Unique 3 and SOS Explained
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Unique 3 and SOS Explained
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Unique 3 explainedUnique 3 is a screen of screens. The theory is cherry-picking, plain and simple. If a stock ranks among the best from a number of different angles, it seems more likely to outperform. Here's how to get the picks. For each stock in the Foolish Workshop rankings each week, count how many times it appears. To avoid overemphasizing one type of screen, discard rankings that are too similar. If a stock appears on CAPRS, RS IBD, RS 26 and RS 13, for instance, count that as only one "Unique" appearance. On the chart at right, the color bands show which screens are considered so similar that we discard multiple appearances. The dates at the top are the dates when different line-ups of screens first appeared in the Foolish Workshop rankings. We use whatever screens are in the Workshop at the time the stocks are selected because the Workshop represents the "state-of-the-art" in mechanical investing. That means that when the Motley Fool changes the screens in the Workshop Rankings, the underlying screens for Unique 3 change. That could, of course, affect the performance of Unique 3. |
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Once we've counted the number of Unique appearances, we buy all of the stocks that appear on 3 "Unique" screens. For the purposes of reporting returns, we rebalance on the first Friday of the month, but you can start any time. Just use whatever stocks meet the criteria at the time you invest. For 2001, the theoretical maximum number of Unique appearances is 8, up from 7 in 2000.
Stocks that have the same number of Unique appearances are shown each week in ascending order of average rank. Thus, a stock that is ranked 1 or 2 on four Unique screens will appear higher on the list than a stock ranked 3 or 4 on four Unique screens. This is arbitrary. Stocks with the same number of Unique appearances should perform about the same, on average, regardless of the order in which they appear.
Unique 3 can generate a different number of stocks each time you run it. Sometimes it picks 10 stocks, other times 4 stocks. For example, in April 1998 you would have bought DELL, HBOC, PSFT and ALK in equal dollar amounts. If you had $50,000 to invest, that means you would have bought $12,500 of DELL, $12,500 of HBOC, etc., regardless of the number of shares it took to get there. In November 1999, you would have bought 10 stocks, with $5,000 per position. The backtest assumes that, however many stocks the screen picked up, you bought them ALL in equal dollar amounts.
We track the performance of Unique 3 using holding periods of four different lengths: 1, 3, 6 and 12 months. The rules for picking, buying, and rebalancing stocks are the same for all the holding periods. The column on the return summary for 1-month returns assumes you bought ALL the Unique 3 stocks on the "Buy Date" in equal dollar amounts and held them for 1 month. At the end of that month, we assume that you rebalanced the portfolio so that you held the next month's picks in equal dollar amounts, buying, selling, and holding as necessary. The column for 3-month returns assumes exactly the same thing, except that you held for 3 months. The 6- and 12- month periods follow the same rules -- buy all picks in equal dollar amounts. We track all four periods because we are trying to answer the question, "What is the best holding period for this particular screen?"
The "3" in the name Unique 3 does NOT stand for the number of stocks you are supposed to hold. It refers to the idea that each stock you hold has made it onto at least three "Unique" screens.
Unique 3 and the Screen of Screens (SOS) share a similar philosophy. Both say that if a stock appears on multiple screens, it is more likely to outperform. The SOS approach differs from Unique 3 in two fundamental ways. First, SOS does not penalize a stock for appearing on several similar screens. A stock could appear on all four Relative Strength screens and all those appearances would count for SOS. Second, SOS uses a scoring system to rank the stocks. A stock receives 10 points for each first place ranking, 9 for second, etc., down to 1 point for a tenth place (or higher) ranking. The higher a stock ranks, and the more screens it appears on, the better it will do. With 14 screens in the Workshop Rankings, the theoretical maximum score is 140. I'll post the top 10 stocks on the first Friday of each month, but I don't intend to systematically track the returns at this point.
Last Updated on 1/6/2001
By Jonathan Jackel
Email: jonathan@jjackel.com
