From the May 2014 issue of Futures Magazine • Subscribe!

Quantitative Investing

Quantitative Investing: Strategies to Exploit Stock Market Anomalies for All Investors
By Fred Piard
Harriman House (2013)
$30.95; 129 pages

This soft-cover book is aimed at self-directed investors who want to take control and be responsible for their own investments using simple, effective and low-risk strategies. No mathematical or financial background is needed to implement the author’s strategies. Moreover, the strategies presented can be handled in only five minutes a week, certainly manageable for those with full-time jobs. For the most part, an investor can test these strategies once a week or month and ignore charts and financial news broadcasts.

Piard, a software architect with a Ph.D. in computer science and two Master of Science degrees, offers a systematic and analytic investing approach. His academic expertise was very helpful in designing suitable backtests for multiple strategies. He describes quantitative investing as “a scientific approach based upon hypotheses and empirical testing.”

The author developed the strategies for the book after spending many hours using screeners and simulations (using portfolio123.com) of historical fundamental and technical data on thousands of stocks and ETFs. Stocks and unleveraged ETFs are used in his backtesting, and he only uses long strategies.

Piard systematically covers the four strategies used by successful investors: market timing, momentum (relative strength) investing, seasonals and mixing strategies for enhanced performance. For those investors who prefer a fundamental approach, the author includes a chapter on multiple fundamental quantitative models.

He spends some time covering the key factor in designing a strategy. Then he provides keen insight with a focus into the deadly sins of backtesting, including: liquidity, costs, short selling, complexity, over-fitting, misinterpretation, control and leveraged ETFs.

The criteria used to evaluate the strategies are average drawdown, drawdown depth and duration, Sharpe ratio, Sterling ratio, Sortini ratio and Kelly criterion. One of Piard’s key points is that minimizing drawdowns is much more important than maximizing returns. That is why he focuses on Sortini ratio and Kelly criterion. He says the financial markets are the result of human behavior which can be studied and used in developing profitable strategies.

In the market timing chapter, Piard reviews 50- and 200-day moving average strategies, separately and then with 2:1 leverage with daily rebalancing. He used ETFs: index ETFs, sectors and global assets. His test period was 10-12 years based upon the data availability of the ETFs tested. He found that the strategy using global assets performed the best in the last decade. Testing with his timing method, he found that using individual S&P 500 (CME:SPM14) stocks underperformed the ETF strategies.

One offshoot approach covered focused on paired-switching, where two negatively correlated ETFs are used, and only one ETF is invested at a time The key is to always be 100% in one ETF. He demonstrated a strategy using TLT against DIA, then separately against MDY, QQQ and IWM based on 60-day price momentum and a four-week rebalance period. All strategies did much better than holding TLT and one of the other ETFs without switching.

One terrific feature of the book is the use of the author’s free website covering the strategies presented and their coding. Additionally, a free 30-day trial to portfolio12 is available for further reading.

In summary, Piard has compiled an easy-to-use hands-on guide to developing strategies with the appropriate considerations to consider when backtesting data. For self-directed investors looking for a more profitable and less risky approach than buy-and-hold, this book fits the bill. It is well-written, easy to follow, and logically formatted. Additionally, a free eBook is available to purchasers of this book.
 

Leslie N. Masonson is a trader, as well as the author of Buy DON’T Hold and All About Market Timing, (Second Edition). Reach him at lesmasonson@yahoo.com.

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