A System Guy's Approach to Investing

A System Approach to Investing in Uncertain Markets

(A New Venture for Control Retirees)

Iman Khademi and Kemin Zhou

September 24, 2013

Congratulations to Keith

Your New Life Venture Starts Today!

I Have A Dream

To retire as early as possible so that I can do whatever I want can choose any subject

of research I am interested in

have no need to write proposals for funding

can fund my own research

Reality

• No heritage from a rich Dad

• No hope to win a lottery

• Not dare to rob a bank, too dangerous and illegal

• Not fit to start a business

• ……

Only Solution For Me

Rob Wall Street

Ethically and Legally!!!

How to Get Ready for Retirement

Investment Each Year

Annualized return rate

20 years after

30 years after

$10,000 5% 347,193 697,608

$10,000 10% 630,025 1,809,434

One Time Investment

Annualized return rate

5 years after

20 years after

$100,000 5% 265,330

$100,000 15% 1,636,654

$100,000 80% 1,889,568

Ideal Case for Me (I do not have that much time left)

Initial investmen

t

Annualized return rate

3 years after

5 years after

10 years after

$200,000 25% 610,351 1,862,645

$200,000 60% 2,097152

$500,000 30% 1,856,465

$500,000 60% 2,048,000

Reality Check!!!

1/1/1990-12/31/1999

1/1/2000-12/31/2009

1/1/2010-12/31/2012

1/1/1990-12/31/2012

Annualized return

S&P 500 309% -24% 28% 297% 6%

Nasdaq 786% -44% 33% 558% 8.5%

SPY (S&P500)

-10% 37% 1.5%

QQQ (Nasdaq 100)

-49% 45% -2.4%

• Most mutual funds did worse.

SPY (S&P 500)

QQQ (Nasdaq 100)

London: FTSE100

Australia: All Ordinaries

Hong Kong: Hang Seng Index

China: Shanghai Index

Stock Market

The only certainty in any stock market is uncertainty

That is where robust control people may play a role

Most Stock Market Investors

It is Ok. It will go up, I am a long-term investor.

risky

The best opportunity

Success in Stock Market

• Does not have much to do with your intelligence.

• Smart people are more likely to lose a lot more.

• Believe in yourself in stock market, not the market, is the formula for catastrophes.

Isaac Newton

• Isaac Newton lost 20,000 pounds (about $3 million today) due to his speculation in the South Sea Company stock in the 1720s during the bubble.

• “I can calculate the motion of heavenly bodies, but not the madness of people.”

Warren Buffett • Made his fortune by investing

in stock market • His company stock: 10% per

year

It is quite easy to beat Warren Buffett?

Buy or Sell?

It is getting cheaper. Buy more or take the profit now?

I should have Held My Stock! Let Me Buy More.

Many individual investors could not hold anymore and will sell here

It is Ok. It will come back up.

I learned my lesson and I will hold it this time.

Now it is really cheap! Let me buy more.

Really smart buy!

God, I should have never bought more. I have lost too much. I am given up.

Why I am so unlucky?

Dujiangyan Irrigation Project

(Chengdu，256 BC)

To Make $$$$$, Follow Institutional Money

Jesse Livermore's Trading Rules

One of his favorite principles: "There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again." • Trade in the direction of the general market. • Buy rising stocks and sell falling stocks. (Go

long when stocks reach a new high. Sell short when they reach a new low.)

• Never average losses (e.g., buying more fallen stocks).

Mutual Funds and Exchange Traded Funds (ETFs)

• Mutual Funds: A Broad Portfolio of Constituent Stocks for Small Investors;

• Exchange Traded Funds: Stock-Like Mutual Funds or Investment Units, Usually Tracking a Market Index; –QQQ Tracks NASDAQ-100

–IWM Tracks Russell-2000

–SPY Tracks S&P-500

Efficient Market Hypothesis

• Efficient Market Hypothesis (EMH):

– Price Movements Modeled by Random Walk;

– Best Prediction for Tomorrow’s Price: Today’s Price!

– No Gain in Technical or Fundamental Analysis;

– Source of Randomness:

“Active participation of every investor to obtain greater wealth”

~ Sornette

Efficient Market Hypothesis

• EMH Criticism: – Lo and MacKinlay in Non-Random Walk Down

the Wall Street:

“Financial markets are predictable to some degree!”

