Mechanical Investing

Posted in Finance, Accounting and Economics Terms, Total Reads: 867

Definition: Mechanical Investing

Mechanical investing means investing in stocks based upon some predefined criteria. This method of investing helps traders or investors to invest only on the information that is available on the screen. They need not check the background of the company based on the historical data or the future prospects of growth of the company.

These types of investors just invest mechanically such as on the basis of yield or on the basis of highest return that the stocks generated in the past or the price to earnings ratio of the company or the price to sales ratio or the relative strength or momentum of the stock shown technically on screen or on the basis of dividend yield of the company etc. However, more complex mechanical investing strategies are possible based on technical charts or on the basis of complex financial models etc. According to efficient market hypothesis, market already takes into account all the available information in the market related to that particular stock and the same is reflected immediately in the rice of the stock. This style of investing may also be categorized into passive investing on contrary to active investing in which investors constantly watch the markets and invest according to the market behavior and also according to their own interpretation of market happenings.

But, in mechanical investing there is no place for any kind of emotion of the investors. It is solely done on the basis of the numbers generated on screen and hence all the power and anticipation of generating return is transferred to the computer screen. However, Warren Buffet, the man who made billions from the stock market believes in value investing. Since, he believes that the value of such particular stocks is mispriced by the market and is undervalued. However, value investing is also a kind of buy and hold strategy. One of the most common examples of mechanical investing is Dogs of the Dow Strategy. In this strategy, investors buy top ten stocks on the basis of dividend yields on Dow Jones Industrial Average index.

Hence, this concludes the definition of Mechanical Investing along with its overview.

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