
How to create rules for picking winning shares like Rolls-Royce before they take off: ED CROFT
In the second part of our series on how to pick shares, Ed Croft, the founder and chief executive of Stockopedia, explains how to establish rules that will help you pick winning companies and avoid those that turn out to be duds.
He runs through why he considers certain elements important and how the site built its StockRanks system that spotted opportunities such as Rolls-Royce, Jet2 and Games Workshop shares before they took off.
Flying high: Rolls-Royce shares have soared over recent years after their pandemic slump and Ed Croft says a rules-based stock-picking approach could have spotted the opportunity
In the first article of our share picking series, we tackled the problems many investors face – story-driven speculation, tip chasing, and the trap of seeking more and more information, which often brings overconfidence rather than better results.
One answer is using a rules-based approach, based around the characteristics of shares proven to identify winners.
When you know that there's a persistent pay-off to buying the highest quality, value and momentum shares, there can be a real mindset shift.
But for many, that's where the journey stalls.
Because once you realise that rules matter, the next step is to create your first set.
Price to Earnings Ratio of less than 12? Tick. Return on capital above 15 per cent? Tick. Debt under control? Tick. You build a rational set of logic, and it feels good.
Until you hit a wall.
Rules are essential - but they can be restrictive
I still remember the buzz of creating my first stock screen. Stock screens are essentially checklists of rules that can narrow a universe of thousands of stocks down to a manageable list.
My first was based on Jim Slater's criteria from his excellent Zulu Principle book. I had a whole list of 'must have' criteria which would find me reasonably priced, quality growth shares. But how many candidates did the screen produce?
Just three. Two were rather small and illiquid and the third was some obscure foreign-listed firm. It was quite disappointing. And it certainly wasn't an investable portfolio.
Checklists can be powerful – don't underestimate them. They add discipline to your investing and help filter out the noise. But they can be extremely restrictive.
If a stock has a P/E of 12.4 but you've screened for less than 12, should it really be cut out? Of course not. But a strict set of rules won't catch it.
So what do you do?
You start raising all your cutoffs – you find a broader set – but something feels amiss. You know your cutoffs are keeping out some of the best candidates in the market.
Scoring every stock in the market
The breakthrough for me came when I stopped thinking so binary – in pass/fail terms – and came across the idea of scoring. It was Joel Greenblatt, in his excellent 'The Little Book that Beats the Market', that sowed the seed.
What if, instead of demanding that a company have a P/E of less than 12, you scored every stock in the market for how low the price to earnings ratio was? And another for how profitable it was – using its 'return on capital'.
Rather than just having a hard cutoff for 'cheap' or 'good' shares, you could create a gradient – with 'cheap, highly profitable' stocks at one end, and 'expensive, unprofitable' shares at the other.
It's a fundamentally different approach. You're no longer left with just a few stocks, you have a score for every stock in the market. And what's even better, you can then compare any stock against any other.
Stockopedia
Stockopedia is an analysis site for share-picking investors that This is Money's team has used for many years.
Its share data and StockRanks provide exceptional insight.
There are also practical tips, Model Portfolios, and simple, consistent rules-based strategies.
As a special offer, This is Money readers can get 25 per cent off a Stockopedia membership *
How will you score stocks?
You can do this even if you are a stock picker, looking at stocks on a case by case basis. You can build a set of solid rules, which can even include qualitative assessments like 'how experienced and trustworthy is the management', and grade stocks between zero and ten for each rule.
I know some of the best investors in the UK that do this. It does require judgement, but it removes a lot of bias from your investing process, and helps you avoid getting too sucked into a story.
But a more data-first approach allows you to compare all the stocks in the market.
If you like doing your own work, you can do this yourself – you will need access to a financial database to export some data. Some are free on the web, though you do have to be careful with data quality. But it's really worth it.
Choose some key metrics across a few of the quality, value and momentum dimensions.
For example, as I've described, you might choose the P/E ratio and the return on capital (a key profitability measure). Score each one as a percentage from zero to 100, where 100 is 'best'.
Total the scores and rank again. You can then use this score to check your own stock ideas against. It's not hard. And it works.
> Check out the illustration in this spreadsheet
It uses institutional quality data from Stockopedia's database (correct at the time of publishing).
