Which Stocks To Invest In

January 6, 2016

Stock Picking Algorithms Summary • Investors pick stocks in different ways such as from the news, from companies that make products they like, from balance sheets, using fundamental analysis or technical analysis, but all of those methods have different risks and different issues • The algorithmic method is the best method since it is unbiased and it detects market I movements in its predictions. It is the method used at I Know First. • I Know First provides daily forecasts for different time horizons, giving each stock a signal and a predictability, and the December 31st case study is a good example. • In that yearly forecast, I Know First correctly predicted 8 of 10 stocks for the long position, and 6 of 10 stocks for the short position, returning great averages for both and crushing the S&P 500’s performance. • There is no magic in stock picking algorithms, but although the algorithm has many uncertainties, it still makes very advanced predictions. Introduction How does one pick stocks? Those who seek adventures might look for companies in the news, or those companies that are rumored to be taking over. If they hear positive news, they buy the stock, with hopes that the stock will go higher. Some of us are lucky, but most of us aren’t, and, therefore, we lose money. Is luck related to it at all? Other people simply buy stocks in companies that make products which they like. Most Apple (NASDAQ: AAPL) investors belong to that category. Investing in Apple is a win-win situation for them as either they can win big, or they can, at least, own stocks in a company that they like. Some of us are knowledgeable in accounting. We look through different balance sheets to try and find out what a company is really worth putting our money in. This is known as value investing, a technique known to be employed by the great Warren Buffett. The dividend investing strategy is a conservative form of this technique. Fundamental analysis is important. However, the common argument against it is that the current stock price already reflects the known fundamentals. Therefore, buying one stock has no advantage over buying another. Those who solely rely on fundamentals are missing out on a big chunk of information that is encoded in the daily price movements. Another type of investors is technical analysts. Those investors are the ones who like to read charts. They rely on chart patterns and known indicators to find oversold or overbought stocks. They use past patterns in order to predict future patterns. But since the world around us is constantly changing, we can’t expect a pattern to repeat itself. In addition, these patterns and indicators tend to lose effectiveness when too many investors use them to trade at the same time. The Algorithmic Method At I Know First, we use computers, mathematics, and self-learning algorithms to pick stocks. Markets move in waves, and our algorithms are designed to detect and predict these waves. Each algorithmic forecast has many inputs from many different sources, with each input affecting the outcome. The output of each stock is an up or down signal, along with its predictability. The use of mathematics and algorithms eliminates a big problem that all of us share, being emotional. When it comes to money decisions, we make decisions that are irrational and too impulsive. We buy when we should be selling, and sell when we should be buying. Most of us are not capable of reading balance sheets, comprehending the news, and, therefore, we can’t make informed decisions about buying or selling. The Forecast Table Explained The “heat map” table below is the forecast which was issued on the morning of December 31st, 2014 before the market opened. Each cell in the table represents either a stock or an index. Along with the ticker, there are two numbers, the signal in the middle right and the predictability in the bottom left. The stocks are arranged by the strengths of their signals, left to right and top to bottom. On the top left corner of the table is the strongest up signal, which in this case is Cimpress NV (NASDAQ: CMPR), followed by Yingly Green Energy Holding Co Ltd (NYSE: YGE), followed by 8 more stocks rounding out the top 10. The strongest down signal is in the bottom right corner, in this case, Mechel OJSC Sp ADS (NYSE: MTL), followed by Plug Power (NASDAQ: PLUG), followed by another 8 stocks rounding out the bottom 10. The signal is the move direction of the forecast, with a positive up signal or a negative down signal. Predictability refers to the historical correlation between the forecast and the actual result. Thus, it is related to the probability of the predicted move occurring. Green cells are for an up signal while red cells are for a down signal, helping us identify the direction of the market. Case Analysis of the December 31 Forecast: In this exercise, we try to find out whether our forecast could have been anticipated by conventional analysis methods. Among the “I Know First” last year top 10 stock picks for the long and short positions, 8 of the 10 stocks in the long position, and 6 of the 10 stocks in the short position went in the predicted direction in accordance with the algorithm, for the one year time horizon from 12/31/14 until 12/31/15. First, the top 10 long position stocks: Cimpress NV (CMPR) had the strongest upward signal of the December 31 forecast. It gradually went up, ending the year with a small 7.40% gain. Sarepta Therapeutics Inc. (SRPT) went up as predicted, with an amazing 165.70% yearly gain. JKS increased by 45.17%, TSL increased by 29.19%, Monster Worlwide, Inc. (MWW) increased by 25.38%, World Wrestling Entertainment Inc. (WWE) increased by 46.94%, Blue Nile Inc. (NILE) increased by 3.63%. But the most amazing prediction for the year by far was for Exelixis, Inc. (EXEL), which increased by an astounding 317.78%. The algorithm predicted the rise of these stocks, which is something that visible fundamentals could not have done. Yingli Green Energy Holding Co. Ltd. (YGE) and Coeur Mining, Inc. (CDE) were the only 2 stocks for this forecast for the year that the algorithm failed to predict, but the algorithm still had a great return of 50.98%, outperforming the S&P 500 by an enormous 52.98%. Now, for the top 10 short position stocks: American Concrete Institute (ACI) had the most impressive prediction, returning 94.31%, followed by DryShips Inc. (DRYS) with 84.11%, AK Steel Holding (AKS) with 62.48%, Plug Power Inc. (PLUG) with 32.37%, American Eagle Outfitters (AE) with 18.68%, and lastly Orbitz Worldwide, Inc. (OWW) which stayed put with 0.00%. The algorithm was wrong on Ceragon Networks Ltd (CRNT), WebMD Health Corp. (WBMD), Orbotech Ltd (ORBK), and Mechel OAO (MTL), but still managed an impressive 17.63% short average, beating the S&P 500 which stood at -2.00%. Conclusion In conclusion, stock picking algorithms simply are not magically going to do the job for investors. One can follow the fundamentals, the daily price moves, the company reports, the news, the competitors, the suppliers, the patents, the lawsuits, the weather, and more to predict the stock market. Some forecasts could have been produced by those who follow what I mentioned above. However, algorithms are completely different, using computers and logic. The algorithm does not know everything that is out there. It still has a lot of uncertainty, and therefore what it does is it makes very advanced predictions. A lot of available pieces are simply left out when creating a forecast, the noise is separated from the relevant data, but still this algorithm gives you a good idea of existing opportunities. Combined with other forms of stock analysis, the algorithm is an additional tool in making clever investment decisions.