“Predictability is the oil that lubricates the gears of capitalism”

– Grossman and Stiglitz:

“The perfectly informationally efficient markets are impossible”

Fractal Market Hypothesis (FMH)

• Liquidity; • Different Investment Horizons as

Sources of Liquidity; • Stable Market vs. Efficient Market:

Stable market = Liquid Market

• Low Liquidity: Major Cause of Stock Market Crashes;

“Be fearful when others are greedy and greedy

when others are fearful”

~ Warren Buffet

Market Timing: Problem Statement

• To find appropriate times and appropriate stocks to get in or out of the market or to go short or long!

• Assumption: Liquidity (Uncontrollability!!)

Fundamental Analysis

• There is a “Correct Price” for Every Stock; • Stock Prices Fluctuate Around Their

“Correct Price”; • Achieving Profit in a Short-Time from

Mispricing; • To Find the “Correct Price”:

– Study Financial Statements of the Underlying Company, e.g. P/E Ratio, Company’s Capital, Debts, etc!

– Performance of Its Competitors; • Appropriate for the Stock of Individual

Companies;

Technical Analysis

• Using Price and Volume to Catch the Market Trends;

• Daily Prices: Open, High, Low and Close;

• OHLC Charts

• Create a Set of Technical Indicators:

– Exponential Moving Averages (EMAs),

– Stochastic Oscillators, – MACD,

– NASDAQ Summation Index (NASI),

– Distribution Days,

– …

• Appropriate for Large Indexes, ETFs, Mutual Funds;

Mechanical Trading System

Mechanical Trading System

• Economy Observer:(Monthly Data) – Benchmark: S&P 500,

– Unemployment Rate,

– Level of Margin Debt,

– Commodity Price Index,

– Industrial Production Index;

• Technical Trader:(Daily Data)

– Benchmark: NASDAQ Composite,

– Volume, Price, NASI

Moving Averages

Moving Average Convergence Divergence (MACD)

1. MACD line (Black): Difference between 12-period and 26-period MA 2. Signal line (Red): 9-period MA of MACD line

Moving Average Crossover Strategy

10/29/99 11/29/00 12/28/00 1/26/00 2/24/00 3/23/00

3000

3500

4000

4500

5000

10/29/99 11/29/99 12/28/99 1/26/00 2/24/00 3/23/00-1

-0.5

0

0.5

1

Price

EMA(50)

Spectral Technical Analysis(STA): Relative Crossover System(RCS)

• Consider the Following 2-Variable Function: 𝑓 𝑥, 𝑦 = 1 𝑥 . 1 −𝑦 +

𝑥 − 𝑦

𝑥. 1 𝑥 . 1 𝑦 . 1(𝑥 − 𝑦)

• If 𝑥 > 0, 𝑦 < 0 Then 𝑓 𝑥, 𝑦 = 1

• If 𝑥 > 𝑦 > 0 Then 𝑓 𝑥, 𝑦 =𝑥−𝑦

𝑥< 1

• Otherwise 𝑓 𝑥, 𝑦 = 0

Spectral Technical Analysis

• Let’s 𝑃(𝑘) and 𝐸(𝑘) be the daily stock price and an exponential moving average of it:

• Set:

𝑥 = 𝑃 𝑘 − 𝐸(𝑘) 𝑦 = 𝑃 𝑘 − 1 − 𝐸(𝑘 − 1)

• Then 𝑓(𝑥, 𝑦) generate partial “Buy” signals!

• What if we want to get sell signals?

An Example: STA Applied to NASDAQ Composite Index

10/29/99 11/29/99 12/28/99 1/26/00 2/24/00 3/23/002000

3000

4000

5000

6000

10/29/99 11/29/99 12/28/99 1/26/00 2/24/00 3/23/00-1

-0.5

0

0.5

1

Price

EMA(50)

Spectral Technical Analysis Algorithm

• Create a Weighted Summation of “Buy” and “Sell” Signals From Appropriate Indicators to Generate “Buy” and “Sell” Signals:

𝐵𝑢𝑦 = 𝛼𝑖 . 𝐵𝑢𝑦𝐼𝑁𝐷𝑖𝑖

𝑆𝑒𝑙𝑙 = 𝛽𝑖 . 𝑆𝑒𝑙𝑙𝐼𝑁𝐷𝑖𝑖

• Find a “Threshold Level” for “Buy” and “Sell” Signals to Get the “Buy” and “Sell” Commands.

