These are Seeking Alpha articles that recommend the sale of specific stocks. Users may select “exists” in this box to focus their searches on companies mentioned in recent recommendations. Clicking on icons displayed in the SI column of search results brings users to these articles on the Seeking Alpha site. 

  5. Market Cap Decile. Users may input integers between 1 and 10. When a 10 is entered, our search returns only companies whose market value ranks in the highest 10% of the companies we rate. Entering a 1 returns the smallest 10% of the stocks we rank. Leaving this box blank allows companies of all market cap sizes to be returned.

  6. Owned. This filter is useful to those seeking to own or short stocks in which our CEO, Bill Matson, has a position valued at $100 or more. Users may select “Long”, “Short”, or “No Position”. Leaving this box blank has the same result as selecting “No Position”. 

What does it mean when a stock is rated 10 -- or a 1?

According to our rating system, the 10's represent the top 10% of stocks we rate, in terms of having the highest expected future returns. 1's are the 10% having the lowest. In general, stocks with the lowest ratios of price to book value, earnings, and sales (i.e. value stocks), as well as the highest trailing 12 month returns (i.e. high relative strength), will rate highest according to our algorithms.

The empirical evidence for the usefulness of this rating technique is provided by both our CEO’s 16 year track record and his 52 year backtesting of value stocks and stocks with high relative strength.

Our rating system often provides contrarian results. As of 9/9/16, for instance, Facebook – a highly respected household name - had a rating of only 4. Though it had strong returns during the preceding year, its rating was penalized due to its high price relative to book value, earnings, and sales.

Large companies like Facebook generally provide poor returns relative to small caps, as this table indicates. This is primarily due to the premium investors pay for the safety they perceive in owning stock in large, highly visible businesses. The poor relative returns of large companies support our view that this premium is excessive.

There are thousands of publicly traded U.S.-based companies that DDIM doesn’t rate. Why is that?

We focus on companies whose financial data is compatible with the requirements of our algorithms. At this time, for instance, we cover relatively few financial services firms, since some of their most important financial indicators are ignored by our algorithms. Moreover, we have very little empirical data regarding the correlation of these indicators with future returns. 

What does Rank mean?

Stocks are ranked in order of expected future returns. The stock with the highest expected future return is ranked number 1, and expected returns decrease as the numerical rank increases. That is, if we are rating 3100 stocks, the stock ranked number 3100 would have the lowest return expectation. 

What are the ten market cap decile ranges?

A company's market capitalization (also referred to as market cap) is the market value of the company as calculated by multiplying the number of its shares outstanding by the current market price of a single share.
 
As of September 2016, the approximate minimum market caps for each of the decile ranges are:

  1. Decile 1: $5MM

  2. Decile 2: $30MM

  3. Decile 3: $85MM

  4. Decile 4: $200MM

  5. Decile 5: $400MM

  6. Decile 6: $800MM

  7. Decile 7: $1.4B

  8. Decile 8: $2.5B

  9. Decile 9: $5B

  10. Decile 10: $13B

How can I access historical data regarding stocks’ DDIM ratings?

Investment sites often become unwieldy and difficult to use due to the addition of unnecessary features. In order to maximize our site’s value to the greatest possible number of users, our policy is to only provide data that Bill finds useful in his day-to-day investing.

In the case of historical ratings data, we believe its use might actually lower returns, inasmuch as it would increase the effects of anchoring on our users’ investment decisions. Anchoring is a psychological bias that causes investors to overweight a stock’s price history when assessing its value. It often results in delayed or inappropriately subdued reaction to breaking news.

Investors who avoid anchoring bias tend to outperform those who allow it to affect their investment decisions.   

How timely is DDIM’s research?

As is the case with recommendations provided by brokerage firms, our ratings may be misleading when they fail to reflect recent news and price moves. It’s always a good idea to check Seeking Alpha, Yahoo Finance, and/or company websites for important developments before placing orders.  

Do you own the stocks you rate?

We often hold long or short positions in the stocks we rate or in their derivative securities.

How does the Watch List work?

Users may build Watch Lists by checking the boxes in the far left column of their search results. For instance, if Facebook is displayed in search results, checking the box to the left of Facebook’s ticker symbol will add it to the user’s Watch List. Thereafter, until the user deletes Facebook from the Watch List, our most recently posted data for the company will be displayed whenever the Watch List is accessed.     

Are there any other kinds of information accessible through the DDIM system?

By clicking on the name or ticker symbol of a company displayed in Results, you can access a library of previous Seeking Alpha articles focused on that company, as well as a wide variety of other information, including:

  • research from non-Seeking Alpha sources,

  • news stories,

  • earnings history, and

  • SEC filings

When I attempt to access Seeking Alpha articles through DDIM, I am unable to read the entire article. Why is this?

Some Seeking Alpha articles are only available in their entirety to those who subscribe to Seeking Alpha PRO.

To access other Seeking Alpha articles and services that are not reserved for PRO subscribers, it is necessary for you to register as a Seeking Alpha user. At this time, there is no cost associated with registering for a basic Seeking Alpha account.  

When I click on a company’s EP, LI, or SI icon, I often get sent to articles that do not focus on the company. Why is that?

