Stock Investing - Quant and Traditional

[john12ax7]

Any stock investors here? Been doing two approaches,  quant and a more traditional value approach. Will be interesting to see which one wins out long term.

 

[ruffrecords]

Any stock investors here? Been doing two approaches,  quant and a more traditional value approach. Will be interesting to see which one wins out long term.

I have some pension money invested in 10 or so stocks. All fairly big names like ABC and Coke.

Cheers

Ian

 

[bluebird]

Not sure if this applies, but I put my 401K mostly into bonds for the time being. I'm too scared to ride the BIG roller coaster right now. Rather be in the spinning teacups for a couple years. (actually that sounds terrible  )

 

[john12ax7]

For a retirement account it's hard to beat just dollar cost  averaging into low cost index funds.  Being mostly bonds is too much imo.  Better to use more classic stock / bond ratios like 80/20 60/40 etc based on your age and when you would access the money.  If you're more risk averse something like the Ray Dalio all weather portfolio is worth a look too.

The market is at very high valuations,  but bonds don't look too attractive over the next decade either.  I think there is room for commodities and precious metals like gold and silver to run a lot higher.

I've been working on active stock picking,  both through mathematical modeling, and other more traditional metrics.

 

[JohnRoberts]

Any stock investors here? Been doing two approaches,  quant and a more traditional value approach. Will be interesting to see which one wins out long term.

Not sure what you mean by "quant" perhaps "technical analysis", a very old (centuries old) discipline of studying past price moves to predict future price moves.  There are any number of books written on the subject and they can predict ball park ranges of future price moves but not precisely when and where a stock will move. Some make investment bets based on relative upside/downside predictions, a stock predicted to possibly go up a ton but only down a little may be a fair investment.

The classic "Value" investment text was written by Benjamin Graham ("the father of value investing"). Simply it looks at price to earning ratios, book value, and those value metrics relative to similar companies. The ASSumption is that underpriced deep value stocks will eventually catch up to their peers, while sometimes a stock is cheap because the company sucks. 

Another rubric used for stock picking is growth or momentum. The ASSumption here is that very high growers will keep growing. This is true until it isn't. Trees don't grow all the way up to the sky. Lately the momentum party is dominated by MAGA (Microsoft, Apple, google, Amazon, but there are more...)   

For a retirement account it's hard to beat just dollar cost  averaging into low cost index funds.

Generally a safe investment to start out because indexes are diversified across a number of different companies. One or more can fail without crashing your portfolio, like holding large positions in just a few individual stocks could. I had to check because I don't remember them all but I have 9 different stocks or ETFs  in my current portfolio. I have zero bonds... I haven't liked bonds for a long time, and like them even less now, even though at my age popular wisdom suggests that I should be mostly holding bonds. (But what do I know?). 

Being mostly bonds is too much imo.  Better to use more classic stock / bond ratios like 80/20 60/40 etc based on your age and when you would access the money.  If you're more risk averse something like the Ray Dalio all weather portfolio is worth a look too.

Don't know Ray, but still don't like bonds, while bond like dividends can seem attractive, but that's another potential trap. (A high dividend can support moderate price drops because as a stock price drops the dividend appears to go up, but if that dividend gets cut, look out below. The company has to be generating enough cash flow to support high dividends, some oil companies are now borrowing money to pay their dividends... no bueno. )

The market is at very high valuations,  but bonds don't look too attractive over the next decade either.  I think there is room for commodities and precious metals like gold and silver to run a lot higher.

I own small positions in gold and silver... they are both up now but for several years my gold was a loser. Market valuations are compared to what? They have pumped a lot of liquidity into the economy raising all boats (hard assets). If I was younger I might buy land (they stopped making land a long time ago).

I've been working on active stock picking,  both through mathematical modeling, and other more traditional metrics.

There are very smart people picking stocks and even they don't get it right every time. I own some Berkshire Hathaway because Warren Buffett is better at stock picking than I am, and he's a whale so gets offered better deals when he does buy stuff.

Are you thinking of short term or long term trading? Day trading has made many people wealthy, and even more people poor. Fractional shares and low cost trading (like robin hood) has sucked a whole new generation into short term trading. Their entire market experience is a recent market that only goes up... must be nice but unlikely to keep going up forever.  I bought my first common stock in the 1960s so I have seen a lot of individual stocks go down as well. I like to look at companies and ask myself will they still be around 20 years from now? 

