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4. Scoring Formulas (Mathematical Specification)

Independent / quantitative investing

Variables are per stock unless noted. Percent-style inputs from IBD (e.g. Price_Change_Pct) are converted to decimals where noted.

4.1 Leader Score (Brokerage)

[ \text{Leader_Score} = (RS \times 0.6) + (EPS \times 0.2) + (ACC_Numeric \times 4) ]

4.2 RS floor

4.3 CAPM required return

[ R_{\text{required}} = R_f + \beta \times MRP ]

4.4 Beta penalty

[ \text{Beta_Penalty} = \frac{1}{1 + \max(0,,\beta - 1.0)} ]

4.5 Risk-adjusted scores

[ \text{Risk_Adj_Leader_Score} = \text{Leader_Score} \times \text{Beta_Penalty} ]

[ \text{Risk_Adj_Score} = \text{Composite_Rating} \times \text{Beta_Penalty} \quad \text{(IRA)} ]

4.6 Alpha gap (CAPM)

[ \text{Alpha_Gap} = \text{Expected_Return} - R_{\text{required}} ]

4.7 WACC (per stock, simplified)

[ \text{WACC} = \frac{E}{V} R_e + \frac{D}{V} R_d (1 - \tau) ]

4.8 WACC spread (IRA quality)

[ \text{WACC_Spread} = \frac{\text{Annual_ROE}}{100} - \text{WACC_Stock} ]

4.9 Multi-list logic (IRA)

4.10 Default assumptions (summary)

ParameterValue
MRP5.5% (0.055)
Tax rate21% (0.21)
(R_f) fallback4.3% (0.043)
Beta fallback1.0

4.11 Valuation Score — Enhancement 10

The Gap in Pure Momentum Systems

Momentum signals tell you WHAT the market wants and WHEN institutions are buying. They do not tell you WHETHER the price is justified by the underlying business fundamentals.

A stock can have RS 99 and be 3x overvalued. A stock can have RS 60 and be deeply undervalued. Valuation bridges this gap.

PEG Ratio — Primary Valuation Tool

PEG = P/E Ratio divided by EPS Growth Rate

PEG RangeInterpretationGrade
Under 0.5Deeply undervalued for growthA
0.5-1.0Undervalued — growth not fully pricedB
1.0-2.0Fair value — growth matches priceC
2.0-3.0Premium — paying for expected growthD
Above 3.0Expensive — priced to perfectionF

Real examples from portfolio history:

WACC Spread — Value Creation Signal (already in system)

WACC_Spread = Expected_Return minus WACC_Stock

Valuation Grade Scale

Pre-Earnings Run-Up Rule (added May 2026)

Stocks that run 10%+ in the 2 weeks before earnings often produce muted or negative reactions on earnings day regardless of how strong the beat is.

Mechanism: The run-up IS the market’s anticipation. When the beat arrives — profit-taking offsets new buying.

Conditions for priced-to-perfection (all five = muted likely):

  1. Stock up 10%+ in 2 weeks before earnings

  2. 80%+ analyst consensus bullish

  3. Whisper number above consensus estimate

  4. Options pricing modest move (under 6%)

  5. Contrarian analyst(s) cautious despite consensus

Real examples documented:

EARNINGS_CATALYST signal downgrade:

Apply to all three accounts.

4.12 Qualitative Analysis Framework — Enhancement 10

Five Elements of Qualitative Investment Analysis

Every compelling investment narrative contains:

  1. THESIS: What kind of company is this REALLY? Not sector — what role does it play in the economy?

    • Example: NVDA is not a chip company — it is the computing substrate of the AI economy.

  2. PROOF: What operational evidence validates the thesis? Not just revenue — what does the product actually DO?

    • Example: GE Aerospace 26% production lift on Palantir AIP. Navy ShipOS: 200 hours to 15 seconds approval time.

  3. MOAT: Why can competitors not replicate this? Switching cost / network effect / IP / regulation.

    • Example: CUDA ecosystem — 4M+ developers writing AI code for NVDA. Switching means rewriting everything.

  4. TRAJECTORY: Where is this in 3-5 years at scale? What is the next product cycle or demand inflection?

    • Example: Agentic AI inference > training over time. NVDA uniquely positioned for both.

  5. MISPRICING: What is the market measuring incorrectly? What multiple framework should apply vs what does?

    • Example: Market prices NVDA as cyclical chip company. Should price as platform with software economics. 74.9% gross margin confirms software-like economics.

