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My investment advisor tells me that his firm uses a computerized system to rate stocks. Are computers better able to rate stocks than analysts?

Some brokerage firms, who use computerized rating systems, try and remove the human bias and conflict of interest. These firms are of the view that the advantage of such a system is objectivity.

The cost of these computerized rating services varies from several hundred dollars per month (Value Line) to free of charge (Microsofts’s CNBC on MSN Money and Intuit’s Quicken.com).

Different systems produce different rating of the same individual stocks and their ability to outperform a market index fund over a period of time has not been proven. Differences in ratings can be explained by the different methods used to predict future prices. Some models emphasize earnings growth and surprises while others favour ratios like inventory turnover. Different models analyze stocks according to one of four investment styles – value, growth, small cap value and large cap growth.

All these models assume that superior research and analysis can select a group of stocks that can outperform the market averages over the long run. This assumption is disputed by adherents of an efficient stock market who believe that few investors or investing models can beat a low cost mutual fund that tracks a stock market index, given the added transaction costs of active trading.