How To Create Your Own Stock Screener

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How To Build The Ultimate Stock Screener

The ultimate screening process looks at the market from many different angles, and does so religiously.

Because unless you believe in perfectly efficient markets (good luck), numbers alone will never tell the whole story.

Which means that the best idea screening process incorporates both hard and soft data. It also minimizes the use of your time when possible since the real work should be done digging into your best ideas after they've come out of your screen.

So here's our complete process.

It incorporates everything from Excel programming to sharing drinks with Nouriel Roubini. Any tools we use are pretty much available for free and anyone can do it, it just takes effort:

The Ultimate Stock Screening Process >

You start with a proprietary Excel sheet at home... this is your edge.

The most important part of building a proper screening process is to have your own proprietary way of looking at trades, built around how you invest.

While there's tons of available data out there, few take the time to collect it properly and look at it from the right perspective. Even the pros are usually overly focused on the world of broker research, broker models, and brokers' inaccurate forward estimates.

For example, we keep a mergers and acquisition (M&A) arbitrage model that looks at possible M&A trades' investment returns vs. the number of barriers to completion each deal faces. It helps compare the risk/reward various trades offer, both in the past and present since we keep our old models for each deal as reference points.

A personal collection of even seemingly basic things, such as historical PE valuations grouped by industry or option premiums offered over time for specific stocks, can yield insights most market participants completely miss.

You target, track, and follow key variables that drive the rest.... and follow them religiously.

Track a core of key companies and data points, religiously. Which data you track obviously all depends on what kind of strategy you want to follow.

The key though is to keep records of data other people don't get around to focusing on. Maybe this means tracking the profit margins of industries over time, tracking changes in trading volume for key stocks, tracking Chinese iron ore imports, or fund flow data as shown in the picture. Whatever it is, the key is to track key pieces of information that can completely invalidate tons of other arguments people might have for or against your trades.

For example, if you suddenly see bad news in the Chinese steel sector, you already will have a good feel for what's going to happen to hundreds of steel companies worldwide without following each of them closely.

So select key variables related to your strategy and follow them religiously, in your own proprietary models.

Keep your routine simple... by automating Excel.

Whatever you start with, try to minimize the complexity of the proprietary data you keep track of.

The routine shouldn't take much time.

You can even automate Excel models using macros and web-linked downloads, which is how we personally happened to break into finance.

Now go online... and build a short-term watch list.

This will grow over time. Just have a list for things you watch beyond your 'core'.

Call us old-fashioned, but we still use Yahoo Finance to follow groups of stocks. Day traders will probably prefer using their broker's trade station tools.

While the core data we track rarely changes, this watch list has ideas added or removed frequently. Watch list ideas can also be populated into Excel models as well, depending on what your strategy is.

Build a professional news routine.

Everyone surfs the web, but few follow market news efficiently.

Create a hit-list of daily, weekly, monthly must-reads encompassing RSS, key blogs, and news aggregators for idea generation.

Program alerts into your calendar. For example, we have one for Bill Gross's monthly analysis at PIMCO.

Your news flow feeds into your watch list, which then feeds into custom Excel models.

Yahoo Finance's screener is great for fundamental screens.

This is THE place for free stock screening, using fundamentals.

Yahoo's tool offers decent depth (can screen by EV/EBITDA instead of PE for example) and convenience.

In the end, you should look at the real financial statements for any investment, thus we believe there's no need for massive detail when screening. Screen quickly, then spend time digging into your best ideas.

Go to Finviz for trading action.

We can't emphasize how good this free site is at helping you keep abreast of daily market action, all in a glance.

Its stock screener is also very good for momentum/technical types of screens.

One of our simple favorites is to simply look at stocks that experience sudden price or volume changes, it's almost guaranteed to uncover interesting situations which can be added to our watch list.

Now get outside and talk to people.

Despite the Internet's expansion, nothing beats talking with smart people.

Build a list of contacts you keep in touch with, and share thoughts intellectually.

In fact, you don't even need to be much a genius if you are surrounded by them.

Investment ideas will flow out of these interactions, which you can then go work on privately.

Hash out your ideas in writing.

Writing isn't just a form of communication, it is a thinking process as well.

Good ideas should be hashed out in writing since most of us can't maintain a one-hour stream of analytical thought in our heads without interruption. (If you can, congratulations)

So write about your key ideas and you'll screen them down even further. All of the previous inputs will be involved in this.

Repeat the process consistently. You'll discover tons of ideas.

Thus the ultimate screening process involves:

Proprietary models that look at investments from an intelligent perspective (hopefully).
A constant awareness of just a few key variables related to your strategy.
A large and changing collection of watch list ideas.
Efficient news digestion with alerts.
Fast numerical screens.
A network of smart professional contacts.
Writing.
A religious dedication to your routine.

Repeat the process over and over, shaving time off your tasks and tossing out or adding features. Over time you'll discover you have an excellent feel for your investment niche, and you'll be full of interesting ideas from many angles.

Investing is a marathon after all, not a sprint.

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