Thesis Type Classification (added to pre-buy template)

Before completing the pre-buy thesis, identify the thesis type:

Type A — Secular Growth:

Type B — Catalyst Event:

Type C — Macro Rotation:

Type B theses require tighter monitoring and faster exits.

Pre-Buy Thesis Template — MANDATORY

No position opened without completing this template. Written BEFORE the trade executes. If you cannot complete it — you cannot buy the stock.

---
TICKER: [X] | DATE: [X] | ACCOUNT: [IRA/Brokerage/Aggressive]

THESIS TYPE: [A / B / C]
  A = Secular growth (multi-year, enhanced §16.15 on sell)
  B = Catalyst event (strict 8%, tighter monitoring)
  C = Macro rotation (strict 8%, re-entry watch if macro clears)

ONE-LINE THESIS:
I am buying [TICKER] because it is the [role] in [market]
and the market has not yet priced in [specific insight].

WHAT KIND OF COMPANY IS THIS REALLY?

OPERATIONAL EVIDENCE — WHY NOW? (3 specific proof points)
1.
2.
3.

THE MOAT — WHY CANNOT THIS BE REPLICATED?

QUANTITATIVE CONFIRMATION:
  Composite:      [X]  (85+)
  RS Rating:      [X]  (80+)
  Acc/Dis:        [X]  (B+)
  Beta:           [X]  (IRA under 1.5 / Aggressive any)
  Entry Score:    [X]/100  (60+)
  From Pivot:     [X]%  (under 5%)
  Base stage:     [X]  (Stage 1-2 preferred; 4+ = do not buy)
  Volume ratio:   [X]x  (1.40x+ after 1pm)
  Consecutive wks:[X]  (2+)
  PEG ratio:      [X]  (under 1.0 = undervalued)
  WACC Spread:    [X]  (positive = value creation)
  Valuation Grade:[A/B/C/D/F]

WHAT WOULD CHANGE MY MIND?
1. [specific fundamental deterioration]
2. [specific rating deterioration]
3. [specific macro change breaking thesis]

SELL RULE APPROACH (from thesis type):
  Type A: Enhanced §16.15 — distinguish macro vs company-specific
  Type B: Strict 8% — no enhanced hold; exit on first breach
  Type C: Strict 8% — add to Thesis Intact Exits if macro-driven

ACCOUNT FIT AND SIZING:
  Account:   [X]  reason: [tax/beta/strategy]
  Shares:    [X]
  Cost:      $[X]
  Sell rule: $[X]
  Max loss:  $[X]
---

4.13 Macro Tier Classification System

Overview

Not all entry-threshold failures are equal. The Tier system lets documented structural macro conditions relax CONTEXTUAL thresholds by one standard step — while preserving Category 1 rules absolutely.

Category 1 Rules — NEVER Flex

Tier 1 — Structural Monopoly or Oligopoly

Definition: Controls essential infrastructure with no viable substitute or competitor.

Examples:

Flexibility granted (with documented one-sentence proof):

Flexibility NOT granted:

Tier 2 — Dominant Secular Leader

Best company in a strong growing industry. Standard checklist, no flexibility.

Examples: AMD, MRVL, CRDO, ARM, FLEX.

Tier 3 — Strong Momentum

High IBD ratings, strong base. Standard checklist, no flexibility.

Examples: COCO, OII, STRL, HEI.

Documentation Requirement

Tier 1 requires a one-sentence proof: “[Company] is the [monopoly/oligopoly] in [market] because [structural reason that cannot be replicated].” If you cannot write it in one sentence, it is not Tier 1. This prevents rationalization.

Applied Examples

4.14 Anomaly / Hypothesis Investing Framework (Aggressive Account)

Purpose

The momentum checklist measures trailing data (RS, base structure, pivot proximity). It systematically misses companies being structurally REPRICED faster than trailing data confirms. This framework provides a disciplined method for these outliers — distinct from momentum trading and from impulsive speculation.

Where It Lives

Aggressive account ONLY. Two sub-strategies:

Never in IRA or Brokerage.

Three Evidence Layers (all required)

Layer 1 — Structural Macro Catalyst: document what changed that trailing data misses; cite specific evidence (earnings, industry data).

Layer 2 — Smart Money Confirmation: 13F filings showing concentrated active managers accumulating.

13F is 45-day delayed — fine for slow theses.

Layer 3 — Government/Strategic Signal (if applicable): CHIPS Act, Defense Production Act, strategic reserves.

The Falsifiable Hypothesis (mandatory)

State: “I believe [X] because [structural reason]. I will know I am WRONG if [specific measurable event].” If you cannot state what falsifies it, it is faith, not hypothesis — do not enter.

