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So I'm Here, Now What?
Doc's Unofficial Guide for New Mechanical Investors, Part 1.3
(updated 05.01.00)

Welcome fellow fool, to the wild and woolly world of mechanical investing.

Many Fools discover this area all excited after reading one of the daily Workshop articles, or after reading Robert Sheard's book The Unemotional Investor. Some just stumble in, surfing their way through the boards. One or two even claim to have been dropped off by space aliens. However you ended up here, all it takes is an evening's reading to see what all the excitement is about.

"Can they be serious, quoting 30, 40, 50 or even my gosh 60 percent annual returns?" More to the point, How can I get those kind of returns?"

First rule of mechanical investing: "Don't rush into anything!"
(that's worth repeating: "Don't rush into anything!")

Young freshman, you've just stepped off the university elevator and walked right into the Advanced Mechanical Investing Grad School Lunch Room and Belize Travel Agency. Yes that person in the line next to you was talking about "Optimization Techniques when Applied to Geometric Means". Heck he might as well be talking Subspace Field Equations in Nspace Geometry. Before you run quickly for the elevator, take a deep breath, then another. Everyone here started out like you. I too was, and still am a newbie to all this. If you're willing to take a little time, some effort on your part, all will be revealed.

"What is this place?"
Check out this post by DaveGoldman, who gives a brief history of the Mechanical Investing Board. (Though a little confusing if you've just joined us)
"Data mining? CAGR & GSD? Value Line? IBD? Options! Now I'm totally confused."

"What in the heck is Mechanical Investing?
To paraphrase Peter Kuperman (and others), this explanation:

Imagine that you are the Director of Graduate Admissions at a local college. It's the new year and you have many applicants, yet just 5 spaces for new students. You want those who have the best chance of graduating but how do you pick them?

Suppose you have the historical records for the last 60 years of college seniors. Going over those records, you have found that those people who are English majors graduated 60 percent of the time. You also find that those people who are Science majors graduate 80 percent of the time. Further more, digging through the records you discover that women graduate 70 percent of the time, men only 60 percent. Also, those who go out for some sort of extracurricular activity, graduate twice as often as those who don't.

Ignoring political correctness, and just on the historical records, who would you pick for those 5 slots? Answer: Women Science majors, with some extracurricular activity. Without even interviewing the applicants, you've found a group of students whose chance of graduating is better than the average.

Important note: Not that they will graduate, but their chance is better than the average.

That's what mechanical investing is, the use of historical data to pick the type of stocks which did well in the past, in the hope that they will do better now.

You can also read the other links in Section 1 of the FAQ. Some good explanations in those old articles.

Look at a popular screen called RS-26, and how it picks stocks.
1) Select stocks with Value Line Timeliness = 1
2) Sort by the Stocks with the Highest Total Return for the last 26 weeks. (Called here Relative Strength.)
3) Buy the top 5 or 10 in equal dollar amounts, Hold for 1 year.

"Wow, are they all that simple?"
No, some have more criteria, but by and large we like simple. Simple works. You can see more screen explanations here

Why do they pick the stocks that way? Historical data says, those stocks with Value Line Timeliness of 1 do better than those with 2 or more. Same with Relative Strength. Pretty much all the screen criteria have been backtested to pick stocks which do better than the average.

"Backtest? I keep seeing that on the message board."
Imagine you were the great, great, great grandson of HG Wells. In clearing out the old mansion, you find HG's time machine. What do you do but hop in and travel back. Now the old machine doesn't have the range it did when it was new, so you only get back to 1986. Out you climb and head to the nearest stock broker with the $1000 in your pocket. But! You forgot to stock up on old newspapers. Which stocks do you have him buy?

Remember the screen RS 26 week? Just give your new broker those simple instructions. He'll check each week's edition of Value Line (which was published then), buy the top 5, and hold them for a year. Then the following year do it again. "Now, I'm going on a long safari in deepest Africa for missionary work, feeding starving children and don't expect to be back for 14 years." You tell him. "Just keep investing that way, and I'll be back." So after some minor instructions like buy Microsoft at $5 and QCom at $10, it's back to the time machine. Fast forward to the future. When you get here, your bank account would be worth $48,697! Not bad for just a $1000 initial investment.

