Is IBD 50 Better Than IBD 100?

On January 3, 2011 (December 31, 2010, online edition) Investor's Business Daily replaced its popular IBD 100 list - the top 100 small cap growth stocks - with IBD 50. Is this an improvement?

The list is certainly shorter, but is it better?

People like nice round numbers but the market does not care about them. It does not care if a stock is on a list or how many lists it's on. The market just does its thing, and lists reflect the results. The number of strong stocks varies with the market: in a strong market, there can be well over 100 leading stocks; in a bad one - under 50. Back in 2008, during the devastating bear market, there were times when more than half of IBD 100 stocks were underwater, so the list was in effect leading down, although that was not its intent since IBD does not encourage shorting. The list still contained stocks with the highest relative strength ratings, but the key word here is relative - those were the strongest stocks relative to the rest but still declining. A shorter list can certainly be more bullish, or remain bullish longer when the market's breadth is narrowing.

A shorter list narrows the window for errors. IBD 100 was more forgiving to poor performers as it could afford more ballast that was going nowhere. IBD 50 must be more dynamic, but the bottom line is stock selection. IBD insists that stocks for the list are selected based purely on its proprietary ratings methodology. "Proprietary" is a convenient word to hide behind: just say "proprietary" and nobody can question you further, but over the years I have seen stocks with better ratings not making it onto the IBD 100 for weeks or months while lower rated stocks, sometimes below the 50 day moving average, remained stubbornly on the list. Why? I can only speculate. Be that as it may, a good short list should make it easier to find or validate big winners.

IBD is also discontinuing its practice of "black boxing" - putting stocks on the list that are within buy range in thick black boxes. The practice never worked anyway: if you'd relied on black boxes for your stock picks, your returns would have been less than optimal.

Other than that, we will see. I have been following IBD 100 religiously since 2003 and to me the list remains the best educational tool: its biggest value is in analyzing winning stock charts for proper entry points because knowing when to buy is the most important part of profitable stock trading.

More from this contributor:

IBD 100 - How to Get the Most Out of It

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Stock Trading: Are "strong Buys" Worth "Strong Buying"?