In a recent Eureka Report Alan Kohler mentioned how the purchase of a self-parking car had got him thinking about the further developments underway in artificial intelligence and in particular the impact on investment markets. Interesting as ever and we’ll now leave Mr Kohler to his musings.
With programmed trading making rapid inroads into all global markets what are the risks and opportunities for individual investors? For a start algorithmic trading has been used by hedge funds for some years without achieving markedly superior returns. This is partly because computers can’t make subjective judgements – for better or worse, only humans can do that. Computers need quantitative facts and figures to reach conclusions. But what do those two annoying words – quantitative and qualitative – mean anyway?
Quantitative analysis is focused on numbers – price earnings ratios, comparison figures within the same industry, return on equity, balance sheet ratios etc. In other words quantitative is about measuring.
Qualitative analysis is focused on the qualities of a particular company / situation such as management ability, business development options, market purpose and balance sheet capacity. In other words, qualitative is making a subjective judgement about prospects.
Using quantitative methods two sectors of the ASX stand out as seriously overbought – large retail banks and large healthcare companies. As a group, these sectors are overpriced and the potential for significant future gains is diminished. On the other hand two sectors are oversold – property and resources.
Individual quantitative stocks currently rating as overbought include: Commonwealth Bank of Australia (ASX: CBA); Cochlear Limited (ASX: COH); CSL Limited (ASX: CSL); Flight Centre Travel Group Ltd (ASX: FLT); REA Group Limited (ASX: REA); Seek Limited (ASX: SEK). Care should be taken if contemplating purchases of these stocks at present prices.
Stocks rating as oversold include BHP Billiton Limited (ASX:BHP); Rio Tinto Limited (ASX:RIO); Goodman Group (ASX:GMG); Mirvac Group (ASX:MGR); Westfield Group (ASX: WDC). These stocks offer the potential for above market returns over the medium term.
A qualitative analyst may attribute more / less value to the above stocks by personally weighing the individual merits of the companies before making any decision.
One alternative / hedge fund manager to have broken away from the pack is the UK-based Winton Capital Management, who believes that markets are as much influenced by human behaviour as by quantitative or standard investment ratios. This is in contrast to more academic rivals who still cling to the efficient markets theory. Winton employs 120 data scientists and software engineers and is one of the fastest growing hedge fund managers globally. Interestingly, they have found that the constant adjustments made by index managers provide fertile ground when taking advantage of mispriced opportunities. Winton Capital Management is available to Australian investors through financial advisers.
Motley Fool contributor Claude Walker recently wrote he was primarily interested in investing in companies with a (good) purpose. Is this the most efficient way to wring out optimal profits? Perhaps not, but it is one good way of staying sane and finding ongoing satisfaction with your personal investment progress. We’ll all have our own ideas about the purpose of our portfolios; and being human in this assists in keeping the robots away!