Naked Trading: A Robbie Burns Inspired Quant Investing Screen

His approach combines a focus on fundamentals:

"My investment strategy has always been quite simple: find excellent companies and hold them until the value comes out".

"I strongly believe charts are very important to look at.. but I also believe it’s simply crazy to buy and sell shares on the basis of looking at a chart and nothing else at all".

In the book, Robbie seems to ally himself most closely to the investor type that he calls the Medium Term Trader, i.e. an investor that buys and holds shares for:"anything between 3 months and 2 years, does some careful research, sticks to stop losses, takes profits when it’s sensible to do so... & prefers smaller companies (with growth prospects) to FTSE 100 ones".

Investing Criteria

a) Dividends, profits and turnover are rising

b) It has a full listing - "I tend to favour shares that have a market cap of between £50m and £900m because they have a lot more room for growth than, say, a FTSE 100 share".

c) It is liquid - "A spread of 3% is about as much as I’ll allow. 4% max".

d) It is priced at under 15x profits to market cap. He also says it must look cheap, using slightly wider PE based criteria - "Personally, I quite like lower P/E ratios (provided all the other signs on a share are good)... in the region of 12–20". For simplicity, we specify that PE must be less than 20x but sort in PE order ascending.

f) The chart looks positive and is in an upward trend - the measure here seems to be 1 year absolute strength (although he also talks about the three year profile too). He is keen on shares trending upwards and breaking new highs. "Don’t buy shares trending downwards and breaking new lows".

g) Debt is under three times its full-year profits: "My rule of thumb is not to buy anything with net debt more than three times the full-year pre tax profit, or what the likely pre-tax profit might be next year".

Qualitative criteria

In addition, he lists a range of other more qualitative criteria, which can't be filtered quantitatively and could only be assessed based on a detailed analysis of the company, e.g.

"there are no question marks, I understand what the company does, demand for its products is likely to grow".

One other criterion - there is still growth to come - could potentially be quantified by referring to analyst forecasts, although given the poor forecasting record by analysts, company growth prospects are probably better assessed on a case by case basis.

He also does a quick and dirty textual analysis of the annual report to see how frequently it uses words like "challenging" or "difficult" as opposed to "exceeding expectations" or "positive" .

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