Some quants systems no doubt focus on either one vector or one factor. Some are no doubt multi-factor. While the truly ambitious are no doubt seeking a unified theory of the markets, ie. try and incorporate all known anomalies.
Such a system would incorporate small cap
bias, momentum bias, quality bias, value bias, broad diversification,
red flags.
It is the red flags area where short sellers focus. Myriad changes reflected in a firm's accounts may point to warning signs. You can model those and you can model management quality (based on history), but identifying frauds or accounting shenanigans is an incredibly subjective endeavor when the data points you are working with are inconclusive (and they are always inconclusive).
I guess that is why "fundamental based", qualititative oriented investors are now getting caught with their hands in the cookie jar, ie. insider trading. Finding and getting an edge is extremely difficult.
On a side note. I am amazed when I look at so-called small and micro caps where the marketing material of managers in the space talk about inefficiencies due to lack of coverage, that the stocks are generally fairly valued. Now fairly valued is in the eye of the beholder, but there are few glaring mis-valuations from what I can see across the whole spectrum.
Now back to the quants achilles heel. The rigidity of their systems (whether is a static set of criteria or pattern recognition algorithms) or the backward looking nature of the learning systems mean that quants will always miss the nuance of something and/or miss the change in environment because they lack cognitive awareness. And they will never catch the subjective dimensions of not trusting management that comes from a visceral gut feeling.
Showing posts with label bias. Show all posts
Showing posts with label bias. Show all posts
Wednesday, July 2, 2014
Friday, October 16, 2009
Back at it again
No sooner had we rallied 60%+ off the bottom than the bulge bracket boys were back at it again...you just can't wean them off cheap money.
Goldman Sachs, JP Morgan, Credit Suisse, Morgan Stanley, Merrill Lynch, Biggs, Wien, et al - they've all declared it safe to get back in the water. These are firms and guys who have never known an asset they didn't want to buy (or sell to someone). Whether out of habit, or simply because it is in their best interests, they are back playing the same old tune.
"All is well. We love equities. We love commodities. We love bonds. We hate cash."
The "buy" bias that pervades the street is understandable, but reprehensible. It pays scant regard to those traumatized by the financial market implosion, and the possibility that they may be leading them back to slaughter. It wouldn't be so bad if they got the turn right, but the fact they are only now coming out with the "all clear," is a recipe for disaster (we're now at the stage of the sucker rally).
Given the still strong negative sentiment shrouding the market, given the momentum in the market, given the recovery in the economy, given an open monetary faucet, and given the big boys all marching their clients back into the market, the rally still has legs (1200 here we come...but we're coming around the end turn).
Goldman Sachs, JP Morgan, Credit Suisse, Morgan Stanley, Merrill Lynch, Biggs, Wien, et al - they've all declared it safe to get back in the water. These are firms and guys who have never known an asset they didn't want to buy (or sell to someone). Whether out of habit, or simply because it is in their best interests, they are back playing the same old tune.
"All is well. We love equities. We love commodities. We love bonds. We hate cash."
The "buy" bias that pervades the street is understandable, but reprehensible. It pays scant regard to those traumatized by the financial market implosion, and the possibility that they may be leading them back to slaughter. It wouldn't be so bad if they got the turn right, but the fact they are only now coming out with the "all clear," is a recipe for disaster (we're now at the stage of the sucker rally).
Given the still strong negative sentiment shrouding the market, given the momentum in the market, given the recovery in the economy, given an open monetary faucet, and given the big boys all marching their clients back into the market, the rally still has legs (1200 here we come...but we're coming around the end turn).
Friday, August 14, 2009
The Problem With Being a Perma-Bull
The problem with being a perma-bull is that there isn't much room for reflection, or introspection, within one's countenance.
Conditioned by the modern phenomenon of economic growth, perma-bulls have never met a dip they didn't like (the positive skewness of the market leads to a certain complacency). There isn't much pause to consider the value of an asset, or the underlying health of an economy. They are generally dismissive of anything negative, and fail to understand that they operate within an industry that has every incentive and predilection to being bullish. They also tend to be practitioners of momentum (some would say herd followers), and contra to their stated economic worldview (free markets), are great believers in the value of the central bank (emperor with no clothes) to bail them out (they have spent their whole careers succoring on the teet of monetary stimulus).