Back-Testing Results: NASDAQ Composite Test 1998 to 2013 With $1 as Initial Capital

Specs Long/Short Long-Only

Total Net Profit $175.3 $18.53

Total Number of trades 54 35

Percent of Profitable 79.25% 79.41%

Return on Initial Capital 17,530% 1,853%

Buy&Hold Return 107%

Annual Rate of Return 40.76% 21.71%

Back-Testing Results: QQQ Test 1999 to 2013 With $1 as Initial Capital

Specs Long/Short Long-Only

Total Net Profit $160.6 $14.32

Total Number of trades 52 33

Percent of Profitable 76.47% 78.13%

Return on Initial Capital 16,060% 1,432%

Buy&Hold Return 59.54%

Annual Rate of Return 42.61% 20.99%

Back-Testing Results: QLD Test 2007 to 2013 With $1 as Initial Capital

Specs Long/Short Long-Only

Total Net Profit $70.95 $12.53

Total Number of trades 27 17

Percent of Profitable 81.25% 81.25%

Return on Initial Capital 7,095% 1,253%

Buy&Hold Return 97.5%

Annual Rate of Return 92.67% 49.44%

Back-Testing Results: TNA Test 2009 to 2013 With $1 as Initial Capital

Specs Long/Short Long-Only

Total Net Profit $21.71 $13.08

Total Number of trades 16 12

Percent of Profitable 60% 54.55%

Return on Initial Capital 2,171% 1,308%

Buy&Hold Return 268.1%

Annual Rate of Return 93.9% 75.2%

Comparison:

Investor Business Daily’s Market Outlook Signals

Investors Business Daily: Investors.com

Interpretation of IBD Signals:

• Buy Signal: “Confirmed Uptrend” or

“Follow Through Day”;

• Sell Signal: “Uptrend Under Pressure”

and “Market In Correction”;

• Short Selling: “Market in Correction”;

Specs STA Timing System IBD Market Outlook

Total Number of Trades 13 30

Percent of Profitable Trades 69% 50%

Return on Initial Capital 153.66% 64.05%

Annual Return 20.46% 10.41%

Comparison: STA vs. IBD Market Outlook Signals(2008-2012)

• “Long-Only” Strategy:

• “Long/Short” Strategy:

Specs STA Timing System IBD Market Outlook

Total Number of Trades 26 61

Percent of Profitable Trades 62% 52%

Return on Initial Capital 381.79% 74.71%

Annual Return 36.96% 11.81%

Comparison:

VectorVest Market-Timing Signals

VectorVest: vectorvest.com

Vectorvest.com Market Timing

Comparison: STA vs. VectorVest Timing Signals(2008-2010)

• “Long-Only” Strategy:

• “Long/Short” Strategy:

Specs STA Timing System VectorVest

Total Number of Trades 6 7

Percent of Profitable Trades 67% 71%

Return on Initial Capital 70.61% 13.76%

Annual Return 30.62% 6.66%

Specs STA Timing System VectorVest

Total Number of Trades 12 14

Percent of Profitable Trades 55% 50%

Return on Initial Capital 163.13% 34.19%

Annual Return 62.17% 15.84%

Questions: There must be many

institutions and investors tried various methods,

why this method works? Why other methods do

not work?

My Answer:

• They do not know Robust Control Theory!

• Works well for ETF funds, not for individual stocks (ETF is only available in recent years)

• Less risk (ETF holds large number of stocks) and more reward (a few bad companies do not affect much of the total return)

• Does not work well for large positions (in billions of $) : Not easy to get in and out

• No frequent trading: Average of 5 trades per year!

