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Quantitative investing offers several advantages over non-quantitative approaches. It allows investors to focus on long-term trends and regime shifts, avoiding the noise and short-term fluctuations in the market. Quantitative analysis also helps control biases by systemizing investment rules and ensuring confidence in investment theses. Additionally, quantitative investing enables the management of multiple investments and positions, a challenging task for human investors but easily scalable for computers. This approach reduces reliance on luck and allows investors to focus on their skill in making investment decisions.
One bias commonly observed in non-quantitative investing is the focus on buying decisions and neglecting selling decisions. Research suggests that many investors tend to leave money on the table by not giving enough thought to their selling strategy. Quantitative investors, on the other hand, emphasize the importance of rules-based investment strategies that help them avoid biases and make objective decisions. By developing and following systematic rules, investors can determine the optimal time to sell based on their investment theses and avoid emotional or impulsive decisions. This prevents missed opportunities and maximizes investment returns.
The question of what causes stocks to go up can be complex and multifaceted. Traditional indicators like the yield curve or interest rates may not always provide reliable predictions. However, the concept of causation, particularly in the context of causal AI, offers a promising approach. Causal AI involves creating models that identify causal relationships between events and use these models to make informed investment decisions. By building causal models and understanding the mechanisms behind market behavior, investors can gain a deeper understanding of stock market dynamics and improve their investment strategies.
Risk management is crucial in investing, especially when dealing with big events that may affect the market. By controlling exposures and avoiding being exposed to big events that one knows are happening, investors can significantly impact their long-term returns. It is essential to recognize the importance of managing risks and not be solely focused on predicting the outcome of specific events.
Kelly sizing is an investing strategy that focuses on maximizing terminal wealth rather than risk-adjusted return. While it may be tempting to seek maximum wealth accumulation, there is a real risk associated with this approach. Diversification and optimization of portfolios can help mitigate such risks, ensuring that even in unforeseen circumstances, the investments remain intact. Experience also plays a crucial role as individuals often reassess their risk tolerance after experiencing significant losses.
On todays episode Michael Robbins, CIO of Larson Financial & Professor Of Quantitative Investing at Columbia University joins the show for a discussion on the quantitative investing strategy.
Authoring the book "Factor Investing and Machine Learning for Institutional Investing" Michael takes us back to the very basics in answering what is quantitive investing, what actually causes markets to go up, why most investors are NOT stock pickers and how a quantitive strategy can help manage risk & create sizeable returns. To hear all this and more, you'll have to tune in!
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Referenced In The Show:
Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors: https://www.nber.org/papers/w29076
Quantitative Asset Management: Factor Investing and Machine Learning for Institutional Investing: http://quantitativeassetmanagement.com/
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Timecodes:
(00:00) Introduction
(00:39) What Is Quantitative Investing?
(02:24) Selling Fast & Buying Slow
(05:26) What Causes Stocks To Go Up?
(09:02) Are Rising Rates Actually Bad For Stocks?
(15:11) Stock vs Bond Arbitrage Strategies
(17:37) The VXX ETF
(24:11) Most People Are NOT Stock Pickers
(29:54) Risk Management
(35:14) What Are The Biggest Mistakes Investors Make?
(44:31) Being Early Is The Same As Being Wrong
(49:37) What Indicators Are Worth Following With A Quantitative Strategy?
(56:41) Liquidity
(01:00:07) The Five Factors Of Investing
(01:05:55) Investing Using Artificial Intelligence
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.
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