Why Create ClariStock And How Earn More Work Less
Following are our thoughts and detailed guidelines on using ClariStock to earn more but work less on stocks.
Why Create ClariStock
We would like to share our thoughts first on why creating ClariStock and how it can CREATE VALUE for you. The main benefit is you can SAVE substantial TIME on stock analysis and still can make money! You can use your spare time to do great things in life or spend time with your loved ones and family.
Suppose you are bored to read our thought. In that case, you can directly skip it and jump to the detailed guideline below on how to use ClariStock to earn more and work less. Still, we strongly recommend reading our ideas first. You will better understand the rationale behind it, all about quantitative analysis with scientific proof! All are free, you do not need to pay for it. If what we ask, please provide feedback to us on how to improve ClariStock and like and share with others if you find ClariStock useful, that’s all.
Fundamental analysis is always the mainstream of investment analysis on stocks. Many people are making money using that fundamental analysis to hold high quality stocks in the long run. We are also firm believers in using fundamental analysis to analyze stocks. Many people are familiar with the investment criteria of Warren Buffet and Peter Lynch. For example, investing in stocks having wide moat, quality management team, good quantitative metric, including a solid historical financial data (consistent and rising earnings growth in the past 3 to 5 years), high ROE, high gross and net profit margin, high growth potential, low debt ratio, good operating cash flow ratio, resealable valuation (reasonable PE with its earnings growth potential), etc.
Why High Quality Growth Stocks Matters
History has already proved that 8 out of 10 high quality stocks enjoy the same pattern, which all have wonderful financial metrics. These high quality stocks have excellent financial metrics, including high ROE, high margin, high historical revenue and profit growth, low debt ratio, strong operating cash flow, etc. You may ask, what are the other two out of 10 quality stocks? They are the type of super growth stocks like Tesla and Netflix. In the past, they did not have solid and consistent earnings growth, balance sheet or cash flow to support, but of course, they are still quality stocks.
For the stocks recording excellent share performance in the past five years, such as Apple, Microsoft, Google, Adobe, Facebook, you can read their historical financial metrics, they all have great current and past financial ratios! This proves that finding good quantitative metrics is the first and fundamental step for finding high quality stocks to enjoy a high return in the long term.
For those criteria, we can make a direct quantitative analysis. For example, is that stock has high estimated revenue and earnings growth potential this year and next year, high ROE, high margin, low debt ratio, good and consistent historical earnings growth and good cash flow. In the past, we need to analyze a stock manually. For example, we need to have a look at their quantitative metrics one by one, checking are they having high ROE, good earnings history, low debt ratio, high margin or reasonable valuation.
How To Reduce Your Time Of Doing Stock Research But Still Maintain A High Return?
This whole quantitive process on each stock is not complicated, but it takes time. Just check each of them fits the quantitative criteria. If it is fitted, then put it in your stock watchlist. Continue to repeat that step on each stock until you build a stock portfolio consisting of 10-20 stocks.
However, you may need to screen about 100-200 stocks to build a stock portfolio with 20 stocks when you do this process. This may take you 30-50 hours or even more to finish. Moreover, stocks will report quarterly and annual reports! You need to review their financial metric again after just a quarter! Meaning you need to spend additional 50 hours after a quarter to review all the stocks and optimize your watchlist. So the main problem is that you need to take substantial time (30-50 hours) to do the stock research and you may think is there any effective way to reduce the time? Of course, the answer is yes, please read our solution in the following.
Solution We Offer: ClariStock
We think the majority part of stock analysis is a purely quantitative analysis. Can we use the computer to do all that replicated work? As a result, we spend lots of time writing a computer algorithm. This algorithm is not very complicated in nature. We first determine a hundred quantitative indicators that are the main criteria of being a high quality growth stock, for example, high ROE, high margin, high earnings growth potential, low debt ratio, good cash flow ratio, etc. Then we collect millions of historical, current and future estimated financial data. We put all those financial data into that algorithm to run!
We have set some rules for the algorithm to quantify hundreds of investment criteria. And how the algorithm determine is that the stock good or not? For example, if a stock has a high ROE (>15%), we give it a high score. If the stock also has a high growth of historical earnings growth (>15%), we then give its additional score. Then we add up all these scores of hundreds of criteria together and take a weighted average to form a total mark. At the end, we assign a total mark on each stock. As a result, if a stock has a high total mark, meaning it has a high quality of financial metrics. Generally speaking, a higher total mark (>70) is preferred and means the stock has a high ROE, high margin, high earnings growth potential or low debt ratio.
And of course, you may ask, how do you know is the total mark really accurate to indicate it is a high quality growth stock and bring you a high return if you invest in those stocks with high total mark.
We deeply understand your doubt about our algorithm and total mark, so we tend to use the most objective and scientific way to prove that our algorithm and total mark are useful to help you make money! We use backtesting to prove that.
