UK Analyst reviews Quantitative Investing
It is probably true to say that the market is saturated with investment books on how to make money from growth, value, income shares and the like. New ideas which add anything to this area are few and far between. But in Quantitative Investing Fred Piard provides a refreshing and informative guide on how to implement a number of scientific based strategies in order to do what most investors aim to achieve - beat the market on a consistent basis.
While quantitative investing sounds like a complex strategy, dreamt up by a risk manager with a PhD in Maths at one of the big investment banks, fortunately the author makes it simple to understand and to make use of. To paraphrase Piard's definition, quantitative investing uses behaviours of the financial markets in order to make investment decisions which should, with a reasonable degree of confidence, deliver decent returns.
Author Fred Piard had a background in software, information systems consulting and marketing before applying his knowledge to the financial markets. As a consultant he gained experience of a number of sectors, including energy, banking, healthcare, manufacturing and public administration. He holds a PhD in computer science, an MSc in software engineering and an MSc in civil engineering. With a CV like that you might expect a book full of technical language, but don't worry, every chapter is written in simple English.
Using a scientific approach, the core of the book provides information on market anomalies and how to implement strategies around these anomalies to potentially beat the market. These strategies are built around the four main concepts of market timing, momentum, seasonal factors and valuation. Of course there are no slam dunk free money opportunities in investment and these strategies may not result in a better performance every time - as all the risk warnings say, "the past is not a guide to future performance". However, they have all been used successfully by professionals investors over time in order to give them an edge in beating the market. To demonstrate this the author provides evidence of how all the strategies he suggests have worked over time by backtesting them and showing how they performed in relation to a relevant benchmark.
All the strategies given in the book are based on a number of sound principles, being backed by hard data analysis, academic studies and professional publications. One fascinating study on seasonal trends even looks at 316 years' worth of data, so you can be reasonably sure that the advice given has a much more sound basis than that given by the less credible, fly-by-night, financial commentators out there. Notably, one seasonal based strategy in the book, based on how stock markets perform during different months of the year, returned an incredible 1,132% over an 11 year period, or 27.2% per annum! What's more the strategy is so simple it involves only 8 orders a year and less than a few minutes to implement. It is easy to be dismissive of such strategies but when they can potentially deliver returns like this they are definitely worth investigating.
Quantitative Investing is not a book for the novice investor, with a decent level of knowledge of both fundamental and technical analysis required in order to understand a lot of the strategies in full. Less familiar concepts, such as the Sharpe ratio, Sortino ratio and Kelly criterion, are introduced and some knowledge of basic financial maths and statistics would also help. Nevertheless, all concepts are explained in an easy to understand manner.
Perhaps most important for the private investor, the strategies provided in the book can help to remove emotions from the investment process, enabling a greater degree of discipline and long-term vision. They can also be managed in as little as 5 minutes a week, which makes them ideal for anyone in full time employment or who lacks the time to crawl through company news & financial statements on a daily basis. Also useful is that details of the free software used for the analysis in the book is given in the appendix - unlike many other books this one is not being used as a sales tool for the author's expensive software programme.
Quantitative Investing is primarily based at long-term investors, although those focussed on the short-term, and day traders, are well advised to give it a read given the high trading costs involved in these strategies. On the upside all financial instruments covered in the book are highly liquid. On the downside however the strategies are not suitable for short sellers. Also, they are based mainly on US based listed stocks and ETF's but can be adapted to other markets. Overall, for those investors who want a range of new ideas on how to make money from the markets this book is an ideal addition to the library.