A lot of investors, me included, look for patterns in past data they can use to predict future investment returns.
While I do not believe in only one formula for getting investment ideas, there are without doubt reliable indicators to at least get interesting stock ideas.
But you must be careful,as not everything you will find will be helpful.
Two criteria make an indicator useful:
- Convincing historical testing AND
- Intrinsic logic of the indicator
While the first criteria makes sense intuitively, the second one needs some explanation.
Basically you have to determine if the is the cause of the finding or is merely correlated with it. It is probably best explained through an example.
Just imagine someone wants to convince you of an investment strategy that always goes long (bets on the price of an asset to go up in price) when it’s extremely hot weather.
The person trying to convince you has some very impressive charts handy showing that markets have vastly outperformed on hot days and vastly underperformed on cold days.
So would you invest based on this strategy?
I hope you would not, since all we have is a correlation and not a cause. Hot days correlated with strong returns but they did not cause strong returns!
Where can you find indicators that already complies with both criteria?
A good place to look is the following MUST READ article by Tweedy, Brown Company LLC:
What has worked in investing (pdf).
The most eye-popping results, in my opinion, were shown by the insider strategy (basically buying the stocks of companies that have shown purchases by officers or board members).
Seven independent studies, including one in the UK and one in Canada showed very healthy returns, substantially outperforming the indices.
But does the indicator “insider purchase” also have an intrinsic logic?
I do think so, since insiders per definition have greater knowledge of their companies than outsiders.
It just does not make sense for a chief financial officer for example to purchase stock and cook the books at the same time.
In other words, buying when insiders buy keeps you invested in situations where interests are aligned towards one goal: stock appreciation.
So where do I get insider information from?
The insider transactions information can be found at:
For Europe at inside-analytics.com
For Germany at Insiderdaten
For the USA at insider-monitor.com (thanks Cristina)
I could not find a really good source for the USA and UK. Should you know of any please list them below in the comments.
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