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The key here is found in the two quotes. Eldrehad, you said "Never underestimate the power of a GOOD hunch". Well, that's great, but how do we tell what's a good hunch and what's a bad hunch? The answer is in fsc's quote, that your picks "will likely regress to the mean in the future". Well, that would only be true if your hunches were actually based on factors totally irrelevant to a stock's performance. But they're not -- in the specific case of Whole Foods, you compared the trailing P/E to typical P/Es in their industry. That's about as far as you can get from gut intuition -- you could probably use company P/E versus industry P/E as the only stock-picking criteria you had and do pretty well. Good hunches are the ones that go with the odds, and bad hunches are the ones that defy the odds.

 

My father has played in his office football pool for four years. At first, he paid a lot of attention to the teams, to the players, to sports betting forums, etc. And he lost. Badly. Today, he uses only one factor -- he picks the home team every time. He's spending less time on his picks than anyone -- and winning the pool.

 

The more complex an analysis is, the more points of failure it has. When I pick a stock, I look at its trailing and forward P/E, its PEG, its assets versus liabilities (and whether they're actual assets or "goodwill"), and its income statements. I consider its position in its industry, and the state of that industry's market in general. At that point, if I'm not convinced, I move on. What's the point of looking for more? There's thousands of stocks out there -- why waste your time searching for the one stock that will defy all the odds? Find a few factors that predict stock performance well and stick with them.

 

Of course, as you both said, the great thing about CAPS is that you get real feedback with how the factors you're using are working -- without having to do it through trial and error with your own money.

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