A Well-Designed Factor Based Trading Strategy Can Beat The Market By A Factor of  3X

Can retail investors beat the market?

The answer is yes, but anyone who has been in the game for a few years will tell you that it's difficult to beat the market consistently, over time. Anyone can get lucky for a year or two, but long-term success requires skill, discipline, and above all else - a well-designed plan.

The market has become much more efficient in recent years. but there are always opportunities for those who take the time to design a plan and execute it in a disciplined way. Here are a few sources of Alpha that still exist in today's machine-dominated market.

Where does Alpha come from?

  • Day traders. 90% of them lose most of their money within the first few years, and then quit.
  • Overconfident stock pickers. They overestimate their skills, and don't learn from their mistakes.
  • Low information traders who buy on rumors and hot tips from unqualified sources.
  • Disorganized types who have no plan, no strategy, and no self-control.
  • Impatient traders who jump around from one system to the next, never giving them a chance to work.
  • Wealthy investors who pay top dollar for information and tips that have little to no value.
  • Large fund managers who are forced to sell winning stocks in order to meet client redemptions.
  • Index funds and ETFs that must cling to their benchmark, even if that means buying the worst stocks in the index.
  • People who allow their political ideology to drive their investment decisions.
  • People who are attracted to conspiracy theories, or susceptible to investment scams.

These sources of Alpha are common in our capital markets. While it's true that skilled and disciplined investors can capture much of this Alpha, it's also true that very few of them can do it consistently over time.

Now that you know where Alpha comes from, how do you capture it?

Most people who focus exclusively on the goal of beating the market will fail. There are lots of reasons why, but here's a big one. They look at investing as just another challenge.

Perhaps they have mastered other big challenges in life, like academics, sports, or business.
Maybe they are really smart, with a high I.Q. and a superior grade point average.

But there's a problem. None of these things are enough to make you a successful long-term investor. They help, but it takes a different set of skills to truly master the game. It takes emotional intelligence, self-awareness, humility, critical thinking, and lots of good old fashioned work.

Some people think investing is an art, and others think it's a science. I think it's both. The art involves thinking creatively and noticing things that others don't. It involves intuition and instinct, but these are often compromised by mental and emotional bias, false beliefs and assumptions, and wishful thinking.

So, how can an investor create a strategy that takes these biases into account and removes emotion from the process?

One type of strategy I've been using with clients for years is factor-based screening. Factors have become very popular lately, but I believe this approach will continue to produce results for many years to come. 

All ZenInvestor trading strategies have been carefully designed, tested, and executed in real time. We don't make these strategies available to subscribers until we have at least one full year of actual performance to evaluate how they work in the real world. 70% of our strategies never make it out of beta testing.

The Science of Capturing Alpha

(Beating the Market)

Capturing Alpha is Difficult... but Not Impossible

Why is it that a minority of people succeed in the market while most fail? After all, it’s the same market with the same stocks for everyone, so why the big difference in performance between one person and the next?

It comes down to these three things:

1) Having a clearly defined plan.

2) Having a well-thought-out strategy, and

3) Having the discipline to follow through, no matter what.

If you focus on your own strategy and block out the noise of daily market action, you will increase your odds of success dramatically. I'm not exaggerating when I tell you that you could double or triple your long-term returns with a factor based strategy. How do I know? Because I've been doing this with my clients since 2005, and I have the numbers to back it up. 

Factor-Based Screening Is a Powerful Tool for Investors

Did you know that the most popular, loved, and respected companies are usually not good stocks to buy? By the time you hear about how great the company is, the easy money has already been made.

Did you know that stocks that are making new highs are twice as likely to continue going higher than stocks that are 10% or more below their all-time highs?

Did you know that companies who raise their earnings estimates outperform those who don’t, by a factor of 2-to-1?

Did you know that companies that are being upgraded by analysts outperform those being downgraded, by a factor of 5-to-1?

There is a better way to find winning stocks

How do you find stocks that have the characteristics that make them attractive candidates for buying? You could do what most investors do, and spend hundreds of hours painstakingly evaluating scores of companies, looking for those rare diamonds in the rough. Or…

Or you could accomplish the same goal in a fraction of the time by using one of the most powerful tools an investor can have:

Factor-Based Screening Algorithm

All of these algorithms have been built by me - an investment nerd - but you don’t have to be one to use it. In fact, it’s so easy to use, you will end up saving time, effort, and frustration in your search for winning stock candidates. You will wonder why you didn’t find out about this tool sooner.

Why Should You Use a Factor-Based Screening Algorithm?

Because there are more than 15,000 stocks for you to choose from, and you need a way to find the ones that are poised to move higher. So, you have a few choices.

You could just buy the stocks that are touted by talking heads on TV, written about in the financial press, or offered for free on the internet.

You could get your tips from friends, business acquaintances, or family members.

You could call a psychic hotline, or pay a visit to Madam Ruth. (You know, that gypsy with the gold-capped tooth?)

But how much information do these people really have? How much research did they do? Are they just repeating rumors, making assumptions, or engaging in pure guesswork?

How do they know which stocks meet your standards?

You already know the answer: They don’t.