Long-Term Comparison with:

Domestic and International Indexes,

Bonds and Treasury Bills

Annual Total Return(%) Total Return (%)

3-Yr 5-Yr 10-Yr Bull Bear

STA Algorithm

QQQ(Long) 25.45 24.94 23.12 72.3 12.71

QQQ(Long/Short) 31.95 42.46 33.19 94.89 148.1

QLD(Long/Short) 71.71 104.04 - 196.43 691.82

INDEXES(Domestic)

S&P 500 (EW) 12.7 4.8 10.2 156.5 -53.7

S&P 500 10.9 1.7 7.1 110.6 -50.9

S&P Mid Cap 400 12.0 3.5 9.0 127.0 -50.4

S&P Small Cap 600 14.1 5.1 10.5 142.5 -51.3

INDEXES(International)

MSCI World 7.5 -0.6 8.1 98.3 -53.6

MSCI EAFE 4 -3.2 8.7 84.2 -56.3

BOND INDEXES

BarCap Long Gov. 13.6 9.6 7.6 41.8 16.0

BofA ML High Yld Bond 11.6 9.9 10.2 113.6 -26.2

Treasury Bills 0.1 0.5 1.8 0.5 2.8

Long-Term Comparison with:

Mutual Funds: Top 50 Most Widely Held

Funds

Annual Total Return(%) Total Return (%)

3-Yr 5-Yr 10-Yr Bull Bear

STA Algorithm

QQQ(Long) 25.45 24.94 23.12 72.3 12.71

QQQ(Long/Short) 31.95 42.46 33.19 94.89 148.1

QLD(Long/Short) 71.71 104.04 - 196.43 691.82

FUNDS

Dodge & Cox Intl Stk 4.9 -1.9 11.6 117.2 -59.9

Vanguard Total Intl Stk Idx Inv 3.9 -3.1 9.4 92.6 -58.5

Fidelity Low-Priced Stk 12.6 4.8 11.1 133.9 -48.8

Fidelity Grth Company 12.8 3.7 10.9 127.5 -50.2

T. Rowe Price Mid Gr 12.9 4.8 11.5 133.6 -48.2

Permanent Port 12.9 4.8 11.5 133.6 -48.2

Oakmark Intl I 8.8 3.5 11.2 147.2 -54.9

Fidelity Blue Chip Grth 11.0 4.0 7.1 128.6 -48.8

Vanguard PrimeCap Inv 8.5 3.0 9.9 100.6 -44.3

Last Five Years Comparison with:

Mutual Funds: Top 10 Performers for 2012

Annual Total Return(%) Total Return (%)

2012 2011 2010 2009 2008 Bull Bear

STA Algorithm

QQQ(Long) 20.88 17.14 39.42 34.63 14.55 72.3 12.71

QQQ(Long/Short) 27.07 17.2 52.03 17.29 124.49 94.89 148.1

QLD(Long/Short) 61.71 33.57 134.37 37.85 406.8 196.43 691.82

FUNDS

Fidelity Sel Constr& Hous

38 2.8 21.5 22.9 -26.9 181.1 -50.2

Fidelity Sel Biotech 36.5 18.1 11.4 10.7 -11.4 115.6 -25.4

Fairholme 35.8 -32.5 25.4 39.0 -29.8 101.8 -47.8

Artisan Intl Sm Cap Inv 34.6 -15.3 14.3 58.1 -51.4 141.3 -61.0

Wasatch Intl Gr 33.0 -12.1 34.2 64.1 -54.0 206.9 -65.9

Walthausen SmCp Value 32.1 -6.0 41.8 42.3 - 241.1 -

T. Rowe Price Health Sci 31.9 11.0 16.3 32.1 -28.8 147.9 -35.6

Matthew 25 31.6 10.4 31.9 47.8 -40.5 245.8 -56.9

Matthews India Inv 31.5 -36.5 32.5 97.2 -62.4 3.4 3.9

TIAA-CREF Intl Eq Rtl 30.8 -23.9 19.6 31.8 -49.7 96.3 -61.3

14-Year Comparison with:

Stock Screens of the American Association

of Individual Investors (AAII)

Historical Annual Return of Stock Screens on AAII's Web Site Vs. STA

STA Avg 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

QQQ(Long) 19.6 20.9 17.1 39.4 34.6 14.6 21.0 14.7 12.5 17.2 50.3 -14.4 57.4 -8.7

QQQ(Long/Short) 43.4 27.1 16.6 52.0 17.3 124.5 30.9 14.5 9.8 24.1 50.3 17.3 274.7 34.9

