Automate Your Strategy in Five Steps with Smartfolios

Automate Your Strategy in Five Steps with Smartfolios

In my last post Stockyard: The Investing Platform That Never Panics, I explained what a Smartfolio is: a virtual portfolio that applies your rules to over 5,000 NYSE and NASDAQ stocks every day and generates buy and sell signals when those rules are met.

So what do the rules actually look like? Every Smartfolio answers five questions. You can answer all of them in detail, or skip most of them. That flexibility is the point, and I'll come back to it.

1. Universe - Where should I look?

This is your universe. Leave it empty, and a Smartfolio considers every stock. Or narrow it down by index and by sector.

This is where thematic strategies live. Every company in Stockyard is classified by how much of its revenue comes from each sector: Pureplay, Core, Diversified, or Emerging. So your universe can be as specific as "Russell 1000 companies that are pureplays in cybersecurity."

That distinction changes the bet. Pureplay companies give you concentrated exposure to a theme, with the volatility that comes with it. Including Diversified companies is steadier, but the theme is a smaller part of each business. Neither is right. They're different choices, and now you can make them on purpose.

2. Price (Valuation) - What am I willing to pay?

These are optional price (valuation) filters: market cap, P/E, PEG, Price-to-Sales, Enterprise Value to Revenue, Market Cap to Cash Flow, Dividend Yield.

This is where value strategies live. The idea: good businesses sometimes trade for less than they're worth, and patience gets rewarded when the market notices.

The trade-off: value investing has gone through long stretches of lagging the market. And some cheap stocks are cheap for a reason. They stay cheap.

3. Fundamentals - How healthy is the business?

Under the hood, a Smartfolio can screen on dozens of fundamentals. But they come down to a few plain questions:

• Is it growing? Revenue, earnings, and cash flow growth, measured quarterly or annually.
• Is it profitable? Gross and operating margins, and whether they're improving.
• Is it getting better? Accelerating growth, not just growth.
• Is it beating expectations? Earnings surprises when results come out.

Blended metrics: Some measures answer two questions at once. The Rule of 40, for example, weighs growth against profitability.

Percentile rankings: You can set each hurdle two ways. An absolute hurdle, like revenue growth above 20%, means something very different in a boom than in a recession. A percentile hurdle, like revenue growth in the top 20% of the market, adjusts automatically.

Multi-quarter Consistency: You can also require a hurdle to be met several quarters in a row. One great quarter is noise. A company that clears the bar four quarters running is telling you something about the business.

Put those together, and you can ask sharper questions. Take earnings surprises. Any company can beat expectations once. A Smartfolio can look for the ones that do it consistently, and with a percentile hurdle, for the ones that surprise the most, quarter after quarter. Add earnings growth and revenue growth, and you're looking for businesses that keep growing and keep outperforming analyst expectations.

This is where growth strategies live. The trade-off: growth stocks are often priced for continued success, and when growth slows, the price can fall fast. Which brings us to the last two questions.

4. Technicals - Buy Signal - When should I buy?

By default, a Smartfolio acts right after a company reports earnings, when the fundamentals are fresh.

But you can add a buy enabler and a buy trigger: the enabler is the first hurdle, the trigger the second. When both happen, a buy signal fires. The enabler can look at the stock itself or look at the market. 

For example, the enabler can look at the RSI (Relative Strength Index), a momentum indicator, of the S&P 500 market.  This kind of enabler waits for the market to go on a new uptrend before looking for a buy trigger. The trade-off: those conditions don't come around often, and by the time the signal comes, the rebound may already be underway.

The buy trigger looks for a specific technical price pattern in the stock, such as a breakout. There are many triggers supported.

5. Technicals - Sell Signal - When should I sell?

This is where discipline lives. Sell signal rules are simple on purpose: take profits at a target, sell on a trailing stop, or sell after a set number of days.

Each one is a decision made in advance, when you were calm. A trailing stop signals a sell when you'd be tempted to hold on and hope. A profit target signals a sell when you'd be tempted to get greedy.

Even when a company stops meeting your fundamental criteria, the Smartfolio waits for a sell signal rule to trigger. The exit is decided by the rule you set, not by one quarter's numbers.

Any combination

Here's the part I care most about: almost nothing is mandatory. We deliberately kept the required choices to a minimum, so a Smartfolio can be as focused or as layered as your idea.

Fundamentals only. Look for high-growth companies, at any valuation, anywhere in the market.

Technicals only. Ignore fundamentals entirely and look for breakouts.

Theme only. Every pureplay in a sector you care about, and nothing else.

Or combine them: high-growth companies in a specific sector, bought when they break out. Add a valuation filter, a market-level buy enabler, or a trailing stop. Or don't.

Fundamentals, themes, and technicals, in virtually any combination. And if you think about the market in more than one way, as most experienced investors do, you can run a separate Smartfolio for each idea.

Different Smartfolios for different markets

That specificity has a consequence. Every strategy has conditions it's built for and conditions it isn't. A growth Smartfolio in a market that's punishing growth stocks should go quiet. A Smartfolio waiting on the S&P's RSI should do nothing at all in a calm market.

That's not a flaw. It's the point. When a Smartfolio sits idle, the rule is working.

As an engineer, I think of each Smartfolio as a filter. It passes the signal it was designed for and ignores everything else. A filter that passed everything would be useless.

That's another reason to run several Smartfolios at once. When one is idle because conditions don't fit, another may be active.

What about the money that isn't in a Smartfolio?

In my first post Four Crashes. Three Lessons. One Investing Platform, one of my three lessons was that it's important to be in the market. So what happens to money waiting for a signal?

One approach some investors take is to hold a broad index fund, such as one that tracks the S&P 500, with any money not committed to specific stocks. The index keeps them in the market. The Smartfolios decide where to be more selective, and when.

Try one

Every Smartfolio is backtested automatically the moment you create it, so you immediately see how its rules would have behaved over the past year. A year is a first look, not proof. But it beats acting on a hunch that was never tested at all.

Start with a pre-built Smartfolio to see how one behaves, or build your own around the idea you've always wanted to test.

Stockyard is in beta. I'm inviting early readers to become founding members — locked-in pricing for life, a direct say in what gets built next, and a badge that says you were here first. Sign up for free at stockyardinvest.com - founding members get Pro free until we launch.