Scientific Support With Backtest
How do we know that an algorithm is good or not? For a scientific approach, we can backtest it! Backtesting the algorithm is essential to know whether your quantitative strategy is working in the past. Backtesting means you collect historical data and simulate that if you have used that algorithm in the past, how much return you will generate and will you beat the index. Academically speaking, assume you have a 10-year investment period in the past. After the backtesting, you can see the return at the end of the 10th year, assuming you use that strategy at the beginning of the first year. If the return is high enough and beats the index, meaning that the algorithm is successful! Otherwise, if the return is dissatisfactory, meaning the algorithm does not really work.
All Have Backtest Data To Support
Let us describe how to read those statistic backtest data. For the figure 1, if you use our strategy in 2016 – 2020, you can earn a total return of 655% without doing lots of research! 655% total return outperforms the S&P 500 Index by 449% at the same time! For the figure 3, the first row is the years. The second row displays the annual backtest return of using our ClariStock algorithm. The third row is the annual return of the index (S&P 500 index) as a benchmark. Our goal is that outperform S&P 500 index in the long run (5 – 10 years).
Outperform In The Long Run
The fourth row shows our outperformance or underperformance each year. We can conclude the pattern that in bullish years, such as 2007, 2017 and 2020, we can outperform a lot. This can be ascribed to our strategy of sticking to buy and hold high quality growth stocks. It is not surprising to see those high quality growth stocks record robust share price performance as they reported strong growth in both sales and profit growth.
Our strategy is simple. At the beginning of the year, we use our algorithm to screen through the top 1000 US stocks in terms of market cap. Our algorithm will assign a total mark on each stock. Then we just invest in the top 20 US stocks in terms of total mark with equal weighting (meaning 5% weighting on each stock). We emphasize building a stock portfolio to diversify the risk.
The second row of the table displays the annual return if we use the algorithm at the beginning of the year, invest in these 20 stocks with high total mark, and buy and hold for 1 year.
We do portfolio rebalancing once only at the end of every year. We repeat the previous process and run our algorithm once at the end of each year and then invest in the new top 20 stocks and buy and hold for another one year.
No Guarantee Of Positive Return Every Year
Frankly speaking, our algorithm cannot make you have a positive return every year or outperform the index every year. We would like to build a strategy that is fully supported by statistical data that can make you enjoy a high return and beat the index over a long-term horizon (5 – 10 years). Our strong backtest result has already PROVED that our strategy can do that and is worth your time to look. We understand past performance does not guarantee the future performance will be the same but its backtest track record can at least make you feel confident on our algorithm and use ClariStock.
Why HIGH RETURN?
And why our algorithm can record a strong return and beat the index in the long run. The reason is simple. We rely on our algorithm to pick HIGH QUALITY GROWTH STOCKS ONLY, which are quantified to have solid historical earnings growth, high ROE, high estimated earnings growth, strong balance sheet and good cash flow. This investment method is just like Warren Buffett and Peter Lynch, picking high quality stocks to invest in. As a result, we can earn a high return in the long run without doing much research. Most importantly, our algorithm can save you lots of time to do research.
Underperform During Bearish Periods
We admit during the bearish period, such as 2008 and 2018, our strategy did not work well. We have underperformed the index, meaning holding high quality growth stocks can also make a loss in the short term. But most importantly, we need patience and wait for a recovery. During the recovery stage, for example, 2009 or 2019, our strategy worked very well and outperformed a lot by holding high quality growth stocks during the recovery stage. That being say, the outperformance during bullish periods can offset the underperformance during bearish periods, so the total return can beat the index in long run.
No Market Timing
Frankly speaking, we admit we will not try to time the market or will not predict the next year is whether bullish or bearish. Timing the market is not our priority or goal. To keep things simple, we adopt the same strategy every year, just like Warren Buffett to adopt the same strategy, long-term investing in wonderful companies with reasonable valuation and not time the market. Consistent strategy can also help you avoid some big mistakes, such as selling during the bearish market and buying during the market peak.
For our strategy, during bullish years, our strategy can outperform the index a lot and earn a high return with buy and hold the high quality growth stocks for one year.
You can interpret our strategy as an aggressive strategy without making a stop loss. For our strategy, we emphasize during the bullish periods, our strategy can earn and outperform a lot and is sufficient to offset the underperformance in the bearish period.
Actually, we do not include any stop loss feature for our algorithm. We also backtest our strategy with stop loss and find that total return is not very good compare to the algorithm without stop loss. We buy those high quality stocks at the beginning of the year. If a stock records 24% loss, meaning the share price has fallen 24% from the beginning of the period, we will forcefully sell the stock at that price and make a stop loss. The following table displays the annual return.
Frankly speaking, you can see the overall volatility is reduced, but the total return (212%) is also reduced. For a bearish period like 2008, stop loss makes sense and can help us to record a smaller loss compared to index.
But in bullish periods, this strategy will underperform a lot as stop-loss may let us miss many big investment opportunities, e.g., selling those high quality growth stocks too earlier and miss the rally afterward.