Take a look and see if you can find any of your shares within it – their scores might surprise you
While this is just a simple example, the benefit of this kind of gradient-based thinking is huge. It can add so much rigour to your process, but more than this – it really gets results.
Putting it all together to catch share price moves early
Scoring the market for a couple of financial ratios isn't really that robust.
Just scoring for 'value' based on the P/E ratio can leave opportunities on the table – what about companies that are cheap relative to their company sales, but are just turning profitable? When their sales grow, they can see huge profit expansion.
So at Stockopedia, we built a system that takes this further. Every stock gets a daily score – out of 100 – based on its quality, value, and momentum profile – but each of these scores is built from a range of financial ratios to give a more robust and rounded guide to their relative merit.
We call these measures the StockRanks and they have a terrific track record of finding stocks that perform.
Top ranked stocks through time have included many of the very best multibaggers in the UK market – stocks like Rolls Royce, Games Workshop, Jet2 and more – before they took off.
The top 10 per cent of ranked shares – those in the 90+ range – have on average returned 11.9 per cent annualised. And the lowest ranked 10 per cent? Well, more than 75 per cent of them end up losers – with an average annualised return of -17 per cent.
Now, this doesn't mean every 90+ ranked stock is going to be a winner. Of course not. A good score is not a buy recommendation. Individual stocks do their own thing, profit warnings happen and markets go down as well as up. But across groups of stocks, over the longer term, the odds weigh in your favour. That's what matters.
Building a portfolio that captures the 90+ effect
In the third article of this series, we'll explore how to move from understanding the pitfalls of emotional investing to applying a rules-based approach that works.
Avoiding behavioural mistakes such as poor stock selection, under-diversification, and reactive trading, we'll show how to construct and manage a rules-based portfolio that has a high chance of beating the market.
Hashtags

Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles


Daily Mail
8 minutes ago
- Daily Mail
Defiant salon owner vows to fight 'aggressive' trademark battle with beauty giant L'Oreal over her nkd brand
A defiant salon owner has vowed to fight an 'aggressive' trademark battle with beauty giant L'Oréal, which she claims forced her to close her shop. Rebecca Dowdeswell, 49, has been locked in a legal dispute with the global cosmetics firm and says she has already spent more than £30,000 defending her position. The mother-of-two, from Nottingham, runs the waxing salon 'nkd', a business she first trademarked in 2009; however, the protection expired after ten years, requiring renewal. Under current rules, companies have a six-month window to reapply for a lapsed trademark, but if they miss the deadline, they must start a new application from scratch. Ms Dowdeswell admitted she had put the renewal 'on the list' but said it wasn't 'at the top', calling the decision 'naive'. Her business was forced to shut during the Covid-19 pandemic, with the following two years proving 'so hard' for those in the beauty sector. By the time she reapplied for the trademark in 2022, she was met with a formal objection from L'Oréal. The French company argued that her brand name 'nkd' could cause 'consumer confusion' with its own 'Naked' eyeshadow range. Rebecca Dowdeswell, 49, has been locked in a legal dispute with the global cosmetics firm and says she has already spent more than £30,000 defending her position But rather than back down, Ms Dowdeswell has launched a counterclaim and is now taking on the £233billion firm herself. An Intellectual Property Office (IPO) hearing has now been scheduled to take place later this year, after the unyielding business owner demanded that L'Oréal withdraw several of its own trademark applications. She said: 'I don't feel like I should have been put in this situation in the first place. 'People typically don't challenge them; I've stuck it out. 'We sort of turned the tables and filed actions against them to rescind some of the trademark. We're spelt differently and pronounced differently, which is a huge part of my frustration. 'The UK beauty market as a whole is a massive market. We're not Naked, we're nkd. We're very tied to just waxing and hair removal products. They can get away with it because they're L'Oréal - this is sheer corporate bullying.' She said she had no choice but to fight for her company, which she has invested so much time in. 'It's a trend that you see - they know they have little chance of winning, but they know their pockets are so much deeper than my own. 'You would probably get 90 per cent of companies walking away. I was put in an impossible situation really. I could either walk away from the brand I spent the last 13 years building up or I could defend this and fight this, and it's cost me a lot. 