A short story into how I developed a "quality at good value" score to stocks
About a year ago I came across a content creator I came to really appreciate. It was just about the time that I was starting to become slightly suspicious of investing purely in passive index funds, (see my [thoughts](https://www.reddit.com/r/ETFs/comments/1utksxh/thoughts_on_the_grossmanstiglitz_paradox/)) and wanted to test some more strategies. He introduced a methodology of screening stocks, based on fundamental and valuation metrics, that have been correlated with stocks that have consistently beaten the market on a long term basis.
In retrospect, this sent me on a journey, and prompted me to do my own long exploration on the subject - I've since delved deeply on the work on the quality investing factor premium by Fama and French and have also ran my in-depth own regression testing across two decades. It has practically become my full time job.
The same result came up again and again, when isolating for stocks with specific fundamental metrics, such as high 5y revenue growth, high ROIC, low debt, and good valuation relative to expected growth, they have consistently and repeatedly beaten the market on longer time frames. The specific methodology varies slightly by sector, but the results were nonetheless consistent.
Seeing this with my own eyes, I've decided I'm going to break down all stocks trading in any American stock exchange, seeing the distribution of each one of these fundamental metrics across all stocks, and isolating those with the top scores on each one of them. Finally, I weighted each one of the fundamental scores according to their importance into one aggregate score (I called it the "Zen Score") and I basically ranked all the stocks according to this metric. The results were really cool - All sectors showed up (tech, healthcare, consumer discretionary, financial services), Some stocks that I know of (Meta, MSFT, were both there), and some that I've never heard of (NU for example, has a brilliant score of 99 out of a 100).
This score has since simplified my investing so much, and has become my go-to method for my initial screening. Of course, I always followup with understanding the thesis and understanding if I'm in alignment with the business proposition of the company. But, as an initial step, simply screening for stocks with an above 80 zen score, I can start my research from 60 stocks instead of 4000.
This has also led me to change much of the stocks I own, selling numerous holdings and buying others. And I know it's not a long timeframe to determine anything, but so far my stock allocation has beaten the market by a large margin, holding around 13-14 stocks, with less maximum drawdown on the same period. Of course, I always leave room for doubt and I have a core holding in a number of index funds (Nowdays I go by a barbell approach of core holdings in factor diversified ETFs along with satellite allocations to a number of stocks that have exceptional zen scores).
This has been quite the learning experience for me, and I've learned allot (and made some money) along the way. Anyway, that's the story. I hope you found it somewhat interesting and if you have any questions feel free :)