Traditional Investing: The Old Way
For decades, investing has been largely a human-driven process. Professional investors, or “stock pickers,” would:
- Read company reports and financial news
- Meet with company executives
- Analyze industry trends
- Use their experience and intuition to make investment decisions
While this approach has its merits, it’s limited by human capabilities. Even the most dedicated investor can only process so much information, and emotions can sometimes cloud judgment.
Quantitative Investing: The New Frontier
Now, let’s explore a different approach we use at East Green PMS called quantitative investing. But what exactly is it?
Quantitative investing is like having a set of smart algorithms as your fund manager. Instead of relying solely on human analysis, we use math and data science to crunch vast amounts of market and financial data.
How Does It Work?
- Gathering Data: We collect information about stocks, indices and other traded instruments from numerous sources.
- Analyzing Patterns: We use machine learning and data science to find patterns and opportunities in the data set
- Making Decisions: Based on this analysis, we decide what to buy, sell, hold or switch in our investment portfolios.
The Key Ingredient: Factor Investing
One important component of our quantitative strategy is called factor investing. Think of factors as characteristics that can affect how an investment performs. For example, traditionally, the investment world recognizes four or five main factors (depending on whom you speak to) that drive future returns:
- Value: Is the company priced lower than it should be?
- Momentum: Has the investment been performing well recently?
- Quality: Is it a stable, well-managed company?
- Size: Is it a big company or a small one?
- Volatility: Does the investment’s price jump around a lot?
Now, these are by no means an exhaustive list of factors that drive returns. Moreover, each of these factors have their own characteristic advantages and disadvantages in a portfolio. There is no golden rule that one can just choose the value factor or the size factor, and hope to consistently outperform the market over time. The key here is to choose which factors you want to focus on, and also, when. Because, no one factor has been dominant throughout history and the dominant/leading factor at a given point of time has always been different. We are also constantly identifying new and proprietary, minor factors of investing as well.
Why Choose Quantitative Investing?
- Less Emotion, More Logic: Less human intervention means the strategy doesn’t panic during market dips or get overly excited during booms (or vice versa!).
- Broader View: We can analyze thousands of investments quickly, spotting opportunities a human might overlook.
- Adaptive Approach: Our investment models constantly update and improve to handle changing market conditions.
- Better Risk Management: If one analyzes thousands of investment options, one can also spread the investments across multiple stocks, sectors, and asset classes, and adjust them as necessary. Quickly exiting and entering stock markets, whenever necessary, is also easier in a rule-based strategy.
Is It Perfect?
While quantitative investing has many advantages, it’s not foolproof. Markets can be unpredictable, and even the best models can’t foresee every possibility. That’s why we constantly review and improve our methods, taking cues from the market. And having a kill switch (exit and move into cash) as part of the strategy also helps.
The Bottom Line
At East Green, we have combined advanced data science and our experience in financial markets. While the technology behind it may be complex, our mission is simple – help our clients achieve their financial goals.
Have questions about how quantitative investing could work for you? We’re here to help! Feel free to contact us to learn more.