Jason Zweig, one of my favorite financial journalists, has a fascinating article today about the dangers of quantitative investing - https://blogs.wsj.com/moneybeat/2017/05/05/quantitative-investing-a-crisis-waiting-to-happen/. It’s worth a read.
I’m calling attention to this in the wake of a meeting I had earlier this week with other investors who simply won’t touch anything that isn’t completely reliant on human judgment. Once you’re in the “rules-based” camp, they say, well that makes you a quant, and, summarizing their viewpoint, unless you’re the “mostest” with the “fastest” - i.e., unless you possess the most data, most brainpower, and are processing it all with the aid of the fastest computers and high-speed trading - well you’re destined to lose. Lose to the investor at the top of the quant food-chain, and presumably, to “judgment-oriented” investors like them.
Well not so fast. Personally I think all of these criticisms are intellectual straw-men. Why does one have to be the “mostest” with the “fastest”? For that matter where is it written that complexity is the only path toward investing success?
Furthermore, I think their criticisms miss the point. Given the grim performance of active money managers - the vast majority of whom rely on their investment judgment - it’s worthwhile to remember that we are all trying to beat a simple index, i.e., a market-cap index. That’s the bogey. Note I said “simple index”. But I didn’t say it’s necessarily easy. It’s difficult to beat that index. But is complexity and speed the only path? I think not.
I think it helps to get back to basics. For example: what are the flaws with a market-cap index? How can those flaws be bested? Once better performance is discovered, how does one accomplish superior performance with less risk/volatility? Etc., etc. Now, I think it’s true, as suggested in Jason Zweig’s article, that many quant investors go astray with their complex models, and that they don’t realize how they “become” the very market they are trying to beat. But my point remains - a few systematic, uncorrelated investment strategies, each anchored by nothing more than just a few time-tested metrics (say, 2-3?), just might do the trick. Now, is that quantitative investing? If so, how is the S&P 500 not a means of quantitative investing? How many metrics does it take before a simple rules-based approach becomes dangerously quantitative? And who decides the answer to such questions?
Before writing this I went back and re-read Warren Buffett’s speech at Columbia University, the “Super-Investors of Graham and Doddsville”. A classic. Granted, his focus is solely on value-investors and the non-random success of disciples of Ben Graham. But, in the context of this thread, I have to say that some of the successful investors he profiles in that speech, like Walter Schloss, would probably be branded as “quant” investors by critics today. If so, consider me guilty of the same “quant” label. I’d be happy if, at the end of my investing career, my methods and performance are as “flawed” as the least successful investor among the group highlighted by Buffett in that speech. But until the “judgment” crowd proves the superiority of their approach, I’m not going to lose much sleep over their critiques.
Alright, time to get off my soapbox. But I welcome input from others here.
Ed