No easy answers but these days you have the advantage of low cost trades, and massive information available free over the WWW. Back several decades ago it was a struggle just to get a current stock share price.

For short term (day trading) there are paid investment services that look at large bets in the options market to predict how the big fish (smart money?) are investing. But they have a tendency to drink the same kool aid and can sometimes all make the same wrong bets.

If I knew how to get rich in the stock market, I would do it, not give it away for free...  :

Buy low, sell high... Good luck.

JR

 

[Heikki]

Read "A Random Walk Down Wall Street" by Burton Malkiel if you wan't to know what long term data and academic studies say about popular investing techniques. If you're a fan of technical analysis you might not like the book, he compares technical analysis to astrology.

 

[Script]

No bonds here. They have been useless for more than 10 years now.

Professional big-time investment has it that no single position should make up more than 4 or 5 per cent of the entire portfolio. While this makes sense for very big portfolios, it is difficult to realize for small investors, unless they have very big money too. Well, what this means is that investments should be diversified. Having too much in one basket, one stock, one industry branch, one asset class, one strategy (e.g long versus short-term) equals running a very high risk and then the entire private investment enterprise will turn out to be a stressful and time-consuming activity, for the need to follow developments closely.

All investors need to structure / diversify their portfolio once it is more than a handful of different positions. Investments require time.

Contrary to common believe, stocks are comparatively 'safe' in the LONG run (10+years) -- provided they are bought comparatively low (close to or below book / accounting value), they are diversified, and they are good companies (which have been around for long and will most likely be around for longer VERSUS purely hyped industries or asset classes).

Dividend payments are too easily underestimated. A stock that has been bought low and risen by 100 percent over a couple of years (cos solid business model) is a good gain if sold now, but that same stock now can also yield double the original dividend amount -- and if it is a good company it can do so every year (old buy and forget strategy). Sure, that stock can crash by 30 or 50 percent, but with a solid business model it is very likely to recover and recover comparatively quickly.

Short-term, high-risk investments can yield that extra performance boost, but usually only for people who (1) really know what they are doing and/or (2) are willing to also invest time (the latter being the reason why pensioners are often good and even the better investors).

Last but not least, never invest all and everything at the same time -- unless there is cash coming in regularly and securely from elsewhere at all time. Nothing is worse than being forced to sell cos running out of cash for living expenses.

 

[JohnRoberts]

No bonds here. They have been useless for more than 10 years now.

+1

Professional big-time investment has it that no single position should make up more than 4 or 5 per cent of the entire portfolio. While this makes sense for very big portfolios, it is difficult to realize for small investors, unless they have very big money too.

and time to spend monitoring that many companies. I just checked my account last night and I have 9 different market positions spread across my Roth retirement account, and taxable account. I am 25% cash in those market accounts. Over the last several years I bought a few CDs but the interest rates these days are hardly worth the trouble.

Well, what this means is that investments should be diversified. Having too much in one basket, one stock, one industry branch, one asset class, one strategy (e.g long versus short-term) equals running a very high risk and then the entire private investment enterprise will turn out to be a stressful and time-consuming activity, for the need to follow developments closely.

All investors need to structure / diversify their portfolio once it is more than a handful of different positions. Investments require time.

Not only should you diversify holdings across different companies, you need to invest in different industries. Holding two or three similar companies can all drop in lockstep if that industry has problems.

Contrary to common believe, stocks are comparatively 'safe' in the LONG run (10+years) -- provided they are bought comparatively low (close to or below book / accounting value), they are diversified, and they are good companies (which have been around for long and will most likely be around for longer VERSUS purely hyped industries or asset classes).

That is problem with investing while old... good companies long term will generally grow out of short term set backs, but older people may not have 10+ years to wait for that. 

Dividend payments are too easily underestimated. A stock that has been bought low and risen by 100 percent over a couple of years (cos solid business model) is a good gain if sold now, but that same stock now can also yield double the original dividend amount -- and if it is a good company it can do so every year (old buy and forget strategy). Sure, that stock can crash by 30 or 50 percent, but with a solid business model it is very likely to recover and recover comparatively quickly.

with the bond market so puny there is a lot of investors chasing high dividend yield. Too high dividends are a warning flag that the company may be in trouble.

