Building a base filter

To demonstrate how to filter in SharePad, we’ll build a base filter that filters out the shares we are least likely to be interested in. Our criteria will be personal, but the filtering technique can be applied to almost any investment style.

Establishing your sweet spot

To exclude shares we don’t want, we must decide what we want. A time honoured way of developing an investment style is to steal from other people. We’ll have some fun in future articles using filters designed to mimic investing greats like Peter Lynch and Joel Greenblatt. They are good investors to mimic because they have been successful, and they also wrote books about how they invested. I nicked my style from these investors and others (all of whom credit generations of investors before them), and mixed it with a bit of theory from business schools.

I look for profitable businesses that I can invest in preferably for at least a decade. I want the main driver of my returns to be the growing profits of the companies I invest in, not the wavering sentiment of traders, which to my mind is capricious. There are many ways to make money in the stock market (and many ways to lose it), this is the one I am most comfortable with.

Because my aim is to hold the shares for a long time, I favour businesses that have a good deal of control over their destiny. Generally they’re not banks, insurance companies, utilities, housebuilders, miners or oil and gas exploration firms. Banks are hostages to credit cycles, insurance companies to underwriting cycles, the profits of miners depend on commodity prices, oil companies on oil prices, and housebuilders on house prices. Utilities are heavily regulated.

I have other reasons for avoiding these industries too. In this country, the listed banks and utilities tend to be large monopolistic concerns with complex finances and a reputation for putting the interests of management ahead of customer service and shareholder returns. The accounting for banks and insurance companies is different to most other companies, and learning to analyse them would require me to learn a new language.

These are my own prejudices of course. Traders may be able to predict and capitalise on the cyclicality of some of these industries, but my grudges mean I’ve never developed the skills required to analyse them, and so I filter them out.

That still leaves a large number of other businesses to invest in. Among them are companies that will be easier for me to analyse, and companies that are likely to prosper through thick and thin.

That’s my sweet-spot.

Building the base filter

So let’s get started.

Before we create the filter we must make our first filtering decision: which market to filter. SharePad includes many domestic and foreign markets but I generally choose the LSE Shares list which includes all shares listed in London. You can find this by clicking on the Other Lists button [1] on the toolbar at the top of SharePad. I use this option so much I have replaced the default FTSE 100 button, the left-most button on the toolbar, with an LSE Shares button [2] by dragging it from the Other Lists menu.

Next we create the filter by clicking on the Filter button [3] in the List view toolbar. Select Apply filter from the drop down menu and then New, give your filter a name, and click OK twice to return to SharePad.

To add our criteria to the filter we click the Add criteria button [4] in the newly created filter area.

I’ve chosen two criteria: Market Capitalisation and Supersector. Market capitalisation is the market value of all the shares in a company. Usually companies with very low market capitalisations are not well established and since I prefer profitable stable businesses, I tend to ignore them.

To find market capitalisation in among the hundreds of screening options available to us, we can either search for it – using the Search field in the top right of the Add criteria dialog – or find it on the Ratios tab:

Clicking OK returns us to SharePad where we can decide how low to go in terms of market capitalisation. I’ve set the limit at £25m by typing the number into the Min: box [5], but we can also set minimums and maximums by dragging and clicking the tiny chart next to it which shows the distribution of shares by market capitalisation.

In SharePad, shares are classified into industries, supersectors, sectors and ultimately subsectors. Classification, though, is more of an art than a science and within some of the classifications there are a wide variety of companies. The construction industry is cyclical, and buy and hold investors have good reason to be wary of builders. But excluding the entire Construction & Materials sector means filtering out stable businesses like James Halstead which manufactures and supplies vinyl flooring. James Halstead’s revenues are global and vinyl flooring needs to be replaced at regular intervals, so the business has proved relatively immune to construction downturns.

By clicking Add Criteria again, I’ve chosen to exclude the supersectors I most distrust: Banks, Basic Resources, Insurance, Oil & Gas, Real Estate and Utilities.

We can choose to exclude more tightly defined subsectors, though. The easiest way to get a feel for the sector options is to add columns [6] for Sectors and Subsectors as well as the Supersectors of the shares in the filter. We won’t be able to screen for subsectors unless we add a Subsector criteria to our filter but adding the columns will show us what is possible. The Construction & Materials sector, for example, is divided into two subsectors: Heavy Construction and Building Materials & Fixtures. James Halstead is in the second subsector, and so is Alumasc, another company I like. There may be mileage in refining the filter to exclude the Heavy Construction subsector but not Building Materials & Fixtures.

It is important not to get too hung up on our choices. Inevitably we will exclude companies we might invest in, and include many we won’t. The trick is to shrink the pool down to a manageable size, while keeping good prospects in it.

To run the filter click the Apply filter button [7]. There were 2,210 shares in the initial list of LSE Shares, and the filtered list contains 886. It’s a good start.

I hope you will join me in future articles where I will explore additional filters, use SharePad’s other features, and stray outside SharePad on our journey from idea to investment.

Hello filter, goodbye system

Within my last article, The perils of filtering stocks, I embedded a plea:

“If you are a systematic trader, also known as a mechanical investor, using affordable tools like SharePad, I’d love to hear from you.”

Reading the replies, I realised my definition of systematic was too loose though. The systems my correspondents kindly described were largely momentum trading systems. They still require, it seems to me, some human judgement: to decide when a price trend has broken, or when the price chart conforms to a certain pattern. Some of the systems require a human to watch over them, and buy or sell the shares when the system says.

These are not systems we can set and forget, the kind of mechanical trading systems we see described in books and articles encouraging traders to buy shares in companies on a periodic, often annual, basis. I am talking about the “Dogs of the Dow” for example, which buys shares in companies with the highest dividend yields, or “The Magic Formula”, which uses two criteria, profitability and value, to invest in good companies at cheap prices.

The ideas in these systems can be very powerful, and have inspired many investors, but I’m still looking for an investor that follows one blindly.

Despite the perils, we cherry pick from filters, whether these are the filters of our own experience, the statistical filters we create in SharePad, companies touted in newspapers, magazines, blogs and websites, or tips on Twitter.

For the reasons I mentioned in my first article in this series (How the stock market actually works), I favour the first two sources over the second two.

From Ideas to Investments

1. How the stock market actually works
2. The perils of filtering stocks
3. Building a base filter