You are correct in that the articles brought to your attention do not necessarily focus on the companies you’re researching. Rather, they will often contain mention of these companies in the context of analyzing other companies’ competitive positions or other industry factors. Looking at a company from the perspective of authors who are writing about its competitors can very often reveal unexpected and important data points for you to consider.

We believe this feature is a valuable complement to the Seeking Alpha company-focused libraries which are accessible by clicking on the name or ticker symbol of a company displayed in Results.

 

Trading Strategies

How likely am I to match Bill Matson’s returns?

Think of our ratings as you would a 2016 Camaro LT with a two liter engine. It will take you from 0 to 60 in 5.1 seconds – which is quite a bit better than most cars on the road. But if you want to get to 60 in 4 seconds, you can pay more for better performance and go with the six liter Camaro SS.

Similarly, if you were to spend an hour or two once a year maintaining a diversified portfolio of our highest rated stocks, you might well outperform the average mutual fund by a significant margin (assuming that you follow the order entry procedures we suggest later in this section). But if you want to boost your performance, allocating additional time and/or money to the active management of this portfolio is likely to further enhance your returns. (Note that past performance doesn’t guarantee future performance.)

One low cost, do-it-yourself approach to active management would be to study and apply the strategies detailed in Data Driven Investing, which is available (and free!) in its entirety through Google Books (click here to view the entire book). Another approach would be to find an investment advisor who will implement these strategies on a day-to-day basis while:

  1. charging an annual fee no greater than 1% of the assets you give them to manage, and

  2. using a discount broker whose commissions are no greater than $10 per trade.    

It is worth noting (and repeating) that the returns earned by our CEO are largely attributable to the daily attention he has given his portfolio. As he likes to say: “You get out of investing what you put into it.”

That and: “Never let someone who has done nothing tell you how to do anything.”

The lion’s share of value added from our ratings is expected to arise from the continuing superior performance of strategies that are purely quantitative. Again, past performance does not guarantee future performance. In particular, it would be difficult for most investors to approach the returns documented in Data Driven Investing, which were achieved by a portfolio manager with extensive relevant training and experience trading stocks and equity derivatives full-time during a period (2000-2004) when small company value stocks were performing especially well. In addition, Bill’s use of margin, which magnified his returns, would not be considered suitable for most investors.

Managing Risk and Using Dynamic Hedging

In looking at Bill's brokerage statements, you may notice that he not only uses a lot of margin, but also that he owns significant options positions. Isn't this incredibly risky? How does Bill's dynamic hedging strategy work? Please review this article to learn more about this very important topic

When using DDIM, why wouldn't I always go long the top 10 stocks? Why not always short the bottom 10 stocks?

First of all, it would be a bad idea to only have 10 stocks in your portfolio. We suggest that our users put no more than 5% of their portfolio into any one stock and no more than 10% in any one industry.

It would also be a bad idea to move in and out of stocks as they leave and re-enter the top 10, as this would generate enormous trading costs and commissions. Since many of the top 10 stocks are, at any given time, likely to be illiquid, even investors with portfolios of modest size may well find it impossible to trade these stocks in the order sizes they desire without paying excessive prices when buying and tanking share prices when selling.

DDIM ratings are based purely on quantitative measures derived from financial statement and trading data. We strongly suggest checking Seeking Alpha articles for flaws that aren't reflected in this data before buying any stock, regardless of its rating, as well as checking its Seeking Alpha Quote Page for price changes and news events occurring after our most recent rating. The same goes for any short sales you may be contemplating. 

Among the stocks we rate highly, you will often find companies based in China or having significant operations there. Extreme caution should be taken in these situations, given that a disproportionately large number of such companies’ financial figures have proven unreliable in the past.

Should I think of your firm as my investment advisor?

Nothing posted on our website or otherwise communicated by us to our users and/or the general public shall be construed as personalized investment advice.  

Does it make sense for me to focus on a small number of stocks, or should I own stock in many different companies?

Make diversification a priority. Assume that every stock we rate (even Apple and Facebook!) has the potential to go to zero. The best way to avoid catastrophic losses in your stock portfolio is to invest no more than 5% of it in any one stock or more than 10% in any one industry. Even the 5% per stock limit may be excessive in the case of illiquid small company stocks.

Am I better off using limit orders or market orders?

Always use limit orders, never market orders.

When buying stocks with spreads between the bid and asked prices of more than 2% (i.e. 2% of the stock’s price), you should only offer more than the midpoint of the spread if you are trading on breaking news. Similarly, when selling stocks with spreads between the bid and asked prices of more than 2%, you should only ask for less than the midpoint of the spread on trades motivated by breaking news.

One more thing. When placing an order involving a stock with a wide bid/asked spread, always check to make sure that your order price is reasonable in light of the stock’s most recent trading history.

Am I better off entering day orders or good-til-cancel orders?

Unless you are checking Yahoo Finance or other news sources regularly for breaking news (especially immediately before the market opens), you should place only day orders, never good-til-cancel orders.

Is there a particular time of day that is best for entering orders?

Unless you are both a) checking for breaking news immediately before the market open and b) skilled at anticipating the price impact of such news, it is best to wait until at least 10:30 EST before placing orders.

And unless trading is your full-time profession, you should only place orders during normal market hours.

 

 

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