Quantitative value investing

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Quantitative value investing,[1] also known as systematic value investing, is a form of value investing that analyzes fundamental data such as financial statement line items, economic data, and unstructured data in a rigorous and systematic manner. Practitioners often employ quantitative applications such as statistical / empirical finance or mathematical finance, behavioral finance,[2] natural language processing, and machine learning.

History of development[edit]

Quantitative investment analysis can trace its origin back to Security Analysis (book) by Benjamin Graham and David Dodd in which the authors advocated detailed analysis of objective financial metrics of specific stocks. Quantitative investing replaces much of the ad-hoc financial analysis used by human fundamental investment analysts with a systematic framework designed and programmed by a person but largely executed by a computer in order to avoid cognitive biases that lead to inferior investment decisions.[3] In a 1978 interview,[4] Benjamin Graham admitted that even by that time ad-hoc detailed financial analysis of single stocks was unlikely to produce good risk-adjusted returns. Instead, he advocated a rules-based approach focused on constructing a coherent portfolio based on a relatively limited set of objective fundamental financial factors.

Examples[edit]

Joel Greenblatt's magic formula investing is a simple illustration of a quantitative value investing strategy. Many modern practitioners employ more sophisticated forms of quantitative analysis and evaluate numerous financial metrics as opposed to just two as in the "magic formula".[5]

James O'Shaughnessy's What Works on Wall Street is a classic guide to quantitative value investing, containing backtesting performance data of various quantitative value strategies and value factors based on compustat data from January 1927 until December 2009.[6]

The investment firm Euclidean Technologies Management is a notable example of a company using machine learning for systematic value investing.[7]

Practitioners[edit]

A notable practitioner of quantitative value investing is Sarah Ketterer of Causeway Capital Management.[8]

References[edit]

  1. ^ Wesley R. Gray, Phd. and Tobias E. Carlisle, LLB. Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors. Wiley Finance. 2013
  2. ^ http://www.investopedia.com/university/behavioral_finance/
  3. ^ [1], The Psychology of Human Misjudgement a speech by Charlie Munger
  4. ^ http://www.bylo.org/bgraham76.html
  5. ^ Joel Greenblatt. The Little Book That Still Beats the Market. Wiley. 2010
  6. ^ James O'Shaughnessy. What Works on Wall Street Fourth Edition. McGraw Hill. 2014
  7. ^ http://www.euclidean.com/machine-learning-equity-investing
  8. ^ https://www.forbes.com/sites/schifrin/2014/06/18/kumbaya-for-value-investors-and-quants/