Although our algorithm with the stop-loss feature can outperform in the bearish market, this can also underperform a lot in the bullish years. In the end, the outperformance in bearish years cannot offset the underperformance in bullish years. Total return in 2006-2020 is just 212% with stop loss feature, vastly underperformed the strategy without a stop-loss (total return of 655%!). So you understand what is the rationale of high risk, high return. We admit stop-loss strategy can reduce the volatility, but also reduce the potential return in the long run. This explains why our final strategy does not include stop-loss. Again, we use backtesting data to prove that.
If you care a lot about the volatility, especially you think you cannot bear the significant downside risk in bearish years, you can add your own stop-loss strategy. For example, if you use our algorithm, you can sell the stock immediately if the share price was fallen by 24% from the beginning of the year.
Pure Computerized Analysis, Not Affected By Human Emotion
Apart from strong backtesting data support, we would like to emphasize our algorithm is fully implemented by computer, not including any human action. It means the whole investment process will not be affected by irrational human sentiment and behavior. Irrational behavior, for example, people buy high during the extreme bullish market and sell low during the bearish market, is one of the root causes of big investment failure. Our algorithm can avoid this.
Save Your Time And Do Meaningful Things In Your Life
We understand life is limited, do not waste time doing meaningless things, such as repeating the manual equity analysis on every stock and reading their financial figures or ratios one by one. Save your time, let ClariStock help you do the part of stock analysis, especially the quantitative part.
Our mission is you can save lots of time by using ClariStock to analyze stocks. Just mentioned above, when you have heard a new investment idea about a stock, just type its stock ticker at ClariStock, then you can easily read a 1-page summary of that stock. For example, total mark, scores of various criteria, so you can quickly understand its growth potential, profitability, financial metric and historical annual result performance just within 1 minute. In other words, you can have a big picture of that stock first. That is it, just 1 minute. Of course, if you have lots of free time, we also encourage you to do more research on that stock, including reading its report and news.
No perfect investment strategy, trade-off between your time and return
We also think there is not a “perfect” investment strategy in the world. No strategy can guarantee you to earn a positive return and beat the index EVERY year. Our strategy is to help you earn a high return and beat the index in the long term by saving your time.
Simple Strategy To Follow
Our strategy is very simple. Just browse the top 20 stocks of our new annual recommendation list for the coming year. It will be released at the end of each year. These stocks are ranked in terms of total mark.
Build a diversified portfolio and invest in it with equal weighting. If you invest in all 20 stocks (meaning each stock represents 100/20= 5% weighting of your total portfolio).
If you think 20 stocks are too much for you with your investable money, invest in our top 10 in terms of total mark is fine. However, we would like to make things clear: investing in more stocks can reduce your total portfolio’s overall volatility and risk. If you have enough money, investing in 20 stocks is much preferred.
Annual rebalancing once only
Sell Existing Stocks With Ranking Below 20
Then just buy and hold them for 1 year. At the end of each year, please prepare to have some time to read our new annual recommendation released at the end of each year. If some of your existed stocks do not appear again in the top 20 of the new recommendation list. This means their total marks are lower than the other top 20 stocks, implying there are much better stocks for you to buy, so please sell those existing stocks if their new ranking is below 20.
Buy New Stocks With Ranking Above 20
On the other hand, it is not surprising you may find some new stocks in the new recommendation list which they are not included in your current portfolio. Those new stocks have a higher ranking in terms of total mark. Previously you have sold some stocks which have a lower ranking below 20, right? After selling them, you will have new money to buy those new stocks having a high ranking above 20, so just buy those new stocks
Hold Stocks If The Ranking Remains Top 20
If you find that your existing stocks are still at the top 20 of the new annual recommendation list, perfect! Just hold them in the coming year. The rationale is simple, if they can remain in top 20, meaning their quality and growth potential are still good, so just hold them.
Above 5% Weighting, Sell More Down To 5% Weighting
First, we emphasize equal weighting on the top 20 (5% weighting for each stock). For existing stocks, you may find some of their weightings are higher than 5% of total portfolio as their share price has outperformed the other stocks, so a higher weighting to the portfolio. If its ranking is still in top 20 and its existing weighting is higher than 5%, just sell the stocks until this stock accounts for around 5% of the total portfolio.
Below 5% Weighting, Buy More Up To 5% Weighting
For existing stocks, you may find some of their weightings are lower than 5% as their share price has underperformed the other stocks, so a lower weighting to the portfolio. If it is still in the top 20 and its existing weighting is lower than 5%, just buy more until this stock accounts for around 5% of the total portfolio. You can think of this as a way of buying low as this stock was underperformed last year compared to others. The share price is currently still at a low level, giving you an excellent opportunity to buy low.
Still Have Doubt? Do Further Manual Research
We understand you may have some concerns about our algorithm or these stocks recommended.
Please take time to do further manual research on them. Just screen out some stocks after you think their quality is not good enough to buy. Your concern is reasonable. However, we are very confident that you must find some of our recommendations still have solid fundamentals and high growth potential after your screening out process. This at least proves that ClariStock can still provide some value to you even you do not invest in all our recommendations.
Frankly speaking, if you do further research on our recommendations and find that none of them have high quality and are not worth you to invest. That is okay, so please skip ClariStock as we think our strategy may not fit you.