Wednesday, August 30, 2017

Efficiently Inefficient #7 : What kind of equity investor are you ?

Today's article is short as we're moving into equity investing territory and I don't want to burden readers with too man equations on discounted cash or the residual method in equity valuation.

Instead, when you read anther investment blogger, try to see whether you can lump him or her into one of the two categories :

a) Discretionary equity investor

Most financial bloggers fall into this category. These investors use their own personal judgment to decide which stocks to invest in. Typically such investors will use some equity valuation models but will often supplement it with discussions about firm's managers, competitors, intuition and experience.

For such bloggers, a lot of emphasis is placed on the story and discretionary investors need a compelling narrative to make an investment decision.

The strength of this approach is that the investor has a large edge over everyone else in that they have access to managers of the company and may be privy to information that is normally unavailable to ordinary investors. The weakness is that only a few companies can be covered.

b) Quantitative equity investor

A quant employs small edges in multiple diversified trades to do well in the markets. Tools and insights are drawn from economics, statistics, maths, engineering and computer science. A quant requires a lot of data.

The strength of this approach is its objectivity and discipline. The weakness is that your model can fail when you are hit with a black swan event that cannot be predicted by your equations.

Right now, I am probably not professional enough to be categorised into either of these categories so I see myself as trying use both approaches in making money.

As it stands, I make investment decisions from analyst reports on individual firms but find myself gravitating towards testing out broad investment ideas by backtesting.

It is probably best that retail investors try to adopt both approaches due to the lack of time and resources to navigate the equity markets today.


Singapore Man of Leisure said...


Nouns - what we call ourselves - matter less.

Adjectives may matter more.

I've no problem being called gambler or speculator (my dream lable); just as long I can add a "profitable" adjective in front ;)

Call yourself an "investor"; but add a "money lossing" adjective in front and see how many poeple start walking away from you least you ask them for a loan!

Christopher Ng Wai Chung said...

Whether a scheme makes or loses money is something you know only after the fact.

When someone positions himself either as a discretionary or quant investor, you still have no idea whether he will make or lose money.