Quantitative Investment Strategies

[Grunter]

Hi All,

Long time lurker, first time poster to Sharetrader. I've come out of uni with a freshly minted Applied Economics and Finance degree, and have been meddling around with my own personal portfolio whilst in Uni.

One of the areas I'm really interested in is the area of Quantitative Finance, and wondering if anyone on here has this kind of approach to their investing that would like to bounce ideas off?

Feel free to get in touch.

Grunter

[Snow Leopard]

Perhaps you could define what you mean by 'Quantitative Investment' and 'Quantitative Finance' for us?

Best Wishes
Paper Tiger

[Grunter]

Certainly.

One strategy is a Value and Momentum strategy. It goes as follows:

Identify a selection of companies that have low P/E or P/Book Value ratios compared to the overall market (i.e. value stocks). Then filter those stocks to select only those stocks that have gained in the last 12 months (i.e. momentum) and include those in your portfolio.

Next bit is to optimise your portfolio weightings to maximise the return/risk ratio (sharpe ratio). Then you rebalance your portfolio every three months according to the above rules.

That's a simple quantitative strategy used by professional fund managers.

My take is that there is no reason that there is no reason this cannot be successful to a retail investor.

[percy]

Welcome to Sharetrader Grunter.
Google quantitative versus qualitative analysis
The best result I have found is basing your investment with qualitative research,ie attending AGMs,company presentations,and phoning the company and speaking to either the CEO or CFO.
On Sharetrader you can quickly work out who does more than read the annual reports.
Like all qualitative research, the more you do the better results you achieve.
We must remember a good company can have a bad year,and a bad company can have a good year.
Qualitative analysis helps identifying which is which.

[winner69]

Certainly.

One strategy is a Value and Momentum strategy. It goes as follows:

Identify a selection of companies that have low P/E or P/Book Value ratios compared to the overall market (i.e. value stocks). Then filter those stocks to select only those stocks that have gained in the last 12 months (i.e. momentum) and include those in your portfolio.

Next bit is to optimise your portfolio weightings to maximise the return/risk ratio (sharpe ratio). . Then you rebalance your portfolio every three months according to the above rules.

That's a simple quantitative strategy used by professional fund managers.

My take is that there is no reason that there is no reason this cannot be successful to a retail investor.

Simple as for a retail investor,

Lets say the selection of stocks came up with 5 to build a portfolio - EBO, HBL, SCL, TIL and AIR

My challenge to you, grunter, is to tell me what the weighting of each needs to be that gives me the highest Sharpe Ratio (the best bang for my buck relative to the risks taken)

Up to this simple challenge?

[Grunter]

Welcome to Sharetrader Grunter.
Google quantitative versus qualitative analysis
The best result I have found is basing your investment with qualitative research,ie attending AGMs,company presentations,and phoning the company and speaking to either the CEO or CFO.
On Sharetrader you can quickly work out who does more than read the annual reports.
Like all qualitative research, the more you do the better results you achieve.
We must remember a good company can have a bad year,and a bad company can have a good year.
Qualitative analysis helps identifying which is which.


Thanks Percy.

My argument against Qualitative Investment, is this: What makes you think you have any greater insight into a company than the professional analysts that cover these stocks? Because in order to beat the market consistently, you need to have a better insight than the rest of the market.

[Grunter]

Simple as for a retail investor,

Lets say the selection of stocks came up with 5 to build a portfolio - EBO, HBL, SCL, TIL and AIR

My challenge to you, grunter, is to tell me what the weighting of each needs to be that gives me the highest Sharpe Ratio (the best bang for my buck relative to the risks taken)

Up to this simple challenge?

It's not hard to do at all - can easily be done in Excel. It's just time-consuming to create your template, but once it's done, its easy to adjust for different stocks.

Here's a great video on it that helped me out.

https://www.youtube.com/watch?v=FZyAXP4syD8

[percy]

Thanks Percy.

My argument against Qualitative Investment, is this: What makes you think you have any greater insight into a company than the professional analysts that cover these stocks? Because in order to beat the market consistently, you need to have a better insight than the rest of the market.

The professional analysts do not cover most stocks.
For example Macquaries do not cover Ebos or Scales.Craigs do not cover Airwork or PGW.I do not know if anyone, other than Pie Funds, follow TIL.
If you stay away from Fletchers etc and concentrate on small cap stocks ,and focus on what you are good at, you can beat nearly everyone.
On Friday afternoon I phoned the CEO of a small cap stock.I learnt more in that 15 minute conversation than any analyst would have done spending two days reading their annual report [ which I knew backwards]..

[Snow Leopard]

Certainly.

One strategy is a Value and Momentum strategy. It goes as follows:

Identify a selection of companies that have low P/E or P/Book Value ratios compared to the overall market (i.e. value stocks). Then filter those stocks to select only those stocks that have gained in the last 12 months (i.e. momentum) and include those in your portfolio.

Next bit is to optimise your portfolio weightings to maximise the return/risk ratio (sharpe ratio). Then you rebalance your portfolio every three months according to the above rules.

That's a simple quantitative strategy used by professional fund managers.

My take is that there is no reason that there is no reason this cannot be successful to a retail investor.

Whilst trying to avoid the Quantitative versus Qualitative, or any other Investment/Trading Strategy, debate.

Sensible Quantitative strategies can work reasonably well, depending upon said strategy you will get a range of outcomes relative to other types of strategy and that ultimate quantitative strategy - buying the index.