But maybe you think you could better that if instead of your 1986 broker trading yearly, he traded semi annually. Well hop back into the time machine.

Now Jamie Gritton and Brian Finney are not HG Well's grandsons (unless there's something neither have mentioned :) They are the next best thing. That's what the backtesters are, time machines. They tell you what would have happened if you'd gone back and invested then. They can't tell you what will happen in the future, but they can help you see the way our screens did in the past. Feel free to play with both sites.

Brian Finney's site includes an awesome back testing tool and very timely updates of many screen rankings on Friday afternoons. Be sure to click on one or two banners while you're there.

Jamie Gritton's site provides a variety of back tests of the basic strategies, "overlap" strategies, screen-of-screens strategies, and blends of screens. He's always changing something, see what's different this week.

That's the wonderful thing about mechanical investing. You don't have to research the company, know the market, or even what business they're in. If the screen picks them, then you buy them. That will be something you have to come to gripes with, if you invest mechanically. Many people don't even know what the company they're buying does. I had a hard time with that myself. Buy something just on faith. Poppycock! But you are not buying companies, you're buying the screen.

(The methods of picking stocks are called "screens".)

I can hear you saying to yourself, "I don't know about this?" That's why the first rule, "Don't rush into anything until you understand it. It's your money, you worked hard to earn it."

Some recommended reading: Sparfarke's Post of the Day for Sept 17th:

OK, I understand the concept of mechanical investing, and I'll take it on faith that this stuff works. (For now) Now how do I get started?

Take everything with a good dose of healthy doubt. From "Getting your feet wet in the Message Boards"

sageful words:
"Treat the contributors here the same way you'd treat anyone you'd met for the first time at a party. This is important because anyone can show up to our party: no invitations are required. You shouldn't make an investment just because some stranger (or even a friend) talks it up; you shouldn't treat cyberspace any differently.

The fundamental concept is that you should NOT rely upon the information or opinions you read. Rather, you should use what you read here as starting points for doing independent research on companies and investing techniques. Then judge for yourself the merits of the material that has been shared in our forum."

Back To School…
Ask yourself, is a couple of hours a night, 3 or 4 nights a week for a month, too much to ask to help you retire like you want to?

(Helpful Hint: Get yourself a notebook, and a three hole punch. Anytime you come across something worth saving, print it and put it in your notebook for future reference. A warning, you'll fill that notebook fast.)

Grade School
If you are new to investing, and you haven't read through the Fool School,


Mechanical investing is the big time. Done wrong, the methods described can lose you money. LOTS of MONEY! Take several months getting used to investing first. Don't worry, these great returns will still be here when you get back. If you're comfortable with investing, and can handle a little bit of risk, read on.

High School-The Foolish Workshop Board
Bookmark the Foolish Workshop FAQ.

Hopefully you came to this post via the FAQ. If not, you'll find it at the top of any post. This is one of the best references you can have in the start of your exploration of mechanical investing. TMFElan is part School Counselor, part School Librarian. His FAQ should go in the front of your notebook, reread it often. You'll see a lot of post by this man. Listen to what he says.

First Assignment
Read the past 1000 backposts of the Foolish Workshop.

Man, I could hear the screams all the way from the East Coast. I know its a lot but you will get no quicker education, and you won't look stupid by asking a question, just asked 50 posts ago. Going back to the very first post is preferable, but now that we're over 13,000 posts, going back a thousand will get you familiar with the MI community.

Navigation Hint: Look up in the top right hand corner of any post. See Number: box of some number. This tells you the number of the post you're looking at. To go back to number 1000, simple delete the present number in the box, then type in 1000, hit enter. (Or whatever post you need to go to.) Also if you write the post number of where you stop, you can get right back to it.

So you're a thousand back. Now read on

Navigation Hint #2: Look in the top left hand corner of the post. See Investor Roundtable/ Foolish Workshop. It you click on Foolish Workshop, it will take you to the list of posts. Now see below that, Unthreaded * Threaded. Click Threaded. This lets you read the posts together as a thread. Less confusion at first. Later, once you're up to the curtain posts, then use Unthreaded to see the new posts.

