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I've frequently described how to use Web screening tools to come up with investment ideas. Here's some good news. I've discovered a new Web site that takes stock screening to the next level.

The site -- Portfolio123 -- is the brainchild of Chicago software engineer Marco Salerno. His goal is to provide investors with tools for creating automatically managed stock portfolios, and it looks as if he has succeeded. Here's how it works.

Once you get on the site, set up a trading system that includes a set of rules for adding stocks to a portfolio and separate rules for selling stocks out of the portfolio.

After the trading system is defined, the site uses it to identify an initial list of stocks to buy. Then, on a schedule that you've specified, the site will alter the makeup of the portfolio by sending you e-mails listing stocks what to sell and what to buy, all based on your trading rules.

In addition to providing everything you need to define and test new trading systems, Salerno also offers trading systems that he has created that you can use as is, or modify to suit your needs.

The site offers a feature that you can use to find out how you would have fared if you had used your trading system to pick stocks over various periods, going back up to three years. You have to register to use Portfolio123, but for now everything is free. Salerno plans to start charging for certain features in a couple of months, although pricing levels and which features will remain free have yet to be decided.

The easiest way to get started is by using Salerno's model portfolios. The top five, in terms of returns, are displayed on the home page (www.portfolio123.com).

The page shows each portfolio's total and annualized returns since March 31, 2001, which is as far back as Salerno's database goes. The returns are impressive.

When I looked, a portfolio named GARP Top Ranked was the best performer, up 380 percent since March 31, 2001, or 68 percent per year, on average.

Here's the best news. Salerno and his cohorts have devised 24 different trading systems, and the worst performer of the bunch, prosaically dubbed the Value Lg Cap LT, is up 68 percent overall, or 19 percent per year, on average.

To put that into perspective, the S&P 500 Index is roughly flat over the same period. To make the results as realistic as possible, Salerno subtracts trading commissions when he computes the portfolio returns.

Here are my ideas for getting started. Select Portfolios (top menu) and then P123 Models to see the complete list of Salerno's model portfolios, including their performance statistics.

Then click on a portfolio name to see a summary report listing the portfolio's detailed performance data. The summary also shows the portfolio's top 10 holdings and the 10 most recent transactions, including buys, sells and stock splits.

Then click on Holdings (top menu) to see the list of all stocks in the portfolio. While you're there, select Asset Allocation on the Select View dropdown menu to see important information to evaluate the portfolio.

The report shows the distribution of the portfolio stocks in terms of market capitalization and industry sector. Ideally, you want the maximum possible diversification in both areas. Otherwise, the trading system's historical performance will be skewed.

For instance, small-cap stocks (small companies) outperformed the market last year, but may not repeat their success in the future. Thus, the historical results of a portfolio heavily weighted with small-cap stocks would be misleading.

A problem I have with Salerno's predefined portfolios is that most of them consist of 50 stocks, too many for me to buy.

You can modify a portfolio to include fewer stocks by selecting Portfolio (top menu) and then clicking on New. That takes you to Step 1 of the procedure for creating a new portfolio.

In Step 1, use the Copy Settings option at the top to pick the predefined trading system of choice, and then use the Position Sizing option to change the number of stocks in the portfolio.

For instance, you'll end up with a 20-stock portfolio if you select 5 percent for the starting market value percentage of each stock.

Finally, click Next and then Finish.

Unfortunately, you lose diversification, and thus increase volatility, when you cut the number of stocks in a portfolio.

So it's a good idea to test the historical performance of any portfolio that you've modified.

That's easy to do by selecting Simulation (top menu) and then following the procedure I outlined for building the model portfolio. By the way, Salerno suggests a minimum of 15 stocks in a portfolio, and he believes more is better.

Regular readers know that I'm not in favor of mechanical formulas to pick stocks. But Salerno's program gives you the option of deleting stocks before finalizing a portfolio. He suggests researching each stock and throwing out any that don't pass muster before finalizing the portfolio. Then the program will suggest replacement stocks that meet the criteria of the trading system.

Although he has specialized in financial systems, Salerno is a programmer, not a professional stock analyst. Nevertheless, he has come up with a stock- picking tool worth checking out, especially while it's free.

Harry Domash lives in Aptos (Santa Cruz County), teaches investing classes and publishes the Winning Investing newsletter. You can read his columns at www.winninginvesting.com or contact him at hdomash@winninginvesting.com.