For me two of the issues of quantitative strategies are:
The qualitative decisions over choice of strategy and the parameters to apply (i.e. if you are using a stock-screener what 'rules' and what limits to apply);
The quality of the quantitative data:
-- NZX claims that ARV has a P/E of 75 (https://nzx.com/markets/NZSX/securities/ARV), but how 'true' is that?;
-- I can persuade the Google Finance to include ASX.FGE (Forge Group) in a potential
portfolio to buy tomorrow, despite Forge going bust and being forcibly delisted in 2014.

You would want to do a manual sanity check on everything your strategy suggests.

But if you put the effort in, learn on the way, and accept that a reasonable amount of financial theories and formulas have severe limitations in the real world, it could work for you.

Personally I have tried this sort of approach, and to a degree still do, and in theory could operate totally automated portfolios (well I would still need to enter the trades by hand via the broker web-site).
However experience tells me to be wary of the input data, the outcomes of the analysis and my own programming skills.

Best Wishes
Paper Tiger

PS I found your video link scary, and I have a strong constitution for that sort of thing.

[Grunter]

Thanks Paper Tiger, definitely you need to "clean" the data to limit the garbage floating around.

What scared you about the video, by the way?

[Jessie]

There are certainly many overseas share funds and hedge funds that invest using a pure quantitative approaches, eg, AQR Capital Managament have funds which mechanically select stocks based on Value and Momentum. These funds rely on market inefficiencies and can beat the market by a few percentage points over time. In principle an individual investor could replicate this approach. However, to remain diversified, you would need a reasonable number of stocks. A system using only few stocks would be too volatile for any outperformance to be apparent. If you used selected at least 20 stocks to reduce volatility, and your system required trading these fairly frequently, then transaction costs for a small investor might eat up any outperformace. However, it is an interesting idea.

I have also seen some articles by Meb Faber who describes a system of selecting a ETFs based on various criteria such as Momentum and Value. This system could be applied by a small investor and should work with only a small number of ETFs. It attempts to reduce volatility as well as improve returns compared with a buy-and-hold strategy. However, the ETFs he uses are only available in the USA at present. Also, he judges performance based on back-testing, but there is no guarantee that future performance will achieve comparable results.

[Snow Leopard]

Quantative? Quantatitive? No?

Quantitative!! - OK got it right - Copy & Paste for the rest of the post ;)

Quantitative Investment Strategies, which I am going to define as 'Rule based investment processes using predominantly numerical data as the input sources' is a much wider field than you are portraying Jessie.

Even I am a few dollars short of the amounts of money that AQR and friends have to chuck around the markets.

So to use an old quantitative expression you 'Cut your Coat to suit the Cloth' and look for a strategy that fits your circumstances, if you only have enough funds for a few stocks then you look for an approach with a good statistical chance of meeting your goals whatever you decide they are with a few stocks.
Such a strategy could well involve minimal rearranging of weightings.
It will also certainly be more volatile than the big boys achieve but may be just as successful.

Past performance is no guarantee of future profits but back-testing over a broad range of market data is very useful to determine whether a system has any fundamental flaws or is likely to under perform in the long term.

Best Wishes
Paper Tiger

[Grunter]

Would make for a good Master's thesis! Studying whether this could be done in NZ by a "retail" investor.

[percy]

Thanks Percy.

My argument against Qualitative Investment, is this: What makes you think you have any greater insight into a company than the professional analysts that cover these stocks? Because in order to beat the market consistently, you need to have a better insight than the rest of the market.

Grunter;
Google Long-term Capital Management,and read just how well two Nobel memorial Prize winning economists, and a bevy of renowned financial wizards did.

[Grunter]

Grunter;
Google Long-term Capital Management,and read just how well two Nobel memorial Prize winning economists, and a bevy of renowned financial wizards did.

LTCM blew up due to the insane amounts of leverage that they needed to make their strategies as profitable as expected. This is more to do with poor risk management than poor investment strategies. The strategies worked well until a rare and unexpected event caused those strategies to unravel. Less-leveraged firms would have been able to dial back and liquidate, preserving their capital until the markets became normalised again.

That's the key with these funds that blow up - usually its due to their risk management of leverage rather than the underlying strategy itself.

[peat]

rare and unexpected event
funny how these happen so often...

8006
look how the cute lil thing got such a fat tail!

[Lego_Man]

Grunter,

This may interest you.

https://www.harbourasset.co.nz/fund/advanced-beta-fund/

I believe this fund is systematically run, based on regularly calculated Piotroski scores for NZX listed stocks.

http://www.investopedia.com/terms/p/piotroski-score.asp

[peat]

...optimise your portfolio weightings to maximise the return/risk ratio (sharpe ratio). Then you rebalance your portfolio every three months according to the above rules.

That's a simple quantitative strategy used by professional fund managers.

My take is that there is no reason that there is no reason this cannot be successful to a retail investor.



Actually Grunter, I did this in my graduate diploma in 2010. It was slightly simplified with two, two stock portfolios I chose Kraft & Activision, vs Kraft and Comcast.



8010

[heisenberg]

Next bit is to optimise your portfolio weightings to maximise the return/risk ratio (sharpe ratio).

Welcome Grunter. As a retail investor, could you give me a brief rundown as to how to do this - or point me to the place where I can find out?

[Grunter]

Welcome Grunter. As a retail investor, could you give me a brief rundown as to how to do this - or point me to the place where I can find out?

Heisenberg - I posted a youtube video that shows you how to use matrix operations in excel. Hope this helps.