If you want to find stocks that meet your criteria, you can find them quickly and easily with a factor-based stock screener. But, just because you narrow down the list of 15,000 available stocks to just a few dozen, that doesn’t mean that you’ve identified the best stocks to buy right now. In fact, your list of candidates could be top-notch, but your timing could be awful. How will you know?


Where do we go from here?

Keep in mind, a screening program is not a silver bullet. Anybody who tries to sell you a trading system that they claim is guaranteed to beat the market is a probably just a charlatan. It’s a claim that can’t be made, except by hucksters and pirates.

The advantage of using a factor-based trading strategy is that it’s a great way to see what worked and what didn’t BEFORE you put your money at risk.

You can paper-trade the strategy at first, to get comfortable with the procedures and see how it performs in real time. After you tweak the parameters a little to suit your tastes, you are ready to go live.


“I don’t have the time or knowledge to build a strategy like this.”

You don’t have to build a strategy like this on your own, from scratch. You could, and many of my clients have done so, but it’s not the only way to go. You can outsource the research, design, backtesting, and maintenance to someone who does this for a living.

5 Screening Strategies That Make Money

You can easily master this tool without taking an expensive trading course or attending an expensive 3-day seminar. If you follow a set of simple, easy-to-learn trading rules, you'll have a much higher probability of succeeding.

Trading the Strategies

Each of the trading strategies has a clearly defined set of trading rules.

All stocks are purchased with an equal dollar amount. At the end of the holding period (4 weeks), the screen is run again, keeping the stocks that remain qualified, selling the stocks that no longer qualify, and replacing them with new stocks that do qualify.

The Holding/Rebalancing Period is the amount of time a stock will be held once it qualifies for inclusion in the portfolio. In most cases, the holding period is four weeks (unless otherwise indicated).

Calculating Performance

At the beginning of each holding period, a list of stocks is generated. The period’s returns are calculated using the % change in price from the beginning of the holding period to the end of the holding period.

Win Ratio: the number of winning (profitable) holding periods out of the total number of available holding periods within the backtested time span. For example; if there were 39 winning holding periods out of a total of 52 available holding periods, the win ratio would be 75%.

The returns for the portfolio is the arithmetic mean of the returns for the individual companies in the portfolio. Compounded performances (when stated), were calculated by taking a hypothetical starting equity amount and calculating the total return for the period. Each subsequent period then used the resulting equity balance as its start to calculate that period’s total return.

No allowance was made for commissions, fees, trading friction, or any other cost constraints, in any of the performance calculations.

Strategy #1. Zen High Quality

Parameters: Strong balance sheet, rising earnings and earnings estimates, and recent analyst upgrades.

For this strategy we define high quality like this.


  • Quality of earnings (earnings that are increasing steadily and come from improving productivity).
  • A strong balance sheet. little or no debt, strong free cash flow, and high return on capital.
  • An expanding market share, improving return on equity, and increasing profit margins.
  • A positive change in earnings estimates for the current quarter and fiscal year.
  • Recent ratings upgrades from the analyst community.

The Results

Over the last 10 years, the Zen High Quality strategy delivered an average annual return of 19.4%.

And it was up 29.2% in 2020.

Strategy #2. Zen Value

Parameters: Cheaply priced with one or more catalysts for a rebound.

For this strategy we define high value like this.


  • Low P/E relative to its peer group.
  • Low P/FCF relative to its peers.
  • Strong balance sheet.
  • Belongs to an out-of-favor industry that's showing signs of improvement.

The Results

Over the last 10 years, the Zen Value strategy delivered an average annual return of 16.9%. And it was up 20.0% in 2020.

Strategy #3. Zen Earnings Leverage

Parameters: Rising earnings and earnings estimates, and recent analyst upgrades.

For this strategy we define earnings leverage like this.


  • Rising earnings expectations after an earnings miss that knocked down the stock price.
  • A 10% rise in reported earnings that will spur a 20% (or more) increase in the stock price.
  • A new source of earnings from acquisitions or productivity improvements. 

The Results

Over the last 10 years, the Zen Earnings Leverage strategy delivered an average annual return of 13.5%.

And it was up 9.6% in 2020.

Strategy #4. Zen Sector Rotation

Parameters: Changes in the relative strength of sectors based on where we are in the business cycle.

For this strategy we define sector rotation like this.


  • Of the 11 sectors, identify the top 3 that have the highest potential for price improvement.
  • Downgrade sectors that have become over-valued.
  • Upgrade sectors that are poised to move up in attractiveness based on economic conditions.

The Results

Over the last 10 years, the Zen Sector Rotation strategy delivered an average annual return of 15.5%.

And it was up 27.9% in 2020.

Strategy #5. Zen Smart Money

Parameters: Top picks from my personal contacts with traders and analysts at top Wall St. firms.

For this strategy we define smart money like this.


  • Traders and analysts who have proven their ability to identify winning stocks early.
  • Large institutional investors who are just starting to build positions in attractive stocks.
  • Pairs traders with a knack for identifying over-and-under valued stocks from the same industry.

The Results

Over the last 10 years, the Zen Smart Money strategy delivered an average annual return of 16.6%. And it was up 24.5% in 2020.

Click the Button Below to See Pricing Information

A Well-Designed Factor Based Trading Strategy Can Beat The Market By A Factor of 3X.