Q&A: Stock Screens

Q:

Some time ago, I became a life member of the AAII (American Association of Individual Investors). The organization provides many different "stock screens" that encourage members to develop small stock portfolios that usually seem to beat the S&P 500 over time.

I have become a bit suspicious that these stock screen portfolios would be better compared with small cap or small cap value indexes. They usually chose small or microcap stocks, seem to have a lot of volatility and outperform the S&P over a couple of decades. The screens also don't include taxes and transaction costs.

What's you opinion of the added value of these stock screens?

A:

I am suspicious of every system that claims to help individiuals pick individual stocks because they have generally done no better than random chance, in real life circumstances. How can a stock screen or list that is mailed to thousands of members even measure its performance?

Years ago, the Value Line Survey made all kinds of incredible claims about its ability to pick winning stocks. The report was so popular that Value Line started its own mutual fund using the newsletter recommendations. The real-world result was appalling. The Value Line fund regularly failed to beat the S&P 500 and had substantiually higher expenses.

The real-world results with AAII's stock screens are likely to be similar. It's not like their selections are a secret. When will you buy versus your fellow members? When will you sell? Plus, individual stocks are much more risky than diversified portfolios of stocks as they can be infinitely volatile (can an index fund really ever go to zero?).