After 9 years I have decided to replace the old Puget Investor / Invest.vfsystems.net VFS Rating. The VFS Rating uses various fundamental stock metrics to try to determine if the the stock is under or overvalued. It has never been as accurate as I had hoped, for a variety of reasons.
As of 9/30/18, here are final results of the VFS Rating:
Note that over the life of the VFS Rating, on stocks rated 10 would on average outperform stocks rated 1 by .09% a month (.01x above represents the monthly premium, so on average a vfs 10 rating would equate to .10% a month return, where a 1 rated stock would return .01%). There is high variability in these numbers, so I think this might be overstating the accuracy of the rating, but at least it is a positive correlation.
Note that on average the stocks in the portfolio outperformed the market by .12% a month, which annualized is over 1% a year over the S&P 500, which I like. However, that number cannot be credited to the VFS Rating, that number is more a function of the stocks I chose to add to the portfolio. I would like to think the over 1% number is due to my brilliance in picking stocks, but I wonder what that number would look like had I not included Amazon in my portfolio during that time.
I am now taking what I have learned from the calculation of the VFS Rating, and using some more modern programming techniques to improve it. Instead of a VFS Rating, I hope to come up with a target valuation of a stock, from which I can discern the discount or premium the stock market has applied to the stock based on fundamental indicators. This is very tough, because the valuation of a stock (in my current opinion) is primarily based on the growth prospects over the next 10 years – which is a very subjective (and inaccurate) forecast. But I have some ideas, and if I set up my measurements right I should be able to see if it can be done successfully.
In the meantime, I plan to rely on my technical indicator that is on the invest.vfsystems.net site. This indicator has shown some promising early results. Since November 2017, the performance of this indicator can be described as Y=.077x + .294. This formula is a little convoluted, but my technical score goes from a -10 to a 10, so a stock with a score of 10 out performs a stock with a score of -10 by approximately 1.5% a month. Again, this is a small sample set (13 months), but it is promising.
Finally, to repeat what I have told my friends – if you do plan to invest in individual stocks, the most important thing is to get your measurement systems set up. There are so many wrong strategies out there its important to measure your strategy and make sure you are beating whatever index you would invest in as an alternative. I have a number of measurements set up, so hopefully now as I embark on this new formula, it will show positive results. If not.. it could be back to the drawing board once again.