- Use of model/screens can be helpful but have both advantages and disadvantages.
- Some of the disadvantages are: incorrect data, value traps, falling knives, high concentrations, etc.
- An important but ignored problem is that of incorrect data. Even Bloomberg gets it wrong!
- Examples from author’s personal experiences highlight the issues investors should keep in mind.
Using models and/or screens to find potential investments is an efficient method, especially if those models have been backtested and are based on solid logic. However it is important to highlight that there are pitfalls to using black boxes. The biggest issue in my opinion is incorrect data. This article will discuss some of the advantages and disadvantages of using screens, as well as provide several examples where incorrect data was found by the author. While this may sound obvious, I don’t believe enough investors take note of this issue. As a result, these problems could lead an investor to a wrong conclusion and investment.
There are several advantages to using screens or models such as O’Shaughnessy’s Value Composite (see my article here). These include:
To read the entire article go to: Buyer Beware: Your Screen Could Be Working Against You