The Basics of Mechanical Investing

Mechanical Investing gained huge momentum amongst the average investor during the AOL days of The Motley Fool.  When one of their forum moderators wrote the book Unemotional Growth showing how you could take a simple screen of DOW stocks and smash returns over buy and hold by shifting your positions the internet was on fire.

Now everyone who begins to learn stock market basics will come across the concept of mechanical investing.  Search engines and the power of regular home computing have made this type of investing very feasible for the average investor.  Even very complex models only ran from large hedge funds or private investors can be done on a spreadsheet at home.

Unfortunately, all this information have taken many beginners off of filtering stock market 101 concepts to speed up their decision making into over complicating the whole process of investing.  Some spend all their time back testing very complicated models with too many variables, essentially just best fitting the past with no knowledge of the underlying principles that make these screens effective.

If you are interested in mechanical investing you need to start with an understanding in why people trade a stock and why people invest in a stock.  Then you attempt to think out different quantitative facts that could be a leading indicator in a change in upcoming public sentiment about the stock.  It has been shown that the best models use no more than two or three variables.  If you use too many you will find that your back tested results will show very high success, but your future results won’t match as nicely.  If you find a investing strategy that shows good results with only a few variables the future results will have a better chance of being similar.

Mechanical investing is a great way of taking the gambling out of investing.  We all are prone to human emotions influencing decisions.  When these emotions change our investing strategy the outcome good or bad is more luck than anything else.  I don’t want to depend on luck for my future.

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