Guardrails

  1. Paper first — test thesis-generation skill before real money

  2. Smaller size — half a normal position (it is a bet)

  3. Written falsification criteria

  4. 8% sell rule still applies — exit discipline absolute

  5. Separate tracking — measure anomaly hit rate independently

Entry Timing Still Matters

The framework changes WHETHER to own, not WHEN to buy. A structural thesis does NOT excuse buying at an extended entry.

LESSON (MU, June 2026): entered as anomaly at +127% extended with Layer 1 only (Layer 2 pending). Macro pullback hit June 5; closed -16.6%. The structural thesis may still be true, but the extended entry had no margin of safety. Anomaly entries require Layer 1 AND Layer 2 confirmation AND a sane entry point.

4.15 Macro Interruption Filter — Enhancement 11

Overview

When a sell rule triggers, classify the exit type before executing to inform re-entry decisions. Two types of sell signals look identical in the moment but require different post-exit strategies.

Type 1 — Thesis Broken (Permanent Exit)

Indicators:

Action: Permanent exit — do not re-enter without full thesis rebuild event (new CEO, new product)

Real examples:

Type 2 — Macro Interruption (Thesis Intact)

Indicators:

Action: Execute sell rule (rules are rules). Add to Thesis Intact Exits watchlist. Monitor for re-entry when macro clears.

Real example:

The Re-Entry Decision

Macro interruption exit → watch for:

  1. Acc/Dis recovery to B+ or better

  2. RS recovery above 80

  3. Price within 5% of new pivot

All three required simultaneously for re-entry signal.

Thesis broken exit → no re-entry unless fundamental change in business (new management, new product cycle, strategic acquisition).

The Sell Rule Remains Inviolable

Regardless of classification — execute the sell rule. Classification only determines the post-exit watchlist. The rule protects capital. The classification guides whether to watch for re-entry.

See also §16.15 Enhanced Sell Rule Framework for volume context at the moment of the sell decision.

Conference Call Risk (from MRVL experiment May 2026)

When a stock reports earnings on a call — the stock price may react to two distinct information events:

The gap between initial reaction and post-call settlement represents information asymmetry:

MRVL May 2026: 199→199 → 219 (numbers) → 193(call)→193 (call) → 206 (settle)

The 219→219→193 drop happened because:

Lesson: Price immediately after earnings ≠ final assessment. Wait for full call digest before re-assessing position.

4.16 Disciplined Discretion — Off-Method Trades

Distinct from §4.14 Anomaly Investing. Anomaly trades have trailing data that LAGS a structural repricing — the evidence layers still apply. Off-method trades have NO price history at all (fresh IPOs like EROC, SPCX) — the eight layers cannot be computed yet.

The Principle

An investor may take a position the method cannot yet evaluate ONLY under these constraints:

  1. SMALL SIZE. Off-method positions are sized far smaller than method-confirmed entries. Conviction in a story does not earn size — only the method earns size.

  2. THE METHOD MUST CATCH UP TO ADD. Increase ONLY when the ticker develops enough price history for the layers (RS, base, Acc/Dis, pivot) to be computed and to CONFIRM the thesis. Until then, small.

  3. THE 8% RULE IS NON-NEGOTIABLE. Regardless of conviction, business thesis, or institutional demand, the 8% hard stop governs absolutely.

  4. SEPARATE TRACKING. Off-method trades are logged and measured separately from system trades AND from anomaly trades, so the baseline measures the METHOD, not discretionary bets.

Why This Exists

Fresh IPOs have no price history — no layer can be computed. A rigid “never deviate” rule forbids participating in a compelling new business; an undisciplined “buy the story” approach bypasses every risk control. This principle allows participation while containing risk: small size limits damage, the 8% stop enforces exit discipline, and the requirement that the method confirm before adding ensures size is only ever earned by verifiable strength.

Worked Examples (W24, June 2026)

EROC: IPO, behind-the-meter data-center power thesis. 1 share (minimal). Gapped below 8% in 2 days; stopped out -25%. The stop worked exactly as designed — conviction did not override it.

SPCX: IPO (confirmed ticker per Yahoo Finance). Space-based data centers / satellite internet thesis. 10 shares (small). +19% on IPO momentum. Plan: hold for quarterly reports; add ONLY when the method can evaluate it. 8% rule governs.

Both small, both tracked separately. Neither is evidence about whether the 8-layer method works — they measure disciplined discretion, a distinct question.

IBD Growth Strategy — Technical Methodology
3. Two-Strategy Investment Framework
IBD Growth Strategy — Technical Methodology
5. Data Sources and Input Files