QLD(Long/Short) 104.0 61.7 33.6 134.4 37.9 406.8

TNA(Long/Short) 90.5 73.8 8.4 288.3 80.0

Value

Cash Rich Firms 9.5 10.5 -32.8 14.4 56.9 -38.0 7.7 17.2 -2.5 18.6 64.0 -9.4 20.1 40.5

Dogs of the Dow 1.4 9.6 10.7 19.4 8.1 -45.4 -1.8 26.8 -9.8 -1.3 20.4 -9.8 -1.2 4.1

Dogs of the Dow: Low Priced 5 0.4 15.7 13.1 17.3 -7.7 -58.7 -2.7 34.9 -11.8 6.1 17.6 -6.5 7.2 3.2

Fundamental Rule of Thumb 12.6 -6.9 -35.2 17.7 92.1 -41.5 4.1 31.0 5.0 49.6 83.3 4.7 42.3 28.7

Graham--Defensive Investor (Non-Utility) 16.9 18.9 7.0 31.4 57.9 -32.0 20.6 26.6 26.2 11.7 32.7 3.1 61.5 12.0

Graham--Defensive Investor (Utility) 7.5 1.2 8.6 4.6 7.9 -18.4 1.8 29.4 18.5 16.2 16.6 -15.9 5.2 51.4

Graham--Enterprising Investor 17.9 1.1 -1.1 43.5 48.5 -40.7 28.1 72.3 21.3 18.9 25.9 43.5 55.3 24.2

Graham--Enterprising Investor Revised 22.0 -4.9 -4.1 32.9 168.4 -22.6 29.4 34.5 48.2 10.2 50.1 2.2 65.8 -1.4

Magic Formula 10.1 7.9 -30.6 26.6 97.0 -36.3 -5.6 27.9 -9.2 6.5 66.6 6.3 76.1 1.0

O'Shaughnessy: Value 4.7 20.3 -11.2 7.4 31.5 -49.1 -4.2 24.4 2.2 20.2 47.2 -12.1 10.6 22.3

Piotroski: High F-Score 25.8 91.7 -36.4 138.8 34.6 -35.3 1.8 8.1 37.8 37.7 131.6 7.6 76.3 -2.8

Price-to-Free-Cash-Flow 17.0 1.1 -7.0 39.2 147.2 -41.5 -21.2 26.6 10.6 30.9 61.7 13.6 63.8 17.8

Schloss 11.0 13.1 -35.1 12.5 57.5 -23.1 -8.1 30.1 20.0 -26.6 140.7 -0.1 20.5 14.9

Weiss Blue Chip Div Yield 10.4 19.2 7.6 26.9 27.9 -26.2 4.5 14.2 6.4 13.6 48.9 -14.1 25.6 18.8

Historical Annual Return of Stock Screens on AAII's Web Site Vs. STA

STA Avg 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

QQQ(Long) 19.6 20.9 17.1 39.4 34.6 14.6 21.0 14.7 12.5 17.2 50.3 -14.4 57.4 -8.7

QQQ(Long/Short) 43.4 27.1 16.6 52.0 17.3 124.5 30.9 14.5 9.8 24.1 50.3 17.3 274.7 34.9

QLD(Long/Short) 104.0 61.7 33.6 134.4 37.9 406.8

TNA(Long/Short) 90.5 73.8 8.4 288.3 80.0

Value With Price Momentum

Lakonishok 13.7 7.5 -0.6 32.7 53.5 -23.7 15.1 14.4 14.0 31.2 39.9 -5.2 -3.5 36.7

O'Shaughnessy: All Cap 11.1 12.4 -5.0 29.4 23.3 -40.9 12.5 24.1 21.9 47.4 28.7 -11.8 63.7 6.3

O'Shaughnessy: Growth 15.9 28.8 -7.5 21.3 22.4 -38.2 12.6 17.2 14.4 45.1 90.3 10.1 19.2 11.5

O'Shaughnessy: Growth Market Leaders 5.7 15.8 -1.2 15.7 12.6 -44.5 15.5 9.6 18.9 6.7 26.2 -8.9 5.7 -9.0

O'Shaughnessy: Small Cap Growth & Value18.0 30.3 -0.3 26.1 -3.3 -32.4 29.6 36.2 19.1 26.8 107.5 0.8 13.4 13.2

O'Shaughnessy: Tiny Titans 23.7 20.0 -22.9 21.1 71.1 -56.4 2.2 35.2 7.5 45.8 154.8 51.9 84.1 -6.6

Growth

Dual Cash Flow 12.9 5.1 -21.6 31.0 76.0 -46.8 -7.3 20.4 10.4 24.7 66.9 -13.9 24.6 5.7

IBD Stable 70 10.1 24.6 3.7 21.2 56.0 -37.2 -10.6 6.9 1.8 29.0 48.4 -11.0 9.5 23.9

Inve$tWare Quality Growth 5.7 19.7 -9.4 17.3 39.6 -24.1 -10.9 0.9 14.9 18.0 33.3 -25.0 8.0 18.5

Return on Equity 12.1 10.1 -5.7 32.0 40.0 -33.8 7.2 8.7 17.6 23.9 46.9 -3.8 18.1 31.4

Historical Annual Return of Stock Screens on AAII's Web Site Vs. STA

STA Avg 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

QQQ(Long) 19.6 20.9 17.1 39.4 34.6 14.6 21.0 14.7 12.5 17.2 50.3 -14.4 57.4 -8.7

QQQ(Long/Short) 43.4 27.1 16.6 52.0 17.3 124.5 30.9 14.5 9.8 24.1 50.3 17.3 274.7 34.9

QLD(Long/Short) 104.0 61.7 33.6 134.4 37.9 406.8

TNA(Long/Short) 90.5 73.8 8.4 288.3 80.0

Growth & Value

Buffett: Hagstrom 13.8 13.0 8.2 27.7 30.0 -25.8 14.4 11.3 11.4 27.6 35.2 -8.7 13.9 11.4

Buffettology: EPS Growth 9.7 17.4 3.8 20.5 57.5 -36.9 5.8 8.8 11.9 13.2 32.8 -10.9 25.7 5.9

Buffettology: Sustainable Growth 10.4 8.8 0.7 18.4 68.0 -28.9 3.9 8.7 9.5 17.5 37.6 -11.9 29.7 3.3

Dividend (High Relative Yield) 7.7 9.8 3.0 19.4 16.4 -21.4 -9.6 14.5 -1.0 19.1 27.9 0.4 24.1 23.3

Dividend Screen: DRPs 7.7 10.9 1.9 19.8 29.4 -24.2 -21.2 20.9 -1.5 17.4 28.3 -1.2 38.9 27.7

Dividend Screen: Non-DRPs 12.4 18.1 4.3 25.3 25.4 -31.7 -7.6 17.1 7.1 22.8 40.5 28.6 54.7 16.5

Dreman 9.9 20.6 -11.7 22.7 37.2 -34.9 -17.5 19.3 18.7 24.2 37.7 8.3 26.4 38.0

Fisher (Philip) 2.2 -0.6 -50.9 9.2 107.9 -43.1 8.2 -1.2 -11.7 -3.9 78.1 -10.7 70.7 -16.7

Foolish Small Cap 8 Revised 16.0 41.8 -49.2 15.4 161.0 -60.6 13.5 44.6 15.3 -3.9 67.8 22.2 29.5 51.5

Kirkpatrick Bargain 8.3 14.9 3.6 9.4 22.2 -25.3 44.2 25.2 29.1 33.4 14.6 -18.4 -5.3 22.6

Kirkpatrick Value 11.1 19.4 -15.1 -25.5 -8.9 -3.7 77.8 18.5 88.2 16.6 45.6 -36.3 40.8 63.9

Lynch 11.7 0.7 -27.9 24.9 82.8 -37.3 11.7 15.6 7.8 59.8 59.0 -7.2 39.3 3.2

Murphy Technology -4.1 42.3 -29.8 40.0 28.8 -49.7 -15.8 -1.9 34.1 107.9 -33.7 -79.6 26.7 -52.1

Neff 18.2 15.0 -4.2 35.0 52.5 -33.6 -13.9 13.9 7.7 29.5 85.1 15.0 65.2 37.3

Price-to-Sales 14.8 11.3 -2.6 29.6 47.1 -38.5 2.4 16.6 16.9 11.1 69.8 1.3 43.3 23.3