'It has been a huge drain on the financial side but also the impact on myself and my family has been enormous.' Companies have a six-month window to reapply for their trademark after it runs out, or else they have to submit an entirely new application. She said the pandemic delayed her reinstating the trademark, and she was then left frustrated when her application was objected. She added: 'It cannot be fair or right that small companies such as mine are put in this position. 'And if the huge corporations didn't routinely exploit their power and abuse the rules of the UK IPO, knowing that they will likely get away with it due to their sheer size and domination of the market, then this situation wouldn't arise.' L'Oréal claims the nkd branding infringes on their line of Naked eyeshadows, despite the two being pronounced differently. The giant trademarked the Naked name in 2004 but left it unused until they launched their Urban Decay brand in 2010. Ms Dowdeswell added: 'The Naked name is for a wide range of goods which they aren't using. 'We've said this is against the rules of the UK IPO, companies shouldn't trademark against goods they don't use. 'We applied to remove the trademark on goods they aren't using. Like cotton wool, shower gel, deodorants and shaving foams. 'All they apply it against is a subset of makeup - just eye shadow pallets. 'They don't need the trademark on such a wide range of products, it's like a monopoly. 'They have no intention of using it, that's where the abuse of the rules comes in. 'Just because they're a massive company, no one ever stands up to them. 'They first applied for the Naked trademark in 2004. That's 20 years they've had some of these goods trademarked. 'We're nkd and we launched in 2009 - L'Oréal then launched the Urban Decay brand, which has the Naked line in 2010.' A L'Oréal spokesperson said previously: 'We are wholly committed to resolving any misunderstanding there might have been with Rebecca Dowdeswell. 'From the beginning of our exchanges with her lawyers in 2022, we have communicated an offer that supports her business aspirations whilst respecting our longstanding trademark rights.


The Independent
10 minutes ago
- The Independent
100ml liquid restriction set to be scrapped across European airports – but there's a catch
Airports across the European Union (EU) are finally set to scrap the 100ml liquid restrictions for passengers – but there's a catch. The constraint was due to be scrapped last summer, but a European Commission (EC) ruling kept it in place temporarily. Now, aviation hubs with advanced scanners will allow passengers to carry wine, olive oil, perfume and other liquids in containers of up to two litres. Participating airports include travel hotspots such as Berlin, Rome, Amsterdam and Milan, with more expected to follow. While many major airports already have the advanced scanners, not all do, including London's Heathrow. It would cost the airport £1.04bn to install the equipment. There will be no mandatory requirement for airports to implement the new technology and it will be the decision of individual facilities to purchase the scanners. Consequently, the new ruling could cause confusion for passengers departing from an airport with the scanners, but returning home via an airport without them. In this instance, only 100ml would be allowed in the hand luggage on the return flight. The scanners use computed tomography (CT) to scan luggage with increased accuracy. Their introduction also means passengers will no longer have to remove other items from cabin baggage, such as laptops and tablets, further streamlining the security process. The major change was first reported by Italian news outlet Corriere della Sera and confirmed by the European Commission, with the European Civil Aviation Conference (ECAC) set to green light the move imminently. European Commission spokesperson Anna-Kaisa Itkonen told The Independent that they were expecting the ruling to be confirmed 'in the next [few] days.' 'Once individual manufacturer's airport equipment passes tests and gets ECAC approval, it can receive the EU Stamp, permitting the screening of liquids of larger than 100ml. 'After receiving this approval, the equipment may be deployed for use at airports.' The Independent has approached the ECAC for comment. Birmingham and Edinburgh airports to remove the 100ml liquid restriction, while other UK airports still enforce the limit. Under existing rules, hand luggage liquids must be packed in containers carrying no more than 100ml, with some exceptions for baby products and medicines.


The Independent
10 minutes ago
- The Independent
Liverpool forward expected to leave Anfield
Liverpool have accepted a €75m (£65.5m) bid from Bayern Munich for winger Luis Diaz. Diaz, 28, who is currently with Liverpool on their pre-season tour in Tokyo, had asked to leave the club. He is expected to depart to complete the formalities of his move to the German champions. Liverpool had initially insisted Diaz was not for sale and failed in attempts to extend his contract due to wage demands. This transfer represents the third largest fee Liverpool have received for a player, after Philippe Coutinho and Luis Suarez.