Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors

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Quantitative Value

This is a book that gets everything right in broad, but is too insistent on the details.  How should you approach value investing from a purely quantitative standpoint?  Easy:

  • Screen out stocks that have relatively high accruals
  • Avoid companies that may go bankrupt
  • Margin of safety: choose companies with strong balance sheets and profits
  • Look for long-term strength in profits.
  • Buy them cheap.
  • Buy when informed investors are buying.

But here’s the problem.  Like the book What Works on Wall Street, Quantitative Value suffers from over-optimization.  You pass through the data too many times, and you show great returns from the past, should someone have done it that way.  But how much of the result is signal, and how much is an accident?

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The broad principles are unavoidably true.  Even the measure of quality, Gross Profits as a fraction of Assets, was new to me, but when I read it, I realized that it was a proxy for having a moat, a sustainable competitive advantage.  I added it to my screening framework.

With all of that said, I have simple advice to the readers.  Follow the broad outlines of what the book teaches, but don’t follow it in detail.  It is good to own companies that are sound, cheap, and improving.

I would also add this: use quantitative screening and scoring as a first step.  I often note that companies that score well in my screens have accounting issues.  So, be wary, and realize that value investing primarily means having a margin of safety. I.e., you won’t lose much if you are wrong.  Purely quantitative value investing can be improved through company and industry knowledge.

Quibbles

Already expressed.

Who would benefit from this book: Amateur value investors will benefit from this book; if the reader does not want to put the effort into learning value investing, this book will be of no use to him.  If you want to, you can buy it here: Quantitative Value, + Web Site: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors.

Full disclosure: The publisher sent me a copy of the book for free.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

By David Merkel, CFA of Aleph Blog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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