Q&A with Fred Piard
I recently stumbled onto two unknown investment books, by an unknown author, which I am sure you will also find interesting.
Third Point's Dan Loeb discusses their new positions in a letter to investor reviewed by ValueWalk. Stay tuned for more coverage. Loeb notes some new purchases as follows: Third Point’s investment in Grab is an excellent example of our ability to “lifecycle invest” by being a thought and financial partner from growth capital stages to Read More
The first one is called Quantitative Investing: Strategies to exploit stock market anomalies for all investors Published: 26th Aug 2013.
The second one is The Lazy Fundamental Analyst: Applying quantitative techniques to fundamental stock analysis Published: 6th Oct 2014.
Both were written by the unknown (at least to me) author called Fred Piard. He must have been VERY busy to be able to publish two books, the second one just over one year after the first.
Fred also has impressive qualifications. He has a PhD in computer science, an MSc in software engineering and an MSc in civil engineering.
Behaviour can be modeled but not predicted
I really liked the following extract from his bio:
“As a software architect he knows that the things that work the best in the long term are the simplest.
As a consultant he experienced the real economy through various sectors: energy, banking, healthcare, manufacturing and public administration.
And he learned from marketing that human group behaviour can sometimes be modelled, but never predicted. “
What I do for you in the blog
The last line sounds a lot like investing I am sure you will agree.
It is also what I try to do with this blog; look at investment strategies that worked in the past as they are sure to give us a good idea of what may work in the future.
This is of course not a guarantee that the strategy will work but it is a lot better than us just using any old strategy we have thought out and thinking (or rather hoping) it will give us great returns.
These books are on my list
I have not read Fred’s books yet but they are on my reading list, at the moment I am still working through another book you may like called Algorithms To Live By: The Computer Science of Human Decisions.
Find out more about Fred
Before reading his books I wanted to find out more about Fred and thankfully he agreed to the following interview:
How did you get started in investing?
Fred Piard: I was not satisfied with the way I was managing my savings and decided to learn by myself.
I began to read research articles on the Social Science Research Network and to scan data with screeners and simulation tools.
I became a full-time student of market data during a couple of years.
How did the two books you wrote come about?
Fred Piard: I started writing articles on Seeking Alpha in 2012 to share and test ideas.
Some of them got the attention of Mr Eckett at Harriman House. He asked me if I would write a book. English is my 3rd language and he was a great help!
A year later, he asked me to write a second one.
What is the basic idea behind both books?
Fred Piard: Ideas were different for both books.
Quantitative Investing is the book I wished I had read as a novice investor: a reference manual keeping things as simple as possible.
It also contains guidelines to design new models. I was surprised to get positive feedback by very different readers, from novice investors to finance professionals.
The second book is a formalization of working notes on fundamental factors. Unlike the first book, it is not backed by external references.
Time will tell if it is good or not.
Describe your personal investment approach and how it developed over time?
Fred Piard: I work in 3 directions and I start them in this order:
- Tactical allocation (with ETFs),
- Quantitative models of value (for stocks), and
- Systemic risk evaluation.
The 3rd one requires a short explanation.
I don’t believe in single market timing indicators, but I think that it is possible to aggregate several of them to get a kind of avalanche danger scale for the stock market.
I have 2 systemic risk indicators, with ETF strategies and hedging tactics based on them. The simplest version is updated weekly and sent to anyone who asks (to sign up click here).
Describe your investment philosophy?
Fred Piard: In a few words, I would say “investing in abstract models of value”.
It means finding a set of robust data patterns in the financial markets, making systematic models with various rationales, and executing several of them with discipline.
Discipline is compatible with adaptation. Discipline is mostly keeping to basic rules and schedules, having a long-term vision, and resisting the temptation to micromanage.
What are your ideas concerning portfolio composition and the value of individual holdings in relation to the portfolio?
Fred Piard: For a passive investor, it is possible to implement a variant of Harry Browne’s Permanent Portfolio with 4 ETFs like:
- Vanguard Total Stock Market ETF (VTI),
- Vanguard Long-Term Bond ETF (BLV),
- Sprott Physical Gold Trust (PHYS) and
- Barclays 1-3 Month T-Bill ETF (BIL),
And re-balance them once a year in fixed weights, possibly different from the original model, or in risk parity.
For an active investor’s total portfolio, I would say a minimum of 20 stocks and 4 ETFs, with a maximum of 20% of portfolio value in any sector, 10% in any industry, and 2% in any individual stock.
Can you describe your top investing mistakes and what you’ve learned from them?
Fred Piard: Before working with portfolio models, I was taking too large positions.
One of my most expensive mistakes was ignoring the roll yield while holding commodity and volatility ETFs. Then I have learned to use it in models with inverse CBOE Volatility (VIX) derivatives.
How concentrated is your portfolio?
Fred Piard: 28 stock positions plus ETFs, Closed End Funds (CEFs) and other funds covering various asset categories.
The sector exposure is larger in healthcare, consumer staples and technology than in other sectors.
Most stocks are large caps. A big part of stocks is hedged against the S&P 500.
Do you follow any key risk-management guidelines in managing your portfolio?
- I don’t use margin.
- I have limits in position size.
- I keep some cash.
The simplest rules are the best. I am sceptical of other risk-management metrics.
For example, Kelly’s criterion is designed for information theory and gambling, not investing. Its formula is an invariant with leveraging. The risk is not.
What is your view on the use of stop-loss strategies?
Fred Piard: Stop orders are dangerous when prices fall sharply and bounce, for example in a flash crash. They also give to brokers information that can be aggregated.
Speaking of strategies, comparing real or simulated performances with and without stop rules is not enough. The sample of stopped trades must be statistically significant.
Finding a good stop-loss strategy is still on my to-do list.
What do you think of short selling?
Fred Piard: Short selling strategies are impossible to backtest in a reliable way.
There is no database that provides information on the availability and interest rate for borrowing shares on a specific day at a specific broker.
Anyway, I don’t like a game with a possibility of limited gain and unlimited loss.
Also even selling large caps short is not a guarantee against a short squeeze. I had no position in it, but I remember what happened to Volkswagen AG on the 27th October 2008. Gaps up and intraday peaks were crazy two days in a row
What is your 80/20 investment strategy or principle? (The most important 20% you must do to get 80% of the highest investment returns)
Fred Piard: I am not focused on getting the highest returns, but on getting reasonable drawdowns.
Once an investor has found his/her method, the challenge is to follow the plan consistently.
I like this quote of Warren Buffet:”We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen.”
Anything else you would like to mention?
Fred Piard: Yes, Tim, thank you for this interview!
To all readers, I share my point of view as an individual investor. Nothing above is investment advice.
Have a nice day and trade safe.
Your interviewing analyst
Tim du Toit
Article by Quant Investing