This year marks the 20th year of my investing career. Having started in 2000 and immediately seen the dotcom crash, followed closely by the 9/11 the following year, which sent the markets reeling, I was lucky because I did not have much money in the market at the time. Yet, I could get all the lessons without much of the scars.
I have always been curious to learn more about the art and skill of investing and what has made people successful. This has led me to search and read biographies of a very large number of investors and traders. I discovered Buffett, Munger, Lynch early into my investing life and that has shaped my thought process to a great extent.
I have always approached the market as a student. About three years back, I chanced upon Renaissance Technologies, now famous for Jim Simons, the Man Who Solved the Market (bestselling book by Gregory Zuckerman). It fascinated me. What astounded me was that a person with no intrinsic knowledge of markets has been able to compound money at a rate nearly three times that of Buffett, and that too sustainably over decades.
Then I started reading up on quantitative investing. I came across some fantastic books, people and resources. It was like a revelation to me. Since I had a computer programming background and love programming to this day, this whole approach appealed to me. I started learning as much as possible. And experimenting. My endeavour is to synthesize what practical lessons I have learnt in over two decades of value investing.
Some of the reasons why quantitative investing appealed to me were:
- It was rule-based which meant the process was most important: You had rules for the three main components of investing namely i) stock selection, ii) allocation and iii) selling.
- You could completely eliminate behavioural biases: I have come to believe that the biggest determinant of investment success is NOT stock selection, which unfortunately 99 per cent of investors only focus on, but behavioural psychology. Reduction or elimination of biases it the biggest trick that can help reap outsized returns.
- You could back-test your strategy: That is, you could go back in time and check how your investment strategy would have fared. You could also do scenario analysis and check it under different circumstances. The concept of buy-and-hope could be reduced dramatically, if not completely eliminated.
- You could diversify across investment styles: Because it is rule-based, quant investing could help invest in ways which I as an individual was not comfortable doing. So, I could actually devise strategies for playing special situations, turnarounds, short-term super growth, momentum or other such factors. I also realised that due to my long-term investing style, I was not able to take advantage of or tend to ignore shorter-term opportunities. Having well-defined strategies to do so would be complimentary to my core skill of long-term value-based investing.
With this in mind, I started devising and testing different strategies. Getting good quality data in India for a long duration is a very difficult job. I have persisted and will continue to do so in building my own database. I have been actively investing in three strategies since last six months and the results have been interesting.
The world is moving towards quantitative investing. We, in India, have been lagging behind on this although we have some of the best finance, math, statistics and computer science brains in the world. It is high time that we start taking quant investing as a separate discipline within investing and spend time to understand and appreciate how it can work for us.
More on this in my subsequent columns in this space.
(The author is the Founder and Chief Equity Advisor at www.intelsense.in and www.quantamental.in and nothing in the article should be construed as financial advice.)