Investors from the early days of the stock market have been keenly interested in deciphering patterns and figuring out techniques that will help simplify and automate investing. In many ways, the attempt to find a simpler way to profits is in-built into the human psyche - and the desire to hand off investing to mutual fund managers or investment newsletter editors or financial advisors is part of that same urge. The ultimate nirvana for investors is however finding a technique that can be applied mechanically to their own portfolios that results in sharp gains year after year. Several methods for mechanical, automatic investing have been proposed over the years - and while some work, others show flashes of promise before dying out.

The lifecycle of mechanical investing techniques flows something like this:

1. Owing to due diligence by an investor or a group of investors, certain techniques emerge that deliver consistent profits.
2. In due course of time, others hit upon the same technique - this may happen either because of their own due diligence, or because the investors who discovered this technique begin to share their methodology freely with others.
3. Once a critical mass of individuals begins following that automatic investing technique, the method begins to lose its power - as the markets are made up of willing buyers and sellers at the margin, and too many people on one side of the trade results in no trade at all.
4. Even as the technique begins losing its power, it tends to make the headlines of several popular investment journals - further weakening its power and accelerating the demise of that technique.

The above steps are for techniques that are valid candidates for becoming solid, profit bearing mechanical investing techniques. There are many others that are seemingly profitable techniques - such as buying stocks with lowest P/E ratio, or creating a combination of any number of metrics - return on assets, return on equity, earnings growth, price and so on - all of which can be combined in a variety of ways to determine a suitable combination that could be used mechanically.

Unfortunately, most of these methodologies do not take into account the many variables that influence the price of stocks including investor sentiment, economic conditions, increasing competition, margin of safety, company management and so forth. And most of these are hard to quantify by simply looking at financial statements.

In general, our recommendation is for you to stay away from mechanical investing techniques - however, there is an exception - and that is, when choosing to invest in mutual funds. In this situation, you need to apply the upfront effort in identifying the right set of mutual funds to invest in, ensuring diversification as well as having the best managers working for you. Then choose a set amount of money to be allocated to these mutual funds each year - and then ensure that the money is invested mechanically. You may need to do some rebalancing annually, and ensure that your mutual funds are sticking to their stated strategy.

Thus, while we remain skeptical of most mechanical investing techniques, it is possible to however develop a mix of due diligence and automated methodologies and ride them to profit.