Mechanical Reasoning is an analysis of the discipline itself. As much as mechanical reasoning in form of a test is needed for mechanical students and for interviewees. Mechanical reasoning is as well needed for investors who would like to invest in the mechanical field.
As stated mechanical reasoning tests are basically for job candidates or for mechanical students. This test measures a candidate’s understanding of the principles of mechanics, the spatial ability and it also causes and effects relationships.
The mechanical reasoning test is best suited for the selection of apprentices, technical/trade personnel, trainees, and others who are involved in working of a mechanical environment. All items in the mechanical reasoning test are in form of diagrams and specific item content has a wide range that includes; wheels, gears, sliding rods, levers, shafts, weights, pulleys, fixed and non-fixed pivots, conveyor belts and springs.
The Benefits of Mechanical Investment using Mechanical Reasoning
When investing in the mechanical field, mechanical investor may use mechanical reasoning to evaluate the benefits that are accrued and what makes mechanical investing an attractive way to invest. These advantages as seen through mechanical reasoning are;
Low cost: this is under a condition that it is smartly implemented. Mechanical investments normally involve some turnover in your portfolio a few times annually, which can be easily handled by individual investors. With commission fees very low at majority of online brokers, the implementation of these strategies is very low in cost.
By use of a commission free broker, it may be carried out without any fees at all. Compare this with entrusting your money to a professional investment or buying a mutual fund. Advisors can take several hundred dollars monthly in commissions and mutual funds all coming with an overhead referred to as the “expense ratio”. The money finally saved on these fees greatly does improve the long term investment returns.
Historical performance is significant: most mutual fund literature tours their 1, 3, 5 and 10 year return as marketing for the potential investment. The actual thing is that past performance of managed mutual funds does not count for much. There is never any guarantee that the historical results will bear out again in the future. However, the likelihood of 50 years or more of the market trends continuing even into the future is pretty high.
Several mechanical strategies outperform the market: many mechanical strategies have been shown to vastly outperform any investment in the S & P 500 over a long period of time. Most of these mechanical strategies are value oriented ones such as buying low P/E stocks, low price-to-sale rations and buying high dividend yield stocks ‘what works on the wall street’ is a book by James O’Shaughnessy’s , it is a great book that lists the long term returns of dozens of mechanical investment strategies helping you in your mechanical reasoning regarding mechanical investment.
Requires minimal time investment: Majority of these strategies prescribe re-balancing of the portfolio just a few times a year, in most cases, once a year is enough. Because of these infrequent buying and selling, and also because of stock direct from the screen selection, the time investment required is extremely low. There is no time needed to dig into the SEC filings, listening to conference calls, going through the cash flow statements and balance sheets and so on. For this matter there is no time that is needed to learn how to do these things either. Betting the market while hardly trying is a great fight to following a mechanical investment strategy which is a good mechanical reasoning.
Removes the emotion from investing: Through mechanical reasoning this is the single and the greatest reason to follow a mechanical strategy. In an investment game emotion is the worst enemy. It is this enemy that causes people to buy when the market is high and it also causes them to sell when the market is low. In logical terms, this makes little sense, but fear and euphoria are most powerful human behavior determinant. Mechanical reasoning removes these from the equation when one carries out a mechanical investment.
The Drawbacks of Mechanical Investment using Mechanical Reasoning
One-time charges and/or gains can skew statistics: one-time, or what is called “special”, gains and charges are an ordinary fact of life in the investing world. Without taking ample time to research the company’s financial statements, some things will go unnoticed by the mechanical investor. Although, good mechanical screens try to account for this, it is clear that it is not always possible for computer algorithm to get hold of these discrepancies.
The accounting levels differ between firms: what this means is that, when observing a statistical screen, people may not always be comparing apples to apples. For instance, relatively common mechanical screening criteria -price to the book ratio. How a given company calculates the book value can greatly differ.
Mechanical strategies are often very volatile, thus making them difficult when it come to sticking to them: The magic formula, as well as other mechanical strategies, can at times be volatile. There will be some periods where they are going to trail overall market returns. Therefore, the mechanical investor should have a strong will and also conviction that the strategy will outperform the market over the long term period.
You know little about the companies in which your money is entrusted to: for majority of mechanical investors, blindly buy stock in a company without knowing anything about the company therefore seeming risky and ignorant. Although it may not bother some people at all, others take this point as a major hurdle.
Driving using the rear-view mirror: this is clearly the biggest problem when it comes to mechanical investment, using mechanical reasoning. What this means is that, you are investing based on past results, whereas you should be taking into consideration the future prospects. Yet, using mechanical reasoning and doing some fundamental research could have at least raised a red flag on the potential future problems, which is something a mechanical screen would have overlooked or not find.
Mechanical investing as seen has a lot of great aspects, but also involves some risks as well. However one can find a good job or evade the investment risks by taking mechanical reasoning seriously. And thus Mechanical Reasoning