Formula Stocks Review

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Historical track records show that Formula Stocks is a great subscription to outperform the S&P 500. It is also a platform that feeds subscribers trades as long as one believes in the methodology. Unfortunately, this program has not been through a major bear market because the track record only started in 2009. To gain our full confidence we would first want to see more of how the black box works and second review the performances from 2003-2008.

Formula Stocks is a subscription based platform that claims to predict with 89% accuracy the direction of stocks with an average historical return of 18%. The platform offers weekly stock recommendations including which stocks to buy, at what price, how much of it, and when to sell.

On their homepage, they also featured returns compared to Dow Jones Industrial Average since 2009. Formula Stocks’ recommendations are long term with average holding period at 2.24 years. The mathematical expectation from a Formula Stock’s selection is very well defined, and historically has above-average odds of success, higher than normal return characteristics, and a lower than average risk.

To become a subscriber of Formula Stocks cost $50 per month with a 30 day free trial for new customers.

Formula Stocks avg performance graph

Formula Stocks identifies stocks that have more potential of rising through these techniques:

  • Cognitive computing – the capability to learn from experience, and reason based upon it.
  • Business analytics – the capability to analyze business models.
  • Margin of safety principles – the concept of preferring extra safety before investing.
  • Valuation technology – the concept of calculating the intrinsic value of business.
  • The scientific method – the method based upon which a thesis can be formed, tested, and refined.
  • Quantitative measurements – a method with which to quantify a theory.
  • Growth projection – a method with which to project the future growth of business.
  • Intelligent Investment Technologies – 93 different methods for outperforming the market.
  • Alpha prediction – a method which estimates the future return from stock.
  • Position-sizing logic – the concept of matching position size and odds.
  • Portfolio management technology – software for optimizing risk/reward characteristics of a portfolio.
  • Statistics – a branch of mathematics that deals with the interpretation of data.

Performance Metrics

  1. Gain-to-Pain Ratio is 1.318 which indicates far more gain than pain.
  2. The Sortino Ratio is 3.017 for Formula Stocks, showing high reward and low risk.
  3. Average gain from a winning stock which is 65.97%, while the average loss from a losing stock is only -18.32%. Add to this that trades also wins 89.29% of the time and only loses 10.71% of the time. This leads us to a mathematical expectation of (0.89 * 65.97) – (0.11 * 18.32) = +56.95%. Taking an average of 2.24 years to achieve we can divide 59.95 by 2.24 and get an expected annualized return of 26.76%. This is the expected return when 100% invested at all times. While not always possible (good investments can be scarce), it leads to an 18.87% annual rate of growth.

Methodology

One downside of Formula Stock’s methodology is that it appears to be a black box strategy. It was developed between 2003 and 2017 and deployed in its first version from 2009 onward.

As regards to stock analysis, the method comprises business analytics which draws analytical conclusions from many hundreds of variables simultaneously, and as this process is implemented in a High-Performance Computing (HPC) environment, it operates a hundred times faster and handles several hundred times greater complexity than the human brain is capable of.

On top of HPC, the program uses a cognitive computing-based investment process that mimics the human brain’s way of operating when considering investments based on experience. Using machine learning, a process by which software can learn from outcomes of decisions rendered and, much more importantly, decisions never rendered in practical terms, the experience is built up to a level rivaling the world’s very best investors.

Another part is an autonomous portfolio manager, who knows how to allocate capital when to buy, when to sell, and when to hold. Overall, it constitutes a formulaic approach, which has succeeded in outperforming the markets most of the time, measured (1970-2009) and in practical investment application (2009-2017).

How to use Formula Stocks

Formula Stocks can be used in two different ways. First is subscribers choose to mirror the model portfolio that is updated monthly. Second is you choose to use stock suggestions that are updated weekly. The simplest is to “mirror” the model portfolio, which you can do by executing the trades in the “Portfolio trades” window once a month to keep your portfolio rebalanced. First, click on “Portfolio” in the menu. Here you will see the portfolio with a number of positions. At the top, you will see a graph displaying the performance of the portfolio in direct comparison with the S&P500 index. Prices are updated daily. You can scroll down to the bottom and observe the individual portfolio positions denoted in percentage. Click on any of these and a graph will appear. At the bottom of the page, you will find an entry called “Cash.” This refers to the percentage of the entire portfolio which is currently not invested. Once every month, on the first day of the month, the portfolio is rebalanced, which involves buying and selling positions.

Alternatively, you can use single suggestions. You might prefer this, if you already have an active investment portfolio which you want to partially maintain, or if you use our suggestions as input to your investment process. Click on “Suggestions”. You will see several buy and sell suggestions. The buy suggestions are new positions, which it may be advantageous to enter into. The sell suggestions refer to stocks which have previously been suggested for purchase but should now be sold. Within the Suggestions display, each buy suggestion includes a figure called “Cash allocation”. Cash allocation refers to a suggested portion of the funds you wish to deploy. If a suggestion proposes to buy IBM with a 5% cash allocation, and you look to deploy specifically 10,000 dollars on that day, you could attempt to place around 500 dollars in this stock. There are typically more suggestions than there are portfolio trades: Suggestions is the pool of opportunities. The portfolio typically uses some, but not necessarily all, of these.

Portfolio Approach

formula stocks portfolio

On the home page it shows inception date of Formula Stocks portfolio versus a standard buy and hold S&P 500 portfolio. The key here is that this portfolio started in 2009 and has not experienced a bear market. As of March 2nd, 2017 the portfolio has 45 holdings with the oldest holding being 1341 days old and the newest holding being 30 days old.

Suggestion Approach

formula stocks suggestions approach

AS of February 27th, 2017 Formula Stocks has four sell signals and 13 buy signals. This list is updated at the end of every week.

This page also allows one to drill down into the fundamentals of the stock. It includes Cyclically adjusted earnings yield, Dividend Yield, Cash flow yield from operations, Cash flow yield TTM, Growth Yield, Return on net tangible assets, Return on invested capital, and Growth of revenue.

stock fundamentals for formula stocks

Formula Stocks Review
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Formula Stocks

Summary: Historical track records show that Formula Stocks is a great subscription to outperform the S&P 500. It is also a platform that feeds subscribers trades as long as one believes in the methodology. Unfortunately, this program has not been through a major bear market because the track record only started in 2009. To gain our full confidence we would first want to see more of how the black box works and second review the performances from 2003-2008.

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