The first time this has ever happened

  • A moment of serendipity
  • This is how I put the odds in my favour
  • The market within

Did you see this interesting little snippet last week?

The Financial Review reported that State Street’s Olivia Engel became the first woman and first quantitative fund manager to win the Blue Ribbon Award for best Australian large-cap fund.

Now, as a dad with two young daughters, it’s always great to see woman succeeding in a male-dominated profession like investment management. We always tell our seven year old that she can do anything boys can do, and to never think they are better at anything.

But that’s not the interesting thing about the award. Olivia Engel was also the first ‘quant’ to win it. Quant is short for quantitative fund manager. A quant is different from a ‘stock picker’, in that their opinion doesn’t come into it. They let algorithms do the work. As the Financial Review explains it:

Quantitative fund managers select stocks based on computer modelling. In a pure quantitative fund all of the decisions are made according to a formula with no room for human interpretation.

Olivia Engels puts the quant advantage well when she says:

I don’t have to put myself in a situation where I have to worry about whether management is telling me the truth or whether they are simply good at telling a story. The numbers do not lie.

We do not look into the eyes of company executives and ask ourselves if we believe they can turn the company around, or deliver on their promises.

She’s exactly right. Humans are fallible, and prone to errors of judgement. And there is no other place in the world that will expose your errors of judgement like the stock market does. Yet we continue to invest with fund managers, or try to manage money ourselves, despite being clearly fallible!

That the award for the best large-cap fund went to a quant for the first time ever, and was announced just last week, came at an interesting time. I’ll tell you why in a moment. First, let’s check out the market action…

Markets

In Friday’s trading session, the Dow Jones Industrial Average closed down 45.13 points, or 0.24%.

The S&P 500 index fell 3.15 points, or 0.14%.

In Europe, the Euro Stoxx 50 index declined 27.1 points, or 0.9%. Meanwhile, the FTSE 100 fell 0.15%, and Germany’s DAX index was off by 0.55%.

In afternoon trade in Asia today, Japan’s Nikkei 225 index is up 39 points, or 0.24%. China’s CSI 300 index is down 0.67%, while the Hang Seng is off 0.5%.

In Australia, the S&P/ASX 200 index is flat.

On the commodities markets, West Texas Intermediate crude oil is trading for US$47.97 per barrel. Brent crude is trading for US$50.13 per barrel.

Gold is US$1,333.40 (AU$1,757.56) per troy ounce. Silver is US$18.90 (AU$24.84) per troy ounce.

The Aussie dollar is worth 75.86 US cents.

A moment of serendipity

For the past few weeks, I’ve been working closely with Jason McIntosh on a very special event. As you may know, Jason runs the Quant Trader service. Like Olivia Engel, Jason is a ‘quant’. He built and manages a systemic trading service. It runs on algorithms, not on human opinion.

And since we put it into effect in November 2014, the Quant Trader service has comfortably outperformed the market.

In recent weeks, Jason and I have been working on a ‘live webinar’ event to reveal what makes Quant Trader tick. It takes place tomorrow night. If you’d like to join us, there are still some places available. It’s absolutely free to listen in. Just click here for details about how to do so.

We’ve never done this before, so we’re pretty excited about it…and a little nervous. In the first half of the session I’ll be chatting to Jason about how Quant Trader works, and how it manages to consistently beat the market.

When I say consistently, I’m not just talking about the performance since November 2014. Jason did extensive back testing, going as far back as 1993. Quant Trader’s live performance is simply delivering on what the back tested results suggested would happen.

After Jason shows you how the system works, we’ll open it up for a Q&A session. This is where you get to ask Jason anything about the Quant Trader system.

Look, I’ll freely admit, I’m biased. I was responsible for bringing Jason to Port Phillip Publishing. I convinced him to share his extensive trading knowledge and build a trading system for our readers. I wanted you to see how the professionals go about trading, and to learn from them.

And as far as I’m concerned, the ‘Quant’ method is the best. It takes emotion and personal judgement out of the game. In my experience, these two things are the downfall of every trader.

