Filtering out stocks that cannot be ranked well

Research
1

Hi,
Rankings treat all stocks as if they are in the same type of business, but of course they are not, and so a ranking may evaluate some types of business better than others. Long ago I tested my ranking across sectors, but never went all the way to test across industries. I’m also thinking that stocks such as closed end funds and possibly REITs may not be evaluated properly by my ranking, and I expect those could appear in a variety of industries. Is there some way to identify these?

Just wondering if anyone has any thoughts or experience to share on trying to filter out the stocks that may not be evaluated well by a ranking. Maybe it’s not such a big deal since if the stock is not evaluated well, it’s not likely to score too high and so will never be bought.

Don

2

Hi Don,

Yeah CEFs and REITs need a completely different ranking approach, one which might be possible here once dividends are supported.

Industry != FSMisc
Industry != REOper

Should exclude most CEFs and REITs respectively. It might exclude some things you want to keep as well though.

I shared a universe as “No CEFs No REITs”. The performance is considerably different though arguably not better than regular “All Stocks”.

I would like any suggestions for LPs as well. They’re generally just classified as utilities and personally, I don’t want to exclude all of those.

Al

3

Don / Al - Sometime ago I pulled a “complete” list of CEFs from CEFConnect. You can cut/paste this list into a P123 InList if you desire. P123 doesn’t have a few CEFs in it’s database. They were not very liquid however so it shouldn’t make a difference.

Good luck
Steve

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4

Thanks Steve,

I found these in the First Trust Composite Closed End Fund Index.

Al

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5

Thanks for the ideas and lists. I tested my previous generation ranking against sectors but retested my latest and found it is particularly poor at ranking conglomerates. I’ve started looking at industries but many are so small the results are not reliable. Lumber does not test very well and may fall into a class similar to REITs that yield may be a significant factor (I think, don’t know much about lumber stocks), but including or excluding the industries or CEF’s mentioned so far has negligible impact on overall performance.

I’m not done with this subject yet but I try to follow the Pareto principle and focus on the 20% of things that make the most difference, and this is looking like it may not qualify.

Don

6

Don there are less than a dozen conglomerates altogether. The best ranking system will therefore not look good with conglomerates.

To give you an example, testing a ranking system in a sector with 1000 stocks and sorting into 20 buckets means that each bucket contains 50 stocks. That’s enough to get a pretty good idea if the ranking system works on average.

Chip

7

Correct, before testing ranking sys you should look at number of stocks being tests and adjust buckets so that you get at least 5-10 stock per bucket.

As for Conglomerates. I’ve done a fair bit of testing with them and I have yet to find any way to achieve robust predictability with that industry. I have since never gone back to look at them because there are other industries that interest me more and with more stocks in them to build from.