The following was contributed by Bill Matson, the CEO and Portfolio Manager at Oyster River Financial, LLC (ORF), as well as the CEO of BrainFutures.com, Inc., which owns DDIM.com.

Using DDIM ratings, how likely am I to match the returns described in Data Driven Investing?

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 a few hours once a year vetting and maintaining a diversified portfolio of our highest rated stocks, you would stand a reasonable chance of besting major market indexes (especially if you follow the order entry procedures I suggest later in this section). But if you want to further boost your performance, allocating additional time 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 in its entirety elsewhere on this site. Another approach would be to find an investment advisor (ORF, for example) who will implement these strategies while:

(1) charging a monthly fee no greater than .0834% of the assets you give them to manage, and

(2) using a price-competitive discount broker.    

As is noted in the disclosures accompanying the 2019 version of Data Driven Investing, ORF currently focuses on stocks with market caps significantly higher than the typical stock in the Data Driven Test Portfolio. These disclosures also highlight a variety of other reasons why the returns to ORF clients are likely to be significantly lower than those attained by the Test Portfolio. Note that the TP’s returns have NOT been audited by an independent third party.

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. I suggest that DDIM 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. I 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 the DDIM website or otherwise communicated by it to our users and/or the general public should be construed as personalized investment advice. Oyster River Financial, LLC (ORF) provides such advice solely through the investment accounts it manages.   

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?

Except in the case of trades in highly liquid stocks with small bid/asked spreads, you should always use Limit orders, never Market orders.

When buying stocks with spreads between the bid and asked prices of more than 1% (i.e. 1% 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 1%, 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 (i.e. EVERY DAY, 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.