Days of "stock pickers" dead?

[WallStGolfer31]

It seems so to me!

Take a look at this job board over at Wilmott, there's not too many positions that don't have a required MsC/MA/MS/PhD in a quantitative field needed just to apply. Top funds don't use "stock pickers" anymore, they use quantitative researchers. The skills you'll need for today's job market in the funds management industry are increasing quantitative and research oriented, don't get left behind!


Does anyone think otherwise? lol

[investoid]

While quants are on the rise right now, I think at some point the market will find a balance between the hard core quants and the traditional fundamental stock pickers. In fact, I think you'll see the models developed by the quants trickle down to the traditional pickers in the form of stock screening tools as well as single-stock analysis.If you read up on what they're doing, it's not foolproof - everything they do is based on mathematical models that are continually refined. There is no investing panacea, so I think smart individuals will always be able to invest qualitatively (with solid quantitative tools as a basis for their reasoning).What I think this means is the death of 'technical analysis' - and good riddance.

[anfern057]

So the only way to find a good business is with a Mathematical formula?

What a wild future we live in.

And yea, don't you think its a coincidence that on a Quant Message Board you will find jobs that majority require some sort of quant skill?

[WallStGolfer31]

Originally Posted by anfern057

So the only way to find a good business is with a Mathematical formula?

I think this is the fundamental misunderstanding of what quantitative financial research really is from an outside perspective.

It's not developing a mathematical formula and plugging in numbers and ratios to find an investment. What it is though, is applied advanced financial theory, which just so happens to be as math intensive as things like engineering or astrophysics.

You don't see people accusing engineers of designing the perfect building by plugging in conditions into a formula; rather they use design theory, construction techniques, and other pure engineering methods and describe them in the most accurate way a person can describe something, mathematically.

Language has it's limits, and when describing processes that are extremely complex, semantics just won't work, you need something precise, you need mathematics, the language with no barriers.

[aquaswim47]

I agree entirely with Investoid. But I don't think there will ever be a substitute for knowing a company inside and out. Otherwise, you won't have an advantage over these fellows until its too late. That means, it might be advisable to invest between 5-20% of your net-worth in a business that you know well but whereby you can risk losing everything. That's what Warren Buffet did. He also had a lot of luck. I wish all of us on this board could have the same luck that Warren had. Fat chance. Maybe, the risk profile of Warren is high and not one of us would be willing to take on the same risks involved that Warren took on. Alongside with his luck and his ability to evaluate management and their underlying businesses made him a fortune and the guru that we all respect today.

There's also nothing wrong with index funds as they provide a pretty sizable return. Even an 8-9% rate of return with a $20 per day savings rate can translate into significant wealth. To give that up, by actively managing your portfolio better mean 1) that you know what you're doing, and 2) you have some knowledge of a colleagues business before anyone else. Also, this applies if you patron a business and/or really like the product that the business sells. You see that your friend (not a close friend or relative) is seeking a loan and instead, if you find it to have merit, you provide him an equity investment (maybe with a 5 year exit clause in which you are paid back your money in 3 or 4 years and a percentage of the profits with the option but not the obligation to reinvest). In other words, you are a venture capitalist/limited partner for this business. In the agreement, after 5 years, you should only be entitled to a larger percentage of the profits. As long as you have an established business and you have no qualms about your friend's financial character along with knowing that the business is an area that could (will) generate customers, than investing in that business might be a smart financial move. Off course, it also is a risky move. That's one thing that quantitative analysis won't beat.

One question: is luck a part of fate (our destiny) or do we create or own luck?

[WallStGolfer31]

Aqua,

You are aware an overwhelmingly complete fundamental analysis of all the numbers, ratios, and just about every other measurable aspect of the company is taken into account right?

Linked here is an example of what quantitative manager would first start out with, while on the other hand, it is also coincidentally what mutual fund managers and individual investors probably begin to finish with (if not to a lesser extent).

From here fundamentalists will make one of many errors. They will for one, look at growth/decay of their favorite numbers, ratios, etc and extrapolate a trend, or may even create a regression to make the extrapolation.


Quant managers see this sheet given to them from the research underlings as just barely scraping the edge. Think of a quant manager in the sense of a crime scene forensic analyst, detective, jury, judge, and prosecutor into one job.

They take would would be a single hair from the spreadsheet above, run it through hundreds of tests, compare it to research results in the past, and turn out a full research report, about a single line from above. From there you'll track down the same thing in other equities (or whatever your looking at). Then if the rare occurrence of finding some kind of almost microscopic pricing discrepancy is found, they decide how to exploit it, and exploit it to it's fullest.

These things usually disappear fairly quickly (showing market efficiency makes it down to the smallest level), so ongoing research is a must for the survival of a fund.


As you can see, research this deep, this specific does indeed require extremely advanced mathematical techniques. Make sense?

[anfern057]

What I don't get is if its all just "math" why can't it be programmed?

If you are only using raw data that everybody can obtain, why can't you make your formulas (however complex they may be) once in a macro or program and then keep using it without having to calculate anymore.

In other words...Why do I need to go to grad school for this?

Btw Dan, check out my other post about historical data. What I am trying to complile is pretty similar to the spreadsheet you uploaded. We need to put both of our heads together and create a beast of a databse.

[WallStGolfer31]

Andy,

The reason a person has to know this math is due to the issue of the applying it to research. What you apply to each situation will mostly likely be quite different, not just a standard set of formulas.

Here's an example. I ask you how far you've driven to get to my house one day, but one there's one problem, you've rigged your odometer to not log miles in order to increase it's resale value hehe (completely illegal). What does work correctly is the average speed monitor on your dashboard, you also know the time you left and we know the time now.

For you and I, we have obtained the mathematical skills thus far in our education to solve this problem. Rather, let's say you give a 3rd grader full access and instruction on how to use the powerful software Mathematica. The 3rd grader, although having graduate level computation capabilities due to the use of that software, will most likely not figure out the correct answer to our distance problem.


Now take our distance problem and make it 1000 times harder. That's why you need to have graduate level mathematics to solve problems for serious quantitative research. Also, a PhD is all about research as it is, making these guys experts in their field and in research in general. Is it clear what I'm talking about here?