MMasters in Business
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20 March 2024

At the Money: Benefits of Quantitative Investing

2Frameworks
5Insights

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Frameworks in this episode

Finance6 steps

Cheap Stocks on the Mend

Combine broad valuation evidence with positive momentum to find improving bargains.

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Finance6 steps

Evidence-Tested Investing Process

Test investment rules across cycles, then follow them without emotional overrides.

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 2

Myth Buster04:06

Why the Popular P/E Ratio Can Be a Weak Valuation Signal

O'Shaughnessy argues that price-to-earnings became less effective as it became a widely targeted metric. Corporate earnings are easier to manipulate than revenue and some other measures, making a simple P/E screen less reliable than many investors assume.

  • Widely targeted measurements can lose efficacy.
  • Reported earnings are comparatively easy to manipulate.
  • P/E reportedly worked better before modern databases made it a dominant screening target.
  • Revenue and enterprise-value measures can provide complementary evidence.

“when a measurement becomes a target, it often loses its efficacy.”

Jim O'Shaughnessy · 04:28

“Earnings are much easier to manipulate than things like revenue and other measurements of value”

Jim O'Shaughnessy · 04:46
#valuation#pe-ratio#earnings#accounting
Myth Buster07:43

Momentum Is More Than Institutions Buying Their Favorite Stocks

Barry Ritholtz proposes that momentum may arise from large funds repeatedly buying favored companies as cash arrives. O'Shaughnessy accepts that a persistent institutional bid can help but notes that familiar mega-cap favorites often fail to rank among stocks with the largest price changes.

  • Institutional buying can create a persistent underlying bid.
  • Popular institutional holdings often have positive momentum.
  • The strongest momentum rankings frequently contain very different companies.
  • Institutional preference alone does not fully explain the factor.

“Yeah, that's the persistent underlying bid theory”

Jim O'Shaughnessy · 08:25

“a lot of those names don't actually make the cut when you're sorting on your final factor being momentum.”

Jim O'Shaughnessy · 09:02
#momentum#institutions#market-behavior

Explainer· 1

Explainer09:12

Can Quality Microcaps Replicate Private-Equity-Like Returns?

O'Shaughnessy describes the microcap universe as poorly covered and generally low quality, yet rich in overlooked companies. Screening it with quality, momentum, and related metrics may provide returns resembling private equity while avoiding high fees and multi-year lockups.

  • About half of the microcap names discussed lack analyst coverage.
  • The unscreened universe contains many poor-quality companies.
  • Quantitative filters can isolate overlooked candidates.
  • The research found microcap returns could proxy private equity.
  • Public microcaps offer liquidity and potentially lower fees.

“the microcap universe is kind of this undiscovered country.”

Jim O'Shaughnessy · 09:49

“if you're looking for a far less expensive way to get private equity, like returns at lower fees with no lock up, you'll want to…”

Jim O'Shaughnessy · 10:39
#microcaps#private-equity#liquidity#quality

Takeaway· 2

Takeaway14:07

The Four Horsemen Behind Bad Investment Decisions

O'Shaughnessy names fear, greed, hope, and ignorance as recurring sources of investor error. Studying can correct ignorance, but the emotional forces are harder to control, particularly for retail investors whose time and attention are directed elsewhere.

  • Fear can trigger panic selling.
  • Greed encourages performance chasing and excessive risk.
  • Hope can keep investors attached to failing positions.
  • Ignorance is the most directly correctable factor.
  • Knowledge alone does not remove emotional bias.

“the four horsemen of the investment of apocalypse are fear, greed, hope, and ignorance”

Jim O'Shaughnessy · 14:07

“ignorance is the only one that is really correctable by studying.”

Jim O'Shaughnessy · 14:13
#behavioral-finance#emotions#investor-psychology
Takeaway14:30

A Financial Advisor Earns Their Fee When Markets Become Frightening

For ordinary investors, O'Shaughnessy recommends a good financial advisor who can act as a dispassionate wingman. Because the advisor is professionally removed from the client's emotional attachment to the money, they may be most valuable during the rare periods of severe market stress.

  • