The mechanics of investing with stock screens – choose some parameters, apply them to an equity market, and invest in those equities that make the cut – might resemble stockpicking.
But in practice, screening is a far cry from most stockpickers’ definition of the process. That’s because the companies and sectors that a screen ‘selects’ are often less important than the process itself. Screening is a type of quantitative investing. A quantitative approach to anything will, by its nature, place more emphasis on what can be easily measured (such as earnings growth or valuation multiples) than what can’t (such as management skill or regulatory change).
That means jettisoning discretion, insight and ‘feel’, and sticking with the disciplined (or stubborn) application of rules over time. If it doesn’t fit the model (and therefore screeners’ faith in the past repeating itself) then it doesn’t make the cut. It’s as simple, or perhaps as odd, as that.