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Strategy

The Formula Stocks Strategy

Formula Stocks is built around a standard that is simple to describe but difficult to replicate: buy high-quality businesses only when the stock offers an attractive expected return from today's price.

The strategy is not trying to own every great company, every fast grower, or every stock that looks cheap on one headline metric. It is trying to identify when a truly durable business, a sensible valuation, and a timely setup all come together at the same time, while continously re-evaluating risk & reward over time.

In practice

The research stack was built over 14 years and combines more than 200 distinct models. Each model behaves like its own strategy with its own way of evaluating quality, valuation, risk, and timing.

Those models are blended together so the final read is not dependent on one narrow style factor. Value, quality, growth, balance-sheet strength, and other perspectives all contribute to the final decision.

What the strategy looks for

A good business, a sensible price, and a reason to act now.

The first part is familiar. You want a business with durable economics, healthy finances, competent management, and a structure that can keep compounding over time. Most longterm investors agree on that much.

The second part is where discipline matters more. A wonderful company is not automatically a wonderful purchase. If too much optimism is already priced in, the future return available to a new buyer can be mediocre even while the business itself remains excellent.

The third part is timing in the practical sense, not in the headline-prediction sense. The strategy wants a setup where quality and valuation are working together right now. That is why the same stock can move from buy to hold to pass over time without anything dramatic happening to the underlying company.

How it works

A repeatable workflow, not a black-box hunch.

Formula Stocks uses over 200 internal models to evaluate thousands of stocks every month. Every internal model is created using the scientific method with a hypothesis that is heavily battle-tested and proven to work on it's own.

All models are then combined into a single strategy capable of analyzing the entire stock market from many investment perspectives. This matters because a human analyst is not just limited by time. A human analyst is also limited by attention, memory, fatigue, and biases.

01

Scan the full opportunity set

Over 200 models independently and continously evaluates every stock in the market from different investment perspectives.

02

Combine results

A master strategy evaluates the potential investments from all models attempting to find the best possible outcomes.

03

Using AI to narrow the field

AI is never used as a black box strategy, but to enhance and narrow down strategies based on sound princples.

04

Systematic re-evaluation

After a buy trade is completed, the system continously evaluates the stock to make sure the calculated risk and reward remains attractive.

An example

Apple, a great company with several entries.

Apple is a great example to show the Formula Stocks strategy in action because the underlying business has stayed exceptional for decades, and Formula Stocks bought and sold in Apple on 3 separate occasions. The strategy didn't sell because the company fundementals were broken. But reacted based on expected upside from the price at the time.

The strategy had multiple profitable entries across different years, followed by a clear pass in 2021 when the projected annual return fell and the AI Score turned sharply negative. Same business, same good fundementals. But a completely different trade at a higher evaluation.

The point of the framework is not to fall in love with a ticker. It is to keep asking the same question every month: is this still a strong business, and does the stock still offer a worthwhile reward to risk ratio from here?

December 2009

Buy when the quality and price lined up

AI Score: +20

Exited in 2011 at +111.00%

2013

Buy again when the setup reappeared

AI Score: +30

Exited in 2014 at +39.05%

2016

Re-enter when expected returns improve

AI Score: +20

Exited in 2017 at +56.97%

Final notes

This is not pure value investing, and it is not blind growth investing either.

The framework borrows from multiple traditions because each one captures something useful. Value investing helps with discipline. Quality investing helps with business selection. Rules-based exits help prevent attachment to stale ideas.

The result is a strategy that tries to keep both parts of the equation in view: what the business is worth owning, and what the stock is worth paying for.

Selected reading

A few of the books and essays that helped inspire the strategies. The goal is not imitation. The goal is to borrow durable ideas and apply them more systematically and consistently without human bias and cognitive limitations.

The Intelligent Investor by Benjamin Graham

The Superinvestors of Graham-and-Doddsville by Warren Buffett

Security Analysis by Benjamin Graham

Formula StocksFormula Stocks

Beat the market with a technological advantage.

Formula Stocks is an information provider, not an investment advisory service or registered investment adviser. It does not offer individualized investment advice and does not manage client funds. Unless otherwise specified, all return figures shown above are for illustrative purposes only. Formula Stocks does not purport to tell individual customers which securities they should buy or sell, and its recommendations are not solicitations to buy or sell any security. Like a newsletter, Formula Stocks offers a model portfolio that members may choose to use as an input in their own decision-making process. Formula Stocks assumes no responsibility or liability for your investment results. You understand and acknowledge that investing in securities involves risk. For technical reasons, the website displays up-to-date graph data refreshed daily based on backtested data. Backtested performance results have certain inherent limitations, as they may be designed with some benefit of hindsight, even though every effort has been made to avoid that risk. Unlike an actual performance record, backtested results do not represent actual trading and may not reflect the impact of brokerage commissions, slippage, or other fees. Because transactions may or may not have been executed, results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of market liquidity or level of participation. Past results of any investment system are not necessarily indicative of future results. No representation is being made that you are likely to achieve profits or losses similar to those shown here. In addition, information, system output, articles, and other features of our products are provided for educational and informational purposes only and should not be construed as investment advice. It remains the user's exclusive responsibility to review and evaluate the content and to determine whether to accept or reject any content. Formula Stocks expresses no opinion as to whether any website content is appropriate for a user's investment portfolio, strategy, financial situation, or investment objectives.

2021

Same great business, but price is too high.

AI Score: -24

Pass

Reminiscences of a Stock Operator by Edwin Lefevre

Paths to Wealth Through Common Stocks by Philip A. Fisher

Margin of Safety by Seth Klarman

The Black Swan by Nassim Nicholas Taleb

Bernard Baruch by James Grant

Morgan by Jean Strouse

Berkshire Hathaway Letters to Shareholders 1965-2014 by Max Olson & Warren Buffett

Poor Charlie's Almanack by Charlie Munger

Investing the Templeton Way by Lauren Templeton

The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay

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