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An optimized, risk-managed approach to quant investing
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If you’re reading this, you’re interested in learning and more about and using quantitative stock portfolios in your investment arsenal. And hopefully you’re familiar with the basics of this type of quant investing.
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The basic principle is to take a quantitative and portfolio approach to picking stocks
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. For an introduction to what this type of quantitative investing is see the post
here
. And here is a
post
on getting started with quant investing and how you can get started if you’d like to try to do it for yourself. But if you find doing this on your own daunting, and want some help, read on…

Another way to look at quantitative investing is that it is an algorithmic (rules based) approach to choosing individual stocks and constructing portfolios based on them. What are the
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benefits of a quantitative approach to stock picking
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? Here are just a few:

- Higher absolute returns
- Higher risk-adjusted returns
- Less work
- Less noise. Eliminates many behavioral biases that cause investors to fail.
- Broad diversification

Just like Tactical Asset Allocation (TAA) strategies, that use a rules based approach to choosing asset classes, quantitative stock investing uses an analogous approach for individual stocks. But what rules? Similar to the TAA approach, we want to use time-tested methods to generating above market returns and managing risk. These are the famous factors you’ve probably read about:
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value, momentum, company size, quality, profitability
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, etc. There are literally thousands of quantitative systems and methods used for picking stocks. But by focusing on a
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limited number of strategies
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, based on
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proven factors
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, and putting them together carefully in
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portfolios
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it is possible to generate great risk-adjusted returns over the long haul.

What we’re offering with
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QuantPulse
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is to provide a
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select
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number of
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proven
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quantitative stock strategies, apply proven
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risk management
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techniques to them, and put them together in
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portfolios
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. Which strategies? I’ve blogged about many of these strategies for years. Here is a list of basic ones I talk about all the time with a link to a post describing each strategy in detail.

- The enhanced value strategy (VC2)
- Consumer staples value strategy (CS or Cons Spl)
- Utilities value strategy (XLU or Util)
- Enhanced yield strategy (EY)
- Trending value strategy (TV or TV2)
- Large stock index replication strategy (Large SHY)
- Mircocap trending value strategy (Microcap)
- Pure Momentum strategy (Pure mom)

These are all very powerful strategies. They are based on
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factors
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that have stood the test of time like
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momentum, value, size, quality, and profitability
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that have provided
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differentiated
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and
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persistent
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returns over long periods of time. Performance statistics for these strategies are shown in the table below. There is
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performance data on these strategies going back to 1965
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from What Works On Wall Street. The stats post 2009 are out of sample and are my implementations of these strategies.

Unfortunately, most investors have found that it is not that easy to implement these strategies on their own. I’ve tried to help investors for years to implement quant strategies with tutorial posts, but readers have still struggled to implement the strategies on their own. Partly this is because they require access to specialized (and relatively costly) investment software and the capability to do some programing. And that is the main reason for
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QuantPulse
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. Basically, I do the work of creating, running, and tracking the strategies and you focus on executing the strategies. The strategies in
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QuantPulse
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are based on the simple strategies above but go further. There are literally thousands of quantitative strategies for stocks. It can be quite overwhelming. The value in
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QuantPulse
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is that I curate and select from many strategies, and only provide a handful of proven ones for you to use. But I also take it a few steps further.

Most quant services just provide a litany of strategies from various ‘gurus’ with great historical performance and then just give you the list of stocks. That’s fine, but in my experience, it is not enough. It wasn’t for me. First, many quant strategies with fantastic historical returns are simply not investable for most people. For example, deep value strategies with great returns but 60% drawdowns simply will not work for most people. Second, to truly make an impact on your investing results the quant stocks and strategies need to be put together into an integrated portfolio approach. Investing in a few stocks from a quant screen is not going to make a big difference to your overall portfolio. In order for quant investing to be tolerable for most investors and for it to make a difference to your overall portfolio we apply risk management rules to every strategy and we help you put the strategies together into portfolios. The table below shows the results of applying a simple risk-management tool (
the SPY-UI indicator
) to these strategies. Compare the Max DD in the table below to those from a pure buy and hold approach above. In
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QuantPulse
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we apply a better risk management method, SPY-COMP, from our
Economic Pulse Newsletter
.
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Results, in particular drawdowns, using SPY-COMP from the newsletter would be better than results below.
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The last key feature of the
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QuantPulse
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approach, is that these strategies work even better when they are put in a portfolio. In general, strategies perform differently in different market environments. Sometimes certain strategies are in favor and at other times they go out of favor. They can also be combined with a risk-off asset like bonds to further reduce volatility and optimize overall portfolio performance. For example, one of my favorite combinations is putting together the Large SHY, Consumer Staples, Utilities, and Enhanced Value Strategies (70% equally split). Then add a layer of bonds to reduce volatility (30% IEF allocation). Then re-balance annually. The example below is the performance of such a combination from 1999 to 2017. I benchmarked this
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‘All Value’ Quant Portfolio
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vs the 60/40 classic portfolio.

That is a powerful combination. And it’s just one of many. For example, the bond allocation can be dialed up to increase returns while targeting a certain level of drawdowns. That’s just a sample of what can be done with a portfolio level approach to quant investing.

