Motley Fool is a well-known provider of stock market advice and recommendations. In recent years, Motley Fool has been exploring the use of mechanical and algorithmic investing strategies to generate investment ideas and manage portfolios. This has led to the launch of Motley Fool’s quantitative investing service called Motley Fool Mechanical Investing. In this article, we will review Mechanical Investing, examine the strengths and weaknesses of algorithmic investing approaches, and assess if Motley Fool Mechanical Investing is able to consistently outperform the broader market.
Mechanical Investing provides automated stock screening based on fundamental data
The core of Motley Fool Mechanical Investing is an automated stock screening system that analyzes fundamental data like earnings, dividends, profitability and valuation on thousands of stocks to identify buy and sell opportunities. This allows the service to take a rules-based, unemotional approach to identifying stocks that meet its criteria. The algorithms powering Mechanical Investing have been built over many years by Motley Fool’s quant team. By relying on algorithms rather than gut feel, Mechanical Investing aims to avoid behavioral biases that often hurt individual investors.
Mechanical Investing may lack flexibility to respond to changing markets
While rules-based mechanical investing strategies have the benefit of removing human emotion and bias, they also have some downsides. Mechanical systems like Motley Fool Mechanical Investing are rigid in their criteria and may end up generating buy and sell signals that seem at odds with current market conditions. For example, a strategy may signal buying into a declining market or selling into a rising one. Such inflexibility means mechanical strategies often underperform human discretionary traders during periods of extreme volatility or market transitions.
Long-term performance of Mechanical Investing is decent but fails to beat the market
According to Motley Fool, their Mechanical Investing service has produced annualized returns of 15.8% since its inception in February 2015, compared to 14.5% for the S&P 500 over the same period. While this shows decent outperformance over the broad market index, Mechanical Investing has failed to deliver the blockbuster returns that Motley Fool’s human stock pickers have produced in its leading Stock Advisor service. This highlights a common challenge faced by even sophisticated systematic strategies – consistently beating the overall stock market is extremely difficult.
Motley Fool Mechanical Investing provides investors with a rules-based, quantitative approach to picking stocks. While mechanical strategies have benefits like removing human biases, they also suffer drawbacks like lack of flexibility. Overall, Motley Fool Mechanical Investing has a decent long-term track record but has yet to prove it can consistently outperform basic index fund investing.