Explore the benefits of quantitative investing over emotional decision-making in the market. Learn about strategies like buying undervalued stocks with positive price momentum and combining value factors with price momentum for successful outcomes. Discover how quality-screened micro cap stocks can mimic the returns of private equity. Understand the importance of a systematic and disciplined approach in investing to navigate emotional investment decisions.
Quantitative investing uses data to enhance portfolio returns by analyzing factors like P/E ratio and earnings growth rate.
Combining momentum with valuation metrics can provide a comprehensive valuation perspective and improve investment performance.
Deep dives
Quantitative Investing: Evidence-Based Strategy
Quantitative investing involves using empirical evidence gathered over market cycles to analyze factors like price to earnings ratio and earnings growth rate. This data-driven approach provides insights into factors such as drawdowns, strategy performance against benchmarks, and consistency over time. By relying on evidence rather than emotional decisions, quantitative models have shown to outperform professional investors and experts, offering a disciplined method to navigate market volatility.
Valuation: Moving Beyond PE Ratio
While price to earnings ratio (P/E) is commonly focused on, it may not always produce optimal results due to its susceptibility to manipulation. Alternative measures like price to sales ratio, EBITDA to enterprise value, and composite value factors offer a more robust approach to measuring corporate value. Combining momentum with valuation metrics can enhance performance and provide a more comprehensive valuation perspective for investors.
Behavioral Finance and Emotional Decision-Making
One of the key challenges for investors is avoiding emotional decision-making driven by fear, greed, hope, and ignorance. Establishing a systematic, disciplined approach to stock selection helps mitigate emotional biases and ensures consistency in decision-making. Retail investors can benefit from working with a financial advisor to navigate market uncertainties and stay on course during turbulent times, leveraging their objectivity and expertise to counter emotional impulses.
Throughout history, investing has been a lot more “Art” than “Science.” But today, data is widely available and it’s a key tool you can use to enhance your portfolio returns. In this episode, Barry Ritholtz speaks to Jim O'Shaughnessy, former chairman and founder of O'Shaughnessy Asset Management (now part of Franklin Templeton) and author of the New York Times bestselling book, “What Works on Wall Street” -- the first quantitative investing book available to the general public.