The
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initial launch of QuantPulse
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includes the following features:

- The 8 quant stock strategies listed above based on proven factors and tested over many market cycles
- 25 stock and 10 stock versions updated on a monthly basis, each tracked as a separate portfolio and a continuing portfolio
- Exclusive strategies for subscribers (I already have 2 ready to go, a low vol and a Greenblatt “Magic Formula” portfolio)
- Use of my SPY-COMP system for risk management from the Economic Pulse Newsletter
- A portfolio approach to the quant strategies – combinations of quant portfolios for diversification and better risk-adjusted performance

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To implement this level of features on your own you would need to spend over $120/month. Even simple, basic, stock screening tools will run you $16 to $25/month. Mid-level platforms cost around $50/month, have no risk management, have no portfolio construction advice, and you still do all the work
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.
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QuantPulse
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provides a total solution that allows you to make quant investing a key part of your investment strategy. If you’re interested in the benefits of a quantitative approach to stock picking that I described at the outset then
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QuantPulse
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is for you.

I’ve made the QuantPulse member home page open to everyone for now. I’ve only kept the individual strategies’ stock recommendations protected. Have a look around the page. I’ve included detailed performance figures for all of the strategies from 1999 through Aug 31, 2018. I’ve also broken out YTD and more recent performance.

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Pricing: $40/month for a limited time ($50/month will be the regular price)
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If you are already a subscriber to my
Economic Pulse Newsletter
you can find the discount for the
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QuantPulse
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service on the member home page.
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Pricing for Economic Pulse subscribers: $25/month (see Member Home Page for Discount Code).
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If you’d like to sign up for both the Economic Pulse Newsletter and the QuantPulse Service you can sign up below for $60/month (20% off the individual subscriptions).
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REGISTER NOW FOR BOTH ECON PULSE AND QUANT EDGE
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* A personal note on why I use both TAA and Quant approaches to investing.
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Quantitative strategies like these changed the way I invest. I believe they represent a fundamentally better way to invest in individual stocks. I have used these strategies for my own portfolio since 2012 and they make up over 50% of my equity portfolio. The balance of my equity portfolio is in the TAA strategies that are in the
Economic Pulse Newsletter
.
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So, why do I use both?
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For many investors, the simplicity and effectiveness of TAA strategies is more than enough. However, the addition of quant stock strategies to a diversified portfolio can
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improve returns, improve
base rates
, increase diversification, and still keep risk in check
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. For example, below is an example of the ‘All Value Quant portfolio from above, with no bonds, and adding an equal weight allocation to the simple SPY-UI. (I can’t simulate the real SPY-COMP in Portfolio123)

As we should expect we get higher returns by eliminating the bond component but still half the drawdowns of a 60/40 portfolio and the portfolio is even less correlated to the 60/40 portfolio than before. Finally, what is really hidden here is that the combination of TAA strategies and quant strategies in a portfolio
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increases the base rate of the total portfolio and can provide more consistent returns
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. Both TAA and Quant strategies on their own have base rates in the high 70% range. When combined in a portfolio the base rate of the combined approach increases to the high 80% range. If we compare the average returns from the quant portfolios to the returns of various TAA portfolios you can also get an idea of what each type of strategy has to offer. Below are the performance of the TAA strategies I use to compare to the ones I use in the Economic Pulse Newsletter but this time I added the average quant portfolios stats.

As you can see from the table, quant strategies can give you higher performance and more consistent performance (compare 5yr, 10yr, 20yr returns). TAA portfolios can at best give you what a certain asset class will achieve and no more. The downsides? higher turnover vs my TAA strategies (but not vs some other TAA strategies), higher drawdowns, and some more work. Personally, I think it is worth the trade off. But only you can decide.

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When the biggest challenge to any investment system is your ability to stick with it, high base rates and consistency are the biggest insurance you can have against abandoning a particular strategy
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I hope you’ll give quantitative stock investing a try. I think you’ll be pleasantly surprised with the methodology and results over the long term.

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REGISTER NOW FOR BOTH ECON PULSE AND QUANTPULSE
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Hello Paul and Nina. This is Rick and Cathy. Old fans from Houston dating back to 2011 when you started your adventure. We have done OK retired but could use guidance and more cash flow. Let’s say I have 100K to place in a Quantitative Strategy led account. Which of your services should I purchase.

Hey Rick, nice to hear from you. I would check out the Economic Pulse Newsletter first and see if that is what you’re looking for. It is simple to use and a good way to get started with this kind of investing.

Paul

OK Paul Went ahead with that. Lets do a little reading and learning how to make money work for you.

Hi Paul

just reading about your QuantEdge service. Maybe I’m missing something, but seems your strats have either 10 stock or 25 stock variants so if I want to combine strats then then this could result in quite a big portfolio ( even assuming only the 10 stocks versions are used) . Is that correct ? Or does the combining of strats work in a different way so the net number of stocks is more manageable ? thanks Ivan

No, you’re not missing anything. When you’re combining strategies, i.e. more than 2 lets say, then the 10 stock portfolios are the way to go. 10 stocks is the minimum to minimize a lot of idiosyncratic risk. Then you manage the number of stocks by only picking a few strategies. I run 3-4 10 stock strategies maximum. 30-40 stocks, especially when all the buys and sells are updated every 4 weeks by the strategies, and there are only a few buys and sells maximum at every update. The biggest amount of work is the initial buys. It is easily manageable and provides the right amount of diversification.

Paul