Short-term, high-risk investments can yield that extra performance boost, but usually only for people who (1) really know what they are doing and/or (2) are willing to also invest time (the latter being the reason why pensioners are often good and even the better investors).

Last but not least, never invest all and everything at the same time -- unless there is cash coming in regularly and securely from elsewhere at all time. Nothing is worse than being forced to sell cos running out of cash for living expenses.

Running out of money sucks... I lived on a tight budget back in the early 70s and it was not fun. That experience made me miserly. I always worked and avoided expensive habits (so far). 

JR

 

[bluebird]

Well its a retirement plan so I can't really throw everything in to stocks or bonds. I'm allowed 75% Stocks 25% Bonds.

Just changed it to that. Too much pressure from the cool kids!!!!
I've been told many times bonds were not a good idea especially if I have a while till retirement, but I couldn't stand thinking something like 2008 was going to happen. Its a totally different ballgame now and I shouldn't let fear prevent me from taking some risk...

I do think there will be another stimulus package in whatever form which seemed to be a good thing last time. I'm not sure why the republicans are being so stingy about the stimulus. It shouldn't be this partisan.

Look at me, gambling my future on the guys over at the Group DIY Brewery forum! Lol.

 

[john12ax7]

Not sure what you mean by "quant"

https://finance.zacks.com/quant-investing-6944.html

Essentialy a strategy based entirely on statistics and algorithms. 

There are very smart people picking stocks and even they don't get it right every time.

Some of the best short term traders only have a 53% success rate.  But you can make a lot doing that enough times.

I see merit in both modern quant methods and the more traditional Buffet  / Graham style.

 

[john12ax7]

I've been told many times bonds were not a good idea especially if I have a while till retirement, but I couldn't stand thinking something like 2008 was going to happen. Its a totally different ballgame now and I shouldn't let fear prevent me from taking some risk...

2008 will happen again,  you should be prepared mentally for drops of 30-50%. But as mentioned, if your time horizon is far,  you will still be better off in the long term.

Big drops are really buying opportunities.  People who bought in 2008 and more recently this March have done VERY well.

If it's a decent chunk of money I would recommend buying into stocks gradually though, instead of all at once. Perhaps take a year to get to the 75/25 ratio.  Maybe start with 5/95, then 10/90, etc.  This will average out your price entry point.

 

[Script]

Some of the best short term traders only have a 53% success rate.  But you can make a lot doing that enough times.

Requires a lot of money to start with, a traders account (so maybe 100 movments per month or so to not have cost eat up the gain), and a lot of time analyzing and monitoring until enough experience reduces the effort and 'work'.

Unfortunately, there is no secret trading method or strategy (and I doubt even an algorythm) that magically yields a favourably tilted gain ratio continuously over longer periods.

If it's a decent chunk of money I would recommend buying into stocks gradually though, instead of all at once.

+1

 

[john12ax7]

Unfortunately, there is no secret trading method or strategy (and I doubt even an algorythm) that magically yields a favourably tilted gain ratio continuously over longer periods.

There are strategies that work,  but then fizzle out as more people discover and use them. So it is a process of reinvention and discovery.   

I've spent the last few months learning Python and building an integrative trading platform.  So now it becomes a question of how good is the statistical analysis. Time will tell.

 

[Script]

Interesting. Keep us posted, please.

 

[JohnRoberts]

There are strategies that work,  but then fizzle out as more people discover and use them. So it is a process of reinvention and discovery.   

Hedge funds and big money managers have been throwing computers at the market for decades looking to eke out a small advantage that over large numbers of transactions can generate return.

"Quants" was a mildly pejorative description for hot shot programmers that came up with successful investing strategies (computer programs). Since the hedge fund community is small they often copied each other's strategies resulting in everybody standing on the same side of the boat (not good). Many hedge funds have gone out of business from making the same bets as other big money investors.

I've spent the last few months learning Python and building an integrative trading platform.  So now it becomes a question of how good is the statistical analysis. Time will tell.

I am not familiar with python but have been writing code more or less since the 70s.

