Do you want to invest in a company, industry, or organization?
Well, the very first step to take is to analyze the data you will get from these companies. Though, there are different methods that can be employed to analyze these data, for the sake of this article we will focus on the quantitative value investing method.
According to a new study that was published in the CFA’s financial journal, when you use quantitative value analysis, you are able to see the underperformance of some alpha stocks which was not the same when value factors were taken alone.
That being said, in this article I will be focussing on explaining all you need to understand about the concept of quantitative value investing. You will also learn the pros and cons of this analyzing method so as to know when to employ them. Without further Ado, let’s dive in…
One thing that is very special about this analyzing method is that it is very flexible. Individuals can tailor it to their own specifications. Follow me and I will explain how this works.
A very simple example of this quantitative value investing can be seen in Joel Greenblatt‘s magic formula investing. The formula encourages you to buy cheap stocks from at least 30 “working companies” that will give you a high return on capital and earnings yield.
In his book “The Little Book that Beats the Market” Greenblatt claimed that his theories have yielded him an annual return of 30.8% for seventeen (17) years.
Nonetheless, quantitative value investing follows a 3-step process. Which involves;
#1. Building a Strategy:
In building your strategy, you will need to deal with two important aspects in investing. These include risk framework and stock selection.
In the risk framework, you will need to rebalance methodology and diversify your portfolio. Here, you will select your stocks by employing a great ranking system that focuses on each of the companies that you may be interested in.
While in-stock selection, you will need to rank the market and set your buying or selling rules. Once these rules are set up based on your analysis, they become a guiding path for you throughout your investment time frame.
#2. Testing the developed Strategy
When the first step of building a strategy is done, to know how effective that strategy is, you need to put it to work. Thus, to confirm its workability it needs to be tested in 6 different markets. The results will help you identify your strengths and flaws.
#3. Following your Strategy:
Finally, once you have tested the new strategy and worked. The next thing to do is to find a way to track your stocks entering and leaving your portfolio. This is very important to a sustainable strategy.
That being said, a great strategy will give you daily updates on the market movement and the opportunity to compare all performances.
In conclusion, if you must follow this magic formula investing model, QVI requires you do the following;
Yes, the system might be productive but every system sure has its ups and downs. Thus to better understand this quantitative value investing let’s take a look at its pros and cons.
Pros
Cons
The method has Lower volatility
Bulging number of incorrect data
It is an Unemotional Investing
Inability to measure qualitative aspects
It will sure Improve Market Discipline
Stocks can get undervalued
Diversification and Asset Allocation
Conclusion
When it comes to investing, there isn't a single strategy or method to be successful, but there are some great hacks that can help you starve from losses of all kinds while getting your profit at a marginal level.
It is important to take advantage of quantitative investment when building your portfolio. It has a system in place to help you keep track of your stocks and warn you of any major shocks in the market along the way.
Well, the very first step to take is to analyze the data you will get from these companies. Though, there are different methods that can be employed to analyze these data, for the sake of this article we will focus on the quantitative value investing method.
According to a new study that was published in the CFA’s financial journal, when you use quantitative value analysis, you are able to see the underperformance of some alpha stocks which was not the same when value factors were taken alone.
That being said, in this article I will be focussing on explaining all you need to understand about the concept of quantitative value investing. You will also learn the pros and cons of this analyzing method so as to know when to employ them. Without further Ado, let’s dive in…
One thing that is very special about this analyzing method is that it is very flexible. Individuals can tailor it to their own specifications. Follow me and I will explain how this works.
A very simple example of this quantitative value investing can be seen in Joel Greenblatt‘s magic formula investing. The formula encourages you to buy cheap stocks from at least 30 “working companies” that will give you a high return on capital and earnings yield.
In his book “The Little Book that Beats the Market” Greenblatt claimed that his theories have yielded him an annual return of 30.8% for seventeen (17) years.
Nonetheless, quantitative value investing follows a 3-step process. Which involves;
- Building a strategy
- Testing the strategy that built and
- Finally Following your strategy
#1. Building a Strategy:
In building your strategy, you will need to deal with two important aspects in investing. These include risk framework and stock selection.
In the risk framework, you will need to rebalance methodology and diversify your portfolio. Here, you will select your stocks by employing a great ranking system that focuses on each of the companies that you may be interested in.
While in-stock selection, you will need to rank the market and set your buying or selling rules. Once these rules are set up based on your analysis, they become a guiding path for you throughout your investment time frame.
#2. Testing the developed Strategy
When the first step of building a strategy is done, to know how effective that strategy is, you need to put it to work. Thus, to confirm its workability it needs to be tested in 6 different markets. The results will help you identify your strengths and flaws.
#3. Following your Strategy:
Finally, once you have tested the new strategy and worked. The next thing to do is to find a way to track your stocks entering and leaving your portfolio. This is very important to a sustainable strategy.
That being said, a great strategy will give you daily updates on the market movement and the opportunity to compare all performances.
In conclusion, if you must follow this magic formula investing model, QVI requires you do the following;
- Firstly, you will need to establish a minimum market capitalization (usually greater than $50 million).
- Second thing you need to do is to exclude utility and financial stocks.
- More so, you will exclude foreign companies (American Depositary Receipts).
- You will have to determine the company’s earnings yield = EBIT / enterprise value.
- Determine company’s return on capital = EBIT / (net fixed assets + working capital).
- The next thing to do is ranking all companies above chosen market capitalization by highest earnings yield and highest return on capital (ranked as percentages).
- At this point you will need to Invest in at least 20–30 highest ranked companies, accumulating 2–3 positions per month over a 12-month period.
- Re-balance portfolio once per year, selling losers one week before the year-mark and winners one week after the year mark.
- Finally, Continue over a long-term (5–10+ year) period.
Yes, the system might be productive but every system sure has its ups and downs. Thus to better understand this quantitative value investing let’s take a look at its pros and cons.
Pros
Cons
The method has Lower volatility
Bulging number of incorrect data
It is an Unemotional Investing
Inability to measure qualitative aspects
It will sure Improve Market Discipline
Stocks can get undervalued
Diversification and Asset Allocation
Conclusion
When it comes to investing, there isn't a single strategy or method to be successful, but there are some great hacks that can help you starve from losses of all kinds while getting your profit at a marginal level.
It is important to take advantage of quantitative investment when building your portfolio. It has a system in place to help you keep track of your stocks and warn you of any major shocks in the market along the way.