Securities markets are reasonably efficient - portfolios may not be
We believe markets are reasonably efficient - a security adequately prices the available information (thanks to the majority of investors/analysts who spend considerable effort massaging all this information into their different price targets etc). Not priced however, and therefore a potential source of value added, is finding the best combination of these securities that maximises return for a given level of risk. ...we therefore add value by finding this optimal portfolio diversification
Security prices respond faster to new information than fundamental analysis, and the universe is larger
The available information about a company cannot give the whole picture, even supposing management knows it and is at liberty to disclose it. And this information can quickly change with events. And investor/analyst capacity to respond to this information is limited, so that securities are only re-evaluated infrequently, and some stocks are neglected completely. Also, investors’ valuation of this information depends on drivers that lack visibility (risk appetite, leverage, money flows, etc), and these can also quickly change.
...we therefore prefer to analyse market price data rather than fundamentals
...this also lets us access a larger universe of securities
Security price history has valuable information
Historical price patterns enable momentum analysis, so as to be early in spotting price trends, or changes in them. Historical data shows how noisy prices can be, much of it caused by noisy information flow from companies, noisy analysis by fundamental analysts, noisy evaluation by investors; profiling of this data enables this noise to be averaged out so that the overall picture of a security’s performance emerges.
...we use historical data so as to be early in spotting price trends
...we also use it to build portfolios that are robust in the face of market noise
Updated May 20,2012 5:55 am. Number of visits
