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First Monkeys, Now Computers Pick Stocks Better

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NYTimes did a brief piece today about computer models making investment decisions and how these mutual funds, called quant funds (short for quantitative) are gaining in popularity and beating the market. First it was a bunch of monkeys with darts and now it’s computers!

A study published last year in The Financial Review found that enhanced index funds that use quantitative techniques outperformed their benchmarks, on average, from 1981 to 2000.

It’s not terribly surprising though because with the computational power and the vast wealth of quantitative data available, a computer could clean house but the article does a good job of shining a bright light on the good and the bad. The good is that the mutual fund’s decisions are made with a large amount of information, more than what an analyst can get, but there are a lot of bad things too. Quant fund models wanted to buy Merck in 2004 during the Vioxx issue, humans intervened, and they typically trade more often so the fees will likely be higher.

Would you trust a computer model to trade for you?

{ 3 comments, please add your thoughts now! }

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3 Responses to “First Monkeys, Now Computers Pick Stocks Better”

  1. Matt says:

    I don’t trust anybody to trade for me.

    The problem with all this is that it’s _easy_ to find funds that beat the market for a little while…especially when you have thousands of competing funds that don’t beat the market (and hence don’t get written about) and the reporter gets to cherry-pick the winner after it’s already too late for anybody to actually make money on that information.

    But even if you have a genuine competitive advantage, the moment anybody finds out about it, thousands of your competitors will be doing the same thing. Which leads to the stocks you’d want to buy being priced up out of the bargain basement you wanted to buy them in, right into break-even territory (or, in some cases, premium-land, where the guy who invented the system you’re using would tell you to SELL NOW BEFORE THE BUBBLE BURSTS!).

    Every beat-the-market strategy that isn’t vulnerable to this eventuality has been prohibited by law. Because the only thing that’s less than fully vulnerable to such dilution is the use of information not available to the general public. And in the US that’s called “Insider Trading” and is a felony.

  2. Tim MMF says:

    Monkeys with darts? Are you talking about Jim Cramer? j/k ;)

    I heard about those computer pickers, but I think someone who takes a little time to learn about companies they know will likely outperform them. From a business standpoint it seems like a great way to lower costs and provide a better return to your customers.

  3. Khyron says:

    Quant funds are based on models, and the best among them use several different models within the same fund. Those models are created and refined by living, breathing people. The computers are able to take those models, apply them to a large universe of securities quickly, and trade on the results in short periods of time, and without emotion. Personally, if you have a problem with that, I’d like to see how your portfolio returns stack up. Renaissance Technologies and Bridgeway Funds have proven it. The problem is that now that it is popular, the models will have to get even more refined. But there is a reason you have math and physics Ph.D.s making 250K+ annually with these types of firms. Quant trading works. Pure numbers. I’ve been working on developing some of my own quant models but I don’t have the time and resources to really turn it into tradeable strategies. But for my real estate investing, I am applying quasi-quant strategies and I think it has a lot of potential to avoid bad deals.

    To paraphrase Henry Nicholas, anyone who doesn’t like a subject doesn’t know enough about it.


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