Rule #1 Investing 9.9 11.3 -1.0 40.0 99.8 -43.2 -11.7 2.5 -6.7 13.5 48.0 -29.4 38.0 15.0

T. Rowe Price 9.0 -15.0 117.4 11.9 40.1 -47.8 -7.1 -11.3 23.1 44.9 39.2 -15.1 8.4 35.2

Templeton 9.8 31.0 3.2 22.4 54.7 -36.6 4.6 5.3 4.7 22.2 46.8 -32.6 22.0 20.3

Wanger (Revised) 7.8 23.5 -5.2 12.5 24.7 -36.3 15.9 16.5 14.5 22.5 53.2 -13.1 21.1 -2.8

Historical Annual Return of Stock Screens on AAII's Web Site Vs. STA

STA Avg 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

QQQ(Long) 19.6 20.9 17.1 39.4 34.6 14.6 21.0 14.7 12.5 17.2 50.3 -14.4 57.4 -8.7

QQQ(Long/Short) 43.4 27.1 16.6 52.0 17.3 124.5 30.9 14.5 9.8 24.1 50.3 17.3 274.7 34.9

QLD(Long/Short) 104.0 61.7 33.6 134.4 37.9 406.8

TNA(Long/Short) 90.5 73.8 8.4 288.3 80.0

Growth With Price Momentum

Driehaus 11.9 16.7 -14.1 65.7 106.0 -42.7 28.9 41.4 4.3 -10.8 87.8 -42.6 -27.4 -8.3

Foolish Small Cap 8 11.1 16.9 -14.9 25.2 48.1 -53.5 -2.8 9.4 22.6 10.1 107.7 -19.4 -8.6 24.2

Kirkpatrick Growth 16.2 -9.8 -11.6 15.3 80.2 -34.0 87.2 16.2 35.2 -1.5 100.3 -9.1 -9.8 -11.4

O'Neil's CAN SLIM 24.3 18.0 -10.2 -9.6 97.3 -10.5 30.4 29.5 24.1 -3.8 79.0 20.5 54.4 38.0

O'Neil's CAN SLIM Revised 3rd Edition 14.4 7.3 -30.1 42.7 16.8 -26.3 31.4 -5.4 -1.0 -2.6 74.7 -10.3 33.4 96.3

O'Neil's CAN SLIM No Float 15.8 8.9 -3.9 20.6 36.9 -49.7 35.4 12.8 13.3 8.2 55.8 9.7 25.3 43.9

Growth & Value With Price Momentum

ADR Screen 6.4 1.4 -25.9 18.8 53.2 -58.7 25.3 44.7 12.9 14.5 82.3 -4.4 -5.3 9.9

MAGNET Complex 11.7 -19.6 6.9 -20.4 -31.1 -33.7 40.2 -28.6 26.2 18.6 9.1 4.1 110.6 3.1

MAGNET Simple 21.5 -12.4 19.5 56.1 339.5 -70.2 -17.0 72.1 58.1 38.1 62.1 -6.7 -21.7 -26.7

Muhlenkamp 5.1 -3.0 -45.9 2.7 45.2 -24.5 -20.8 2.0 23.6 31.0 41.2 5.9 43.5 22.2

Oberweis Octagon 13.0 32.6 -14.7 78.4 2.1 -56.8 29.1 24.0 4.1 42.3 67.8 -17.5 20.2 18.4

Stock Market Winners 20.0 13.6 21.2 124.6 -9.0 -34.7 13.0 -5.5 25.9 9.6 131.5 32.1 41.6 27.6

Value on the Move--PEG With Est Growth17.8 9.0 -0.3 29.7 24.2 -37.2 29.5 18.3 23.1 54.1 87.0 7.9 34.8 22.9

Value on the Move--PEG With Hist Growth12.9 4.3 1.0 31.7 23.9 -38.3 20.7 9.1 17.2 32.5 50.1 12.1 22.4 19.4

Historical Annual Return of Stock Screens on AAII's Web Site Vs. STA

STA Avg 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

QQQ(Long) 19.6 20.9 17.1 39.4 34.6 14.6 21.0 14.7 12.5 17.2 50.3 -14.4 57.4 -8.7

QQQ(Long/Short) 43.4 27.1 16.6 52.0 17.3 124.5 30.9 14.5 9.8 24.1 50.3 17.3 274.7 34.9