Interestingly enough, practitioners of this science tend to be American and/or equity managers, while practitioners of the counter-stance (perma-bears) tend to be British and/or bond managers.
I spoke a little about some of the traits of a perma-bear the other day, but in the wake of being so harsh on perma-bulls, it would be remiss of me not to expand upon those thoughts here. Let me just add that the positive skew of the markets has killed perma-bears over time. It is one thing to identify and talk about structural flaws or imbalances in the system, but it is a totally different thing to get your timing right in acting upon those concerns. Markets and economies get out of whack periodically. Minsky rightly pointed out that imbalances build over time during periods of general stability. He also pointed out that markets and the capitalist system are inherently unstable. In this environment (and especially after a crash), it will generally pay to have a bullish bias. Besides, people like a positive person over a naysayer anyday. At this point I don't see any repudiation of the phenomenon of economic growth, and so that adds to the case toward a positive skew. Having said that, I am of the opinion that the general growth outlook for the future will be more muted than what we have seen over the recent past (1980-2007). As usual, there will be winners and losers in that environment. The trick will be to pick the winners and avoid the losers.
Conditioned by the modern phenomenon of economic growth, perma-bulls have never met a dip they didn't like (the positive skewness of the market leads to a certain complacency). There isn't much pause to consider the value of an asset, or the underlying health of an economy. They are generally dismissive of anything negative, and fail to understand that they operate within an industry that has every incentive and predilection to being bullish. They also tend to be practitioners of momentum (some would say herd followers), and contra to their stated economic worldview (free markets), are great believers in the value of the central bank (emperor with no clothes) to bail them out (they have spent their whole careers succoring on the teet of monetary stimulus).
Interestingly enough, practitioners of this science tend to be American and/or equity managers, while practitioners of the counter-stance (perma-bears) tend to be British and/or bond managers.
I spoke a little about some of the traits of a perma-bear the other day, but in the wake of being so harsh on perma-bulls, it would be remiss of me not to expand upon those thoughts here. Let me just add that the positive skew of the markets has killed perma-bears over time. It is one thing to identify and talk about structural flaws or imbalances in the system, but it is a totally different thing to get your timing right in acting upon those concerns. Markets and economies get out of whack periodically. Minsky rightly pointed out that imbalances build over time during periods of general stability. He also pointed out that markets and the capitalist system are inherently unstable. In this environment (and especially after a crash), it will generally pay to have a bullish bias. Besides, people like a positive person over a naysayer anyday. At this point I don't see any repudiation of the phenomenon of economic growth, and so that adds to the case toward a positive skew. Having said that, I am of the opinion that the general growth outlook for the future will be more muted than what we have seen over the recent past (1980-2007). As usual, there will be winners and losers in that environment. The trick will be to pick the winners and avoid the losers.
Thursday, August 13, 2009
The Problem With Being a Perma-Bear
The problem with being a perma-bear is that there is no joie de vivre.
When one is always looking for disaster to hit, every little twitch, every little movement from the market or the economy signals impending doom. It is hard to believe that the market might actually go up when one's underlying belief is that disaster is just around the corner.
All the foibles of behavioral bias manifest within one's outlook and actions. As such, it is hard to see the trees for the forest.
It seems to me that we are committing the same mistakes in the present that we have committed in the past. All the signs are there that we will reflate again, only to have to deal with the same problems again in the future. It is the timing of the "again in the future" that is so hard to forecast.
When one is always looking for disaster to hit, every little twitch, every little movement from the market or the economy signals impending doom. It is hard to believe that the market might actually go up when one's underlying belief is that disaster is just around the corner.
All the foibles of behavioral bias manifest within one's outlook and actions. As such, it is hard to see the trees for the forest.
It seems to me that we are committing the same mistakes in the present that we have committed in the past. All the signs are there that we will reflate again, only to have to deal with the same problems again in the future. It is the timing of the "again in the future" that is so hard to forecast.
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