The focus of big money investors for years was on network communication speed. Some firms pay for high speed access to large trading platforms so they can parse out short term trading patterns to identify pricing inefficiencies and profit from them. Several years ago a new trading platform introduced a speed bump in transactions to thwart the high speed front running. I shared recently about some devious traders that were spoofing, placing large orders that they didn't intend to execute, to generate a response from dumb money, and profit from the response to bad data. This is illegal and they got caught.  8)

The modern cutting edge for investing technology is using AI to interpret market moving news, and trading on it before the slow money figures out what is happening. There have been a few remarkable examples of  accidental bad or good news causing lopsided incorrect trades from this bad information.

This is all short term trading and many bets are still being made about election outcomes. The stock market is a discounting mechanism for future expectations. Right now it appears that a divided government will thwart the possible changes expected from a blue wave, so business as usual, while perhaps a little less business friendly.

Recently the market has been distorted by an expected huge IPO from Ant, Alibaba's financial transaction subsidiary. This IPO was scheduled to roll out on two exchanges, and big investors had to raise a lot of cash to participate in the IPO. Generally investors raise money by selling winners after they run out of losers. Then the Chinese government blocked this IPO, meaning all these investors needed to buy back the stocks they sold to raise cash, at least the good ones. So a bumpy ride.

I am not smart enough to day trade, or capable of reading the market moves faster than modern AI.

Good luck with that.   

JR

PS: After reading that Warren Buffett already bought some of the same companies I was investing in (with better deals) multiple times over the years, I just decided to ride his coat tails. Berkshire is currently 25% of my holdings and I am almost tempted to increase it again even though that works against diversification.

 

[john12ax7]

Interesting. Keep us posted, please.

Will do.

PS: After reading that Warren Buffett already bought some of the same companies I was investing in (with better deals) multiple times over the years, I just decided to ride his coat tails. Berkshire is currently 25% of my holdings and I am almost tempted to increase it again even though that works against diversification.

“Diversification is a protection against ignorance.” -Buffet


Riding coat tails can be a rather profitable strategy. Cathie Wood might be the Buffet of tech.  Wish I knew who she was sooner. For those interested in high growth (also higher risk) tech companies,  look her up.

 

[Script]

Berkshire H. is a conglomerate holding company and as such diversified in its investments. It's almost comparable to a fund -- just better.

 

[john12ax7]

So I've run in to a potential issue with algorithmic trading.  How do you extract and factor in news into the computer modelling.? Markets were overloaded on Monday due to the vaccine news.  This caused some significant price swings. The movements made sense from a human interpretation perspective.  But more difficult to quantify with statistics.

Brokerage said it wasn't something they hadn't seen in a long time.

 

[Script]

So I've run in to a potential issue... Markets were overloaded on Monday due to the vaccine news.  This caused...

Maybe skip that 'white' swan. Just like it's 'black' sibling, it's almost impossible to foresee sth like that unless news were bias-filtered or prioritized for 'urgent' issues. Or treat as 'blitz' momentum !?

 

[JohnRoberts]

So I've run in to a potential issue with algorithmic trading.  How do you extract and factor in news into the computer modelling.?

I thought I already mentioned this, some hedge funds use AI news readers to interpret market moving news and trade on it before the slow money figures out what is going on. They don't always get it right and accidental false news releases can mess them up. 

Markets were overloaded on Monday due to the vaccine news.  This caused some significant price swings. The movements made sense from a human interpretation perspective.  But more difficult to quantify with statistics.

The CEO of Pfizer sold $5.6M of Pfizer stock on monday...but he scheduled that stock sale back in august... but the timing of his good news release was sure fortuitous.  :

There appears to be a rotation from momentum (like MAGA) to value stocks on the expectation of a return to normalcy. Not quickly but the stock mark is a discounting mechanism pricing stocks based on economic expectations a year out or more. 

Brokerage said it wasn't something they had seen in a long time.

I suspect there is a lot of new robin hood and fractional share trading volume without good settlement bandwidth.

I have observed a lack of diversity as both of my fin tech positions (Paypal and Square) both moved up and down huge on subsequent days in tight lockstep.

Boeing is scheduled to fly the grounded max 737 jets again soon... That just might be market moving news (or not).  8)

JR