You can also collapse the replies to a thread. This will then show you just the first messages, and is a quick way to search for a particular thread.

Navigation Hint #3: Look at that list of posts. See who the author of the top post is. Want to check other posts by that author? Click on "Author" just above the name. It will then place the list in Author mode. On the top right, click "Prev", this will show you the past posts by that person.

"Teacher, I've Got a Question"
Somewhere along the line, you will come to something you don't understand. Before you ask that question, read on for several more posts. Usually if you're having a problem understanding it, probably someone else may be having trouble too. See if they haven't posted your question and received an answer already. If not, then it's time for your first post.

Look in the top left hand corner, see "Post New * Post Reply". Click "Post Reply". This takes you to the Land of Replies, a screen where you can compose your question. At the top is displayed the original message, below is a space for your question.

Netiquette Advice. It is a good habit to get into, to put a small part of the original message at the top of your reply, usually the part that pertains to that question. But how? Simply take your mouse pointer to the part you want to copy, hold down the button and highlight the text you want. Then with it highlighted, look up to the top of your window (either Netscape or Explorer) See the toolbar, Edit, click Copy. Then go down to the question box, put the mouse cursor where you want it (usually at the beginning) and hit Paste (or Control + V). The highlighted text should appear.

Most of us, italicizes the highlighted part. Simple put a < then an I then an > at the beginning, then < / I > at the end (no spaces). Bold is handled the same only use a B.

If your question is addressed to just one individual, it's often better to just email them direct and not clog the board. Simply find a post of theirs and click on the "Reply to Post" link. At the bottom of the text box, there are three check boxes. The default is to post the reply to the board. To send a personal reply via e-mail only, uncheck the "Post to board" and check the "E-mail to poster".

The Mechanical Investing community here at the Motley Fool can be a place filled with learning and worth. Especially worth! You will thank yourself years later for finding it. What the boards are not is a chat board like you'll find on many of the other web sites you visit. A certain level of courtesy is expected. That's not to say you can not disagree with something posted. Just be polite. And remember, don't assume you know "how" that person meant that phrase. Many a flame was started through misunderstanding.

A Personal Note: We all think we are above the occasional rude posts. You'll find though that sometimes you will take a post to mean something entirely different from the person's original meaning. As much as I think of myself as a calm and considerate person, every once in a while I put my foot firmly in my mouth. You will too. Think before you post!

Be sure to read Stan Lewkowicz's lecture notes on etiquette from the recent MI convention. You can find them here,

So ask away. Remember, the only stupid question is the one not asked.

College- The Mechanical Investing Board
Two boards? What's going on here?

From TMFElan's post
My view is that the MI board is the right place for all research, rankings, lists, and other contributions to the "advancement of science" in this area. If you're posting something that you believe is of general interest to this community then I think it belongs on the MI board. That way, people who want to keep abreast of developments know that the MI board is the one place to go. They don't have to browse the FW board in case there's new info here.

The FW board is for questions and answers of a personal nature. If someone doesn't understand or can't find some information, or wants help and opinions regarding their personal situation, they can ask here and get their answer without taking up bandwidth on the MI board.

Of course EVERYONE is invited to read everything on the MI board, assuming they have the time. ;-)


Assignment #2
Go back 1000, (yes, another thousand) posts and begin reading. Now stop your screaming and don't pull your hair like that. It's for your own good.

What this will do is bring you up to speed on what's current on the Mechanical Investing Board (MI Board for short). Take a look at the date. You'd be surprised to see how recent 1000 posts ago are. Maybe you'll consider going back 2000 instead. Lurk for a while, read what's said. Soon you'll ask that first question. And soon you'll be ready for that first investment using a mechanical screen.

Some Additional Resources
The Motley Fool posts articles on Tuesday and Thursday by many of the same experienced people you see posting on these boards. A lot of gold in those posts. You can find the current article here
Past articles are archived here by date
and by subject here

MindsEye has gone back and compiled the Mechanical Investing Board's backposts by subject. Have a question on RS Overlap? Go to this index, look up the compilation of posts on RSO and voila.

See you in Belize

(and if you've read your posts you'll understand that reference)
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