What we’re reading (6/23)
Here’s a few things we’re reading today:
“The Missing Piece for Quants” (Institutional Investor) (here), an article describing a forthcoming paper that purports to address some problems many factor investors run into—namely, how to assign weights to different factors. In other words, if you rank stocks based on momentum and value, how much should a stock’s ranking on momentum affect how highly you rank the stock overall? Likewise, how much should the stock’s ranking on value alone affect how highly you rank the stock overall? Note, the interviewee in the article claims the performance of value generally has been flattish for about the last 20 years. Presumably, he’s talking about “value” as measured by book-to-market ratios, which is how “value” has traditionally been measured (high book-to-market = good value). We don’t disagree about the performance of book-to-market-based stock selection measures lately. But we do disagree that that’s the right way to measure “value”. In our view, alternative measures have performed much better.
“Want to Remove Human Biases in Your Investment? Try Quant Funds” (Economic Times Markets) (here), a pretty good overview about what exactly quant investing is (doesn’t focus on quantamental so much, in particular, but rather the broader quant umbrella). The article covers a lot of the topics we’ve been talking about at a high level: removing human bias from investing decision-making, backtesting, testing models out-of-sample, avoiding “data mining” and overfitting. It’s a good primer for the newbies.
“Taleb-Asness Black Swan Spat Is a Teaching Moment” (Bloomberg) (here), a summary of a recent Twitter feud between two of the preeminent thinkers in financial markets today, Cliff Asness (of AQR Capital Management fame) and Nassim Nicholas Taleb (of Fooled By Randomness and Black Swan fame). Their debate apparently pertains to avoiding (or hedging against) really adverse and highly unexpected outcomes. Besides the article, we recommend reading pretty much all of Asness et al.’s papers, and certainly recommending reading Taleb’s books (at least the one’s we’ve mentioned here).
“Wirecard’s Former CEO Markus Braun Is Arrested,” (Wall Street Journal) (here), the WSJ’s detailed look at the unraveling of saga at Wirecard AG, the German payments processor, in which ~$2 billion disappeared from the company’s balance sheet, ultimately leading to the former CEO’s arrest this week.
“Stiglitz Urges Capitalism Rethink As Roubini Invokes Stagflation,” (Bloomberg) (here). Per the preamble: “[t]he global economy faces a bleak future in which capitalism could take a beating unless governments get their policy responses just right, two prominent economists warned.”
“Share Madness,” (City Journal) (here). Brokerage accounts at Schwab, TD Ameritrade, Etrade, and Robinhood are up 170 percent this year, largely due to huge numbers of Millennials investing for the first time who, besides just being new to capital markets, are reportedly causing elevated volatility with their supposedly wild and speculative bets. But, according to the article, “[c]oncern that the new, inexperienced traders are distorting markets is absurd, however.”
“The American Press Is Destroying Itself,” (Matt Taibbi) (here). This is an important (and, for some, perhaps uncomfortable) read from a prominent journalist and thinker discussing troubling trends in the media industry. Taibbi offers a detailed look at the “new movement…replacing traditional liberal beliefs about tolerance, free inquiry, and even racial harmony with ideas so toxic and unattractive that they eschew debate, moving straight to shaming, threats, and intimidation.” Anyone who cares about about radical transparency, truth-seeking, and objective analysis (all investors should) will find Taibbi’s commentary harrowing.
