How The StockRanks Give Investors An Edge

19th Feb by Mark Simpson

16 comments 1175 reads

Last week, I wrote about how I use the StockReport to quickly assess a possible investment opportunity. Being able to filter out stocks that don't look interesting or don't match my investing style means that I can focus my time and energy on investigating the ones that do. The StockRanks can be an important part of this initial look, even if they simply point me to where I should be looking. However, I don't think the StockRanks are perfect. No investing tool allows invetsors to beat the market all the time. If it did, everyone would use it, and it would stop working. There are a few fallacies that those unfamiliar with how the StockRanks work tend to fall for. This week, my aim is to dispel these myths and, in doing so, enable investors to use the StockRanks to give them a behavioural edge and overcome the biases that typically plague investment decisions.

Fallacy #1 – Every SuperStock will be a winner

The most common criticism levelled at the StockRank methodology occurs when a highly ranked stock takes a bath. Investors wonder how could something that the algorithms love perform so poorly. For example, prior to the recent warning, this was the StockRanks for IG Design (LON:IGR) :

Here are the StockRanks when the shares were over £2 in mid-2024:

The reality is that highly ranked stocks are often preferred by the algorithms because of the strength of their broker forecasts. If these prove to be incorrect, as they have done for IG Design (LON:IGR) , then this throws off the numbers. However, so much of investing is forward-looking, so it is better that the algorithms use these forecasts, on average, even though they are sometimes led astray.

Even where profit warnings are not affecting the forecasts, the key phrase to remember is "on average". While the average performance of SuperStocks is very good, the range of outcomes is still wide. Indeed, here is the distribution of 1-year returns for 10 years worth of UK SuperStocks at the end of March:

From the same data, the chance of a UK SuperStock generating a positive return over the next year is 56%:

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welwichia

20th Feb

thanks very much Mark - I find these articles really valuable!
Minor typo here: "From the dame data ..."

pj8

Great article, Mark - it's really helpful to have guidance like this - and good to point out the pitfalls as well as the positives.

James Crawford

Really good article - punchy and concise. It’s too easy to get complacent about the stock ranks.

Mark Midmore

New SuperStocks may outperform "stale" ones - remind me where you can see this as a screen, over user defined periods.

Indie

Thanks, Mark! Great piece.

It would be great to be able to put the rise/fall arrows for the ranks as a column in folio table views as well as on the pop-up when you hover over the individual stock name.

Mark Simpson

Hi Mark,

Not currently a screening option I'm afraid, but I believe it is being looked at as an additional feature. You can see the StockRank history at the bottom of the price chart on the StockRepor, though:

HTH,

Mark

Thanks, now corrected :-)

johnsmith68

Thanks Mark - a useful reminder and loads of videos under the Learn section offer similarly good advice. It would be amazing to be able to see things like Momentum rank over time graphically in order to easily be able to spot things like momentum rolling over.

Rusty2

Mark, thanks for an interesting article. I wonder if you have any stats for stocks that reach Stockrank of 100, how they perform afterwards, some seem to have peaked before then. Possibly related to stale Superstocks?

1MCF

Superb, thank you Mark.

Nothing to hand I'm afraid. I had a quick look at the 1 year performance of the highest rank stock at the end of March for each year 2014-2023, which is where I got my 2 companies fell 40% from. It would require a completely different data set to track how each 100-rank stock did after they reached that ranking. I can ask the data heads if it is possible to get that, as it is an interesting topic.

Epitychia

21st Feb

Very interesting. I find it very strange that a 99 stock rank is no better than a 90 stock rank, given that there will be perhaps 110 stocks in the 90+ bucket.

Do any readers have suggestions on why that may be?

For me it is a puzzle because the 90+ decile clearly outperforms to 80+ decile.

Seems strange as the top 25 outperform the 90+ decile. The top QVM are up about 380% since inception, the top Momentum stocks are up over 475%.

22nd Feb

I think there are lots of potential reasons for this. The first is that I have data for a specific date (the end of March), it may be something special about that date - for example COVID market crash was the end of March 2020. Then, when considering a compound return, then how often you rebalance makes a difference. For annual rebalancing, almost all the outperformance of 90+ vs 80-90 comes during the recovery from COVID in 2020.

In terms of Momentum Rank beating QVM, this may actually be the premier "anomaly" but it is also the one that may suffer from the highest costs as regular rebalancing is required. I am always chastened by the reality that quant momentum funds fail to generate the returns of the academic studies.

So I am not sure if a 99 StockRank is better than a 90, it may be. But I'm also not sure the evidence is there to say that it is. And I'd be pretty sure that in a pure quant strategy the difference between a 97 and a 98 StockRank, say, is not statistically significant.

If you are a quant, by all means buy the top 100 ranked stocks and you are likely to do well, but don't buy the 14 or so 99-ranked and think you'll be guaranteed to beat the market without taking a huge amount of idiosyncratic risk. For stock pickers, use the StockRanks, but other factors will be more important than the rank when it comes to the details or small changes between ranks, nor will buying 95+ ranked stocks mean you won't have an occasional big loss.

doctor dave

Thanks Mark again great read. Regarding your point about taking the top 14 stocks being a significant risk, I think that once you have a 20 stock portfolio the chances of a major derailment is actually pretty small. DD

24th Feb

I think it depends on what you define as a major derailment! With a 20-stock SuperStock portfolio, picked at random, or say the top 20 highest-ranked stocks, then the chances of say a 20%+ short-term loss is probably quite small. However, the chance of underperforming the market for a few years (or at least the portfolio of all SuperStocks) is probably quite high - randomness will just be too high a factor with such a small portfolio. There is a reason quant funds hold hundreds of stocks and its not to keep their computers busy!

20 stocks are probably fine, though, if you are doing other work on top of just using the StockRank and are willing to live with the bigger drawdowns it will create.

How the StockRanks give investors an edge

Fallacy #1 – Every SuperStock will be a winner

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Mark Simpson

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