A method for stock-picking

[rukawa]

I believe guessing stock prices based on financials is a good method of learning how to value companies. But I've also realized that its might be a good fundamental method of stock-picking.

 

Basically what I propose is that a person go through valuelines or some set of financials for a company quickly (~5-7 min per company) with the objective of guessing the stock price as closely as possible. After they have gotten reasonably good at this game you make a list of any companies where their guess was way higher than the actual stock price. These are the stock you buy.

 

My admittedly unreliable intuition is that the method would work very well, it could be use with any person as the guesser...a 10 year old child, an investment banker whatever or even an artificial intelligence and it would produce reliably good results. It would even produce better results if you had two people competing to guess the stock price and they received some price based on who guessed better (like the price is right gameshow).

[matjone]

I think I've more or less done this.  It's a good education in how far stock prices deviate from what you think would be a good estimate.  Or maybe I'm just bad at this.

 

For me the first part of the formula would be to put it into a basic category.  Is it a turnaround, a high ROIC moat stock, an asset play, etc.  Without making that decision you really have no idea.  And even within those categories there are more attributes to consider.    I imagine the code for something like this would be extremely long and complicated.  You'd probably need a big team of programmers to come up with something for all cases and even then there'd probably be a lot of holes in it.

 

For me the idea of one guy knowing the price of everything is a little like the idea that the government can decide the amounts of things to produce, and the prices to sell them at.  The economy is too big and too complex, so it works better when you have one guy or management team trying to make those decisions for a small part of one market, and even then it is very hard even for smart and dedicated people.  Same thing with stocks I think - the market is more efficient with many different specialists working in their area, and the corollary is that you will probably be better off becoming a specialist yourself.