We often hear about the two most common investment methodologies and philosophies, one is fundamental and the other is technical. I’m here to introduce, demystify and educate people on the often misunderstood philosophy of quantitative investing.
Quantitative investing seeks to reduce potentially adverse human biases and bases investment decisions solely on data, only facts; he is emotional and disciplined. Quantitative investing is generally a more rigorous use of science and math than fundamental investing. Quantums don’t try to understand the nuances of an idea, but instead analyze patterns and scan thousands of data points for statistical consistency.
Now, while this may sound more “out there”, it is in fact MOST common in our daily lives, or in almost every aspect of our existence. Every time we use our mobile phones we are using the results of mathematical rigor, every time we get into our cars we benefit from solid scientific studies on everything from the crush zones that keep us safe to the angles of the car that maximize your performance. Better yet, we rely on science and numbers to get astronauts into space, to steer man-made machines into the vast void of space and stay on perfect course! So in my opinion it is perfectly logical to use the same methods to invest. Yes, fundamental investors have a place in the world of investing and yes, they can extract hidden value by talking to management and learning about the specifics of a product or market segment. But, as solidly as math can take us to the moon, it can help design a successful investment methodology.
In quantitative analysis, quants like me look at the behavior of prices, which is really the behavior of people who trade stocks. The up and down movement of a stock over the course of a day is really the battle between buyers and sellers, each with their wide variety of reasons for making buy or sell decisions. With this in mind, what becomes relevant are things like “who’s winning the fight”, which is looking at where they closed the action in their range, or “who’s more aggressive”, which can be seen by looking at how fast they move. in one direction or another, or “how strong the buyers are”, which can be seen by studying the volume behind the buy orders. In other words, a more granular look at the activity of buyers and sellers is really an analysis of the dynamics of supply/demand, which in almost any econometric model can tell us more about the situation and, in particular, about the greater possibilities of for a certain event to occur. Leave. Simply put, if the demand is constantly increasing, one wants to own that!
Let me explain further why the statistics used by quants are, in my opinion, more relevant than the ratios calculated from balance sheets and income statements. All of the information on a balance sheet or income statement is exactly what most (critical) investors use to make their decisions about whether to buy or sell. From a quantitative perspective, the reasons behind the decision to buy or sell are irrelevant; Quantitatives just want to see the consensus results of those decisions. If there is something fantastic on the balance sheet, millions of people will start buying a stock and the stock will start to do better. The quanta will notice this force and jump directly onto it. So in the end, I think quantitative investing is an integral conduit to knowing what all the balance sheets and income statements say. With this in mind, I guess you could say that quants are inadvertently exposed to balance sheets and income statements by looking at what traders do.
Another argument I often hear against investing and quantitative modeling is that it is based on historical stock and price activity and, as a result, uses a more limited source of information than, say, fundamentalists. As explained above, historical trading activity is, by definition, the largest source of information, as all other information, no matter where it was collected from, is added to people’s trading decisions based on that information. Whether it’s from conversations with management, trips around the world to each and every store, or in-depth analysis of balance sheets, income statements, or quarterly reports, every investment decision results in a purchase or sale to someone else. price and with certain size.
Therefore, when studying price/volume activity, quants capture ALL of this information. In a way, it is Darwinian, that is, all information evaluated by market participants is reflected in their collective buy/sell decisions (trading activity), ultimately revealing the consensus view of the market. If a management conference call was attended by many, some listeners didn’t like it, and some listeners liked it, and I’m just one of the listeners, I only have a single source of information (my personal like or dislike). But, if I look at the stock performance after the call, I see what the majority decided, which is probably the most accurate interpretation and therefore the most likely predictor of future outcome.
