Why have a mechanical portfolio?

This may seem a bit of a strange thing for an Investment Club to do. After all, one of the main features of an IC is to spend time discussing shares whilst a mechanical portfolio just "is". You obey the rules and little or no discussion is required. But there again, perhaps we're a strange Investment Club!

So why have one? Well, first off we don't make decisions to purchase shares lightly. This is good in as much as it reduces the number of bad decisions. Unfortunately it also means that we can go several months without buying any shares. Not great for keeping people interested. By having a mechanical portfolio we can ensure that shares are bought and sold on a regular basis.

Secondly, we believe that mechanical strategies can work. Most reject the idea based on the popular but overly-simplistic strategies that get written about in newspapers and on web sites (e.g. Beat the FTSE or buying the best / worst performers from the last year). Such attempts are invariably the result of data mining or statistical flukes and before long start losing money when they get quietly abandoned. Strategies that work are invariably more complex and often non-obvious.

Ultimately, we decided to have a mechanical portfolio when we sat down and worked out exactly what we wanted to get out of our club and how best to achieve it. This discussion resulted in our adopting a formal investment strategy of which the mechanical portfolio was just part. For more information about our strategy and hints on producing your own, please follow the 'Club Strategy' link on the main menu.

What's so great about your mechanical strategy?

The glib answer is that it makes money and beats the market :)

We think that our mechanical strategy has two main advantages over other types. First off, the strategy now encompasses two sub-strategies. The first aims to pick companies which are cheap by traditional 'value' criteria (price to earnings ratio, price to book value, etc.). The second looks for companies which have high growth expectations. The idea is that this provides diversification - if value is doing poorly then there's a good chance that it is because growth is in vogue and doing well and vice versa. We may consider further different sets of criteria in the future to provide additional diversification.

The second advantage is that having filtered companies we then rank them using a weighted criteria process. This is a technique that seems to have been all but overlooked by other mechanical strategy authors. It is sufficiently unusual that we had to write our own software in order to rank and then calculate the criteria scores to produce an overall score.

What are the criteria based on?

As mentioned above there are separate criteria for value and growth stocks. These are loosely based upon the "Cornerstone Value" and "Cornerstone Growth" strategies described in James O'Shaughnessy's book What Works on Wall Street. His strategies call for buying 50 companies at a time - somewhat impractical for your average Investment Club! This is one of the main reasons why we devised a sophisticated ranking system so that would could pick a single 'best' company each month.

Can our club use your strategy?

There is enough information on this website for you to replicate the strategy. However, we do not in any way recommend that you do so and in particular that you do not blindly buy and sell based on the share selections that get published here. We must emphasise that the detailed information is put here partly to provide a central repository for the club, partly to assist other clubs to consider the idea of a mechanical portfolio and partly for vanity ;-)

If you should still want to follow our picks, please bear in mind that:

We would be delighted if our success inspired you to devise your own mechanical strategies, but given the points above please don't rely on following ours.