QLD(Long/Short) 104.0 61.7 33.6 134.4 37.9 406.8

TNA(Long/Short) 90.5 73.8 8.4 288.3 80.0

Earnings Estimates

Dreman With Est Revisions 15.2 13.0 21.6 26.5 62.9 -37.1 4.3 39.8 9.3 35.0 69.2 16.6 -29.9 38.7

Est Rev: Down 1.1 13.6 -15.2 26.8 57.6 -42.6 -20.0 12.9 -0.4 13.4 51.8 -43.8 26.7 -7.1

Est Rev: Down 5% -0.4 9.2 -31.1 30.3 76.0 -47.8 -24.7 26.1 2.5 8.0 70.9 -61.5 28.3 -4.2

Est Rev: Up 15.6 14.1 2.1 28.8 53.9 -31.2 13.7 21.8 17.3 25.2 57.3 0.8 -3.5 2.2

Est Rev: Up 5% 28.1 28.8 6.1 35.9 86.3 -18.4 25.7 40.3 24.5 25.8 75.0 12.9 -8.1 3.6

P/E Relative 15.9 14.3 -1.9 29.6 51.8 -15.8 3.9 21.2 17.2 24.7 51.1 11.1 16.1 20.3

Specialty

Insider Net Purchases -1.5 11.5 -31.4 7.4 59.0 -51.7 -10.9 4.8 -14.6 33.5 86.8 -20.9 21.8 -38.3

Indexes

S&P 500 2.6 13.4 -0.0 12.8 23.5 -38.5 3.5 13.6 3.0 9.0 26.4 -23.4 -13.0 -10.1

S&P 500 Growth (TR) 4.1 14.6 4.7 15.0 31.6 -33.9 9.1 11.0 1.1 7.0 27.1 -28.1 -16.1 -19.1

S&P 500 Value (TR) 4.0 17.7 -0.5 15.1 21.2 -38.5 2.0 15.3 8.7 15.0 30.4 -16.6 -8.2 -0.5

S&P MidCap 400 7.6 16.1 -3.1 24.9 35.0 -37.3 6.7 9.0 11.3 15.2 34.0 -15.4 -1.6 16.2

S&P MidCap 400 Growth (TR) 10.9 15.8 -0.9 30.6 38.1 -36.9 13.5 5.8 14.4 15.8 37.6 -19.7 -2.6 15.8

S&P MidCap 400 Value (TR) 7.2 20.1 -2.4 22.8 33.7 -33.4 2.7 13.4 10.8 17.2 33.8 -9.4 1.4 19.5

S&P SmallCap 600 6.5 14.8 -0.2 25.0 23.8 -32.0 -1.2 14.1 6.7 21.4 37.8 -15.3 5.7 11.0

S&P SmallCap 600 Growth (TR) 8.0 14.9 4.1 28.0 30.7 -32.2 5.6 10.6 7.3 24.3 38.5 -16.6 3.0 7.6

S&P SmallCap 600 Value (TR) 7.2 17.8 -1.2 24.7 20.6 -28.9 -5.5 19.6 8.5 21.1 39.2 -12.9 9.5 15.8

Dow Jones 30 3.4 7.3 5.5 11.0 18.8 -33.8 6.4 16.3 -0.1 2.6 25.3 -16.8 -7.1 -6.2

NASDAQ 100 6.7 16.8 2.7 19.2 53.5 -41.9 18.7 6.8 1.5 10.4 49.1 -37.6 -32.7 -36.8

All Exchange-Listed Stocks 9.1 14.8 -12.3 26.2 65.8 -46.3 -4.5 17.2 4.5 22.8 81.1 -13.3 21.2 -14.2

Real-Time Implementation (Launched on November 2012)

Return on Capital for Original Code (Nov. 26, 2012 to Sep. 6, 2013)

SYMBOLS Long Trades Short Trades Total

NASDAQ(IXIC) 22.95% No Trade 22.95%

QQQ(1x) 19.33% No Trade 19.33%

QLD(2x) 38.79% No Trade 38.79%

TNA(3x) 100% No Trade 100%

Thank you!