So when I saw that a quant had won fund manager of the year last week, for the first time ever, I knew that we were on to something. Markets are increasingly complex these days…too complex for a human brain to decipher. There is simply too much information to process.

A computer algorithm has no such constraints. It crunches as much data as you put in, and as long as the system is sound (extensive back testing tells us that is the case) you will get an unemotional interpretation of that data.

So please join us tomorrow night for what should be a fun and informative evening. Click here to see how.

Now, I’ll hand over to Jason for an essay on how to put the odds in your favour…

Cheers,
Greg

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This is How I Put the Odds in My Favour
By Jason McIntosh, Editor, Quant Trader

It’s almost that time of year again…

Melbourne Cup Day.

Yes, I know the race is still three months away. But first nominations close in just eight days. This means you can start studying the form. You’ll also be able to begin placing bets.

But there’s a catch to getting in early. You’ll have to sort through a lot more horses.

Consider 2015 for instance. At the close of nominations, there were 140 contenders for the Cup — that’s almost six times the eventual field of 24.

Just think about that.

Most of these 140 horses didn’t even get to the mounting yard. Forget about trying to find the winner. Merely seeing your horse at the barriers would have been a result.

So why choose from the first nominations list?

Sure, the good horses are in there…but so too are a lot of non-starters. Your odds of success are obviously better if you select from the final 24 runners.

The same reasoning applies to the stock market.

Consider this. The ASX has over 2,000 listings. Some of these will go on to become next year’s top performers. The best stocks could rise by hundreds of percent. 

But not every stock will make the grade.

This group will inevitably include hundreds of ‘non-starters’. These stocks will typically trade sideways or in downtrends. Buy too many of these and you could lose your shirt.

Have a look at this chart…



chart image

Source: Big Charts
Click to enlarge


You’ll be familiar with this graph. It shows the movement in the All Ordinaries since late 2014. The market is barely up 200 points — or 3% — from 21 months ago.

This type of grinding market can be really hard. Many stocks bounce around without going anywhere, while others fall for months on end. I’m sure plenty of traders are struggling.

But this doesn’t mean you can’t make money.

I had a look at Quant Trader’s open trades during the week. There were 52 stocks showing gains of 30%, or more. The top 10 trades were up by over 90%.

Just think about that for a moment.

You can make big gains even in a tough market — the opportunities are still there. The trick is to find them amongst all the poor performers.

The market within

I often talk about buying into strength. The key reason for this is to trade with the trend. This can increase your odds of making a profitable trade.

But that’s not all.

Strength is also an excellent screening tool. By only focusing on strong stocks, you automatically cull many of the worst performers. This can give you a big advantage.

Take a look at this next chart…



chart image

Source: Quant Trader
Click to enlarge


This graph shows the performance of Quant Trader’s live buy signals. Transaction costs are not included, for simplicity’s sake, but neither are dividends. It assumes $1,000 placed on every signal.

Now, this covers the same period as the chart for the All Ordinaries. While the broader market has been tracking sideways, the profits from Quant Trader’s signals have been on the rise.

Have a close look at the two graphs. There’s very little correlation between them. You could easily think they were for completely different markets.

So why is this?

Well, in a sense, they are for different markets.

The All Ordinaries is a collection of the top 500 stocks. There is a yearly rebalance. But otherwise there’s no allowance for strength or weakness. You get the best stocks…as well as the worst.  

Quant Trader is more selective. The system only signals stocks that meet the entry criteria. This helps reduce 2000 listings to around 100 companies. It’s like a market within the market.

And look at the result. Quant Trader’s smaller portfolio is doing nicely.    

There’s no reason you can’t get this sort of advantage yourself. The key is to buy into strength. This helps avoid weak stocks — the ones that can drag your portfolio down.

It also reduces your number of choices. You can narrow down a field of 2000 stocks to a select group of possibilities. This can all have a dramatic impact on your performance.

Quant Trader doesn’t offer certainty — I don’t know any method that does. There’ll be times when the system signals stocks that go down. That’s the reality of trading.

But I do know this. Making your stock choices from a select group of strong stocks can make a real difference. That’s the best way I know to put the odds in your favour.

Regards,

Jason McIntosh
Editor, Quant Trader