Investing without emotion?
The CFO of my company was explaining their investment process to me. He said for the last 10+ years the company decided to go with quant and technical analysis. He said one of the main reasons is that it takes the emotion out of investing. I'm new and currently in a back office spot so I dont know much about their analyses. However, is it true that there is no emotion compared with this? They manage a couple different mutual funds and that is their process. It just kinda threw me off to hear that because everything I was taught in school was about qualitative analysis. My goal is to work my way into an analyst role, but I already feel out of place because I know nothing about quant research. So any opinion on the subject of any emotions dealing with quant would be appreciated.
even with quant its hard to totally take emotions out of the game, but it is important to try and minimize them as much as you can. I would 1. learn quant skills as they will help your career 2. try and separate emotions from investing to the extent that you can
Yeah, it seems like it'll always be ther.
I have no idea where to start. I recently failed CFA level 1 so im retaking in December, but the whole quant section is basic probability. Is that all quant is?
I guess I should have clarified, I thrive off the emotion involved with investing and dont care for the idea of investing without emotion. But I do see what you're saying, just dont make decisions based on emotions?
Quant work involves a lot of data, and yes statistics is the tool of choice.
The market participants, other than the algo robots, are human beings. Human beings have emotions. Therefore, the data (such as security price) used in the quant models are based on emotions and expectations of the market participants. So whatever method it is, emotions are involved.
There are only a few guys out there who are truly exceptional quant investors. Jim Simons is the guy that always comes to my mind first. He hires NON-FINANCE PhDs precisely because he believes in finding short-term trends using scientific methods in non-finance disciplines. His firm, Renaissance, is exploring market inefficiencies using unconventional tools. That's hard work and, in my opinion, only way to generate alpha in the quant investing business.
Technical analysis is a very subjective science. There exists differences even among people who use the same technique of technical analysis. For example, if you ask 10 Elliott Waves practitioners to label the same chart, you will get 9 different responses. I know no better name for biases and emotions, rather than tech analysis
Quant - very very often quants is the nice name for algo-fitting. You over-optimize your variables based on the past history. For example, you might create a strategy that trades companies with the P/BV only of 1.44751, because this type of companies, returned the most in the last 10 years. That's over-optimization, there might be survival bias, and your strategy simply won't work in the future. You're driving with the rear-view mirror. *I am referring to the biggest majority of quant strategies. Of course, there is Jim Simmons who hires only PhDs as interns for developing their HFT strategies. By the way, very good article about it : http://www.bloomberg.com/news/articles/2016-07-07/jim-simons-has-a-kill…
My advice, don't go into technical analysis. Look up at the list of top 100 investment managers, and tell me one of them who got rich by trading moving averages. It is very good that you know about qualitative. Focus on that field. Quant- well depends. If you're a probability theory and statistics genius, then you might be a successful quant. In rest, the majority of robots are just an efficient way to loose money. I think the industry will be 80% automatized in the far future. However, the human component will never be removed.
you might even argue that ben graham (warren Buffett's mentor) was the first quant. look at his 10 rules in Security Analysis, all quantitative. there have been tons of studies on various rules based strategies, namely valuation based (david dreman's done extensive work here), and over long periods of time they do pretty well. the trouble is most investors aren't patient enough to stick with a strategy for 10y. low PE would not have worked during the entire 90s decade, it would've been hard to stick with through this.
so the emotional fortitude is not in selecting the investments, it's tested in sticking with the strategy, because even empirically sound strategies fall out of favor every once in a while, sometimes for many years. but as far as dealing with your emotions, I think some people are born with it and others aren't. I think surrounding yourself by the right people helps, if you're constantly around chicken little types, you won't do well. but aside from that, it mostly comes with experience.
Find an approach that you're comfortable with and that stops you from doing things at the wrong time.
I buy into the wide moat, high quality, concentrated portfolio approach. Partly because I think it works due to the structure of the fund management industry, partly because I'm not confident in my ability to identify value better than the rest of the market, and partly because I'm lazy and it suits me. As a result of the above, I'm totally confident in my approach and know I would never panic and sell my shares during a down turn. I may underperform long term (which I doubt), but there's no way I'll get shaken out, which I think is more important.
Do whatever you won't shit your pants over and know you'll stick to. Quant, value, growth, dartboard, whatever.
The hard part about investing only based on technical analysis is you're of a small minority doing that. Whether people admit it or not, most decisions are made based on emotion - not being in tune with how current events, recent performance, and fear and greed, play into the decision making process of others can leave you wondering why your sophisticated model failed to predict alpha and you lost your money.
I think a holistic approach is best with a healthy amount of technical analysis, interpretation of current events, common sense, risk taking and hedging, and some gut feelings is best.
Example: crazy stuff happening in news, buy personal defense industry stock, go to local personal defense store and see its packed, hold and make some money, check RSI see it's way overtraded, get out.
Oh and don't fight the fed, they're much bigger than you.
you are glossing over the fact that not every technical analyst is a good technical analyst. In fact, most are NOT very good.
for example, Just saying "be long above the 20 day moving average, and short below it" is a "technical" strategy..but that doesn't mean its a GOOD strategy.
The "job" of a technical analyst is to find a technical strategy where gains are larger than losses, as well as more frequent. This is easier said than done.
Technical analysis shall be ONLY used to support/deny your ideas based on FUNDAMENTAL analysis. All of those lines cross each other and hit god knows what support/resistance levels because there are fundamentals driving those lines. Technical analysis is literally a process of measuring supply and demand. Do not turn it into a science where it becomes ridiculous and you are simply wasting your time.
It's kind of ironic to say that quant/technical trading takes away the emotion out of investing.
When developing a thesis, admittedly one may tend to get attached to the company that he/she has done a ton of research on. Conviction in an investment thesis can be both a good and bad thing. Objectively, it is this conviction (at least partly driven by emotion) that allows an investor to care less about what the market (everyone else) CURRENTLY thinks because he/she believes there's a market imbalance (time horizon is dependant on what type of fundamental investor you are) available to take advantage of.
Tech analysis, similar to fundamental analysis, is making a prediction about the behaviour of an asset. However, instead of your own thesis, you rely on intra-day, 1-day, 3-day, etc stats to tell you to either get in or get out. At the core of it, this breed of investor also believes that the market eventually balances. An important distinction to be made here though is that the arbitrage opportunity that exists is typically that of a short-term nature.
Let's consider the following possible scenarios of short-term trading:
1.the hype has not yet peaked 2. the anti-hype is temporary 3, the hype has hit its peak 4. the anti-hype has yet to hit its swell
Every single scenario is based off taking advantage of the aggregate investor. Emotion is perhaps even more so emphasized in tech investing, just in a different way. Don't be mislead that tech analysis is this "emotion-less" method of investing. At the core of it, tech analysis is predicting that the asset's behaviour, driven by the average confidence of EVERYONE ELSE, is either completely wrong or slightly misguided.
Between the two methods - you're just reallocating whose "emotion" matters most.
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