My Investment Method
A Systematic Approach to Buying and Selling Stocks
My Universe
My quantitative model casts a wide net, analyzing nearly 15,000 stocks across the US, Canada, the UK, Europe, Norway, Switzerland, and Israel. From this vast universe, I identify approximately 3,700 stocks that meet specific market and quality constraints (e.g. No OTC stocks, acceptable leverage etc). About 2,500 of these are what I consider "liquid" – trading with at least $50,000 average daily volume and a price above $0.5. Nearly all are accessible through Interactive Brokers, my primary brokerage.
My Ranking System
I apply a multi-factor ranking to these 3,700 qualified stocks, focusing on the metrics that have historically generated the strongest alpha. The top 5% of this ranking contains about 50 liquid stocks, which forms the potential buy list. I update the entire ranking weekly to ensure I'm always working with the most current data.
The graph below shows the performance of a purely mechanical strategy: buying the top 50 liquid stocks and selling them when they drop below a certain ranking threshold (or drop from the ranking). This approach demonstrates the power of the "quantitative edge" without any subjective input. I track the transactions and performance of the model in the Portfolio section. Subscribe for access.
Adding a Qualitative Edge
While a mechanical strategy works well, for my own portfolio, I select stocks from the top-ranked list after conducting a qualitative review. This additional step helps me identify issues not captured by the model and discover additional catalysts that strengthen the investment thesis. I may also add stocks that don’t qualify as “liquid” when I think it makes still sense.
Sometimes, this process uncovers potential multi-baggers – stocks with +100% upside potential – which I showcase in detailed deep-dive analyses.
Portfolio Construction
I maintain a portfolio of 20 stocks – a sweet spot I've found through years of testing. A smaller portfolio increases volatility, while a larger one becomes unwieldy to manage. You could reasonably go with 15 or 25 stocks as well, depending on your preferences.
My Buy Process
With proceeds from sales, I purchase new stocks from the buy list. I allow position sizes to reach up to 1.5x the ideal allocation (5% for a 20-stock portfolio). This means the maximum position size for a new purchase would be 7.5%. I keep any remaining cash and dividend income in reserve for future opportunities.
My Sell Strategy
I sell stocks when their ranking falls too far or when I discover a compelling new opportunity that warrants making room in the portfolio (in which case I sell the lowest-ranked stock).
The selling threshold directly impacts portfolio turnover and performance. For rankings between 90% and 70%, turnover varies roughly between 200% to 100% for a purely mechanical approach. It mainly depends on the sell threshold (higher ranking = higher turnover) and a bit on the portfolio size (more stocks = higher turnover) as the average buy ranking of the stocks will drop. Finding the right balance depends on transaction costs, tax situation, and the time available to manage the portfolio.
A Weekly Rhythm That Works
I follow a weekly schedule for transactions based on the updated ranking. Alternatively, reviewing every 2, 3, or 4 weeks (or monthly) is possible, typically with up to a few % reduction in performance but also reduced time commitment.
My approach is essentially "set and forget" for each transaction:
I set limit orders at or near the closing price
I don't chase stocks if my orders don't fill
I wait for the next ranking update to reassess
I'm comfortable holding partial positions when necessary
My Weekly Process in a Nutshell
Each Monday: Review the updated ranking of stocks
Sell: Any stocks that have fallen below my ranking threshold or are filtered out (or occasionally to make room for an exceptional new opportunity)
Buy: New top-ranked stocks with the proceeds
Up to 1.5x the nominal position size
Nominal position size = portfolio value ÷ number of stocks
This disciplined, systematic approach removes emotion from the investment process and lets the quantitative edge work in my favor over time.
The Alpha Engineer --- Investing with a quantitative edge
Disclaimer: The Alpha Engineer shares insights from sources I believe are reliable, but I can't guarantee their accuracy---data's only as good as its inputs! This content (whether on Substack, via email newsletters, X, or elsewhere) is for informational and educational purposes only---it's not personalized investment advice. I'm not a registered investment advisor, just an engineer crunching numbers for alpha. My opinions are my own and may shift without notice. Investing involves risks, including the chance of losing money. Past performance, whether from back-testing or historical data, does not guarantee future results---outcomes can vary. So, please consult your financial advisor to see if any strategy fits your situation. Full disclosure: I may own positions in the securities I mention, as I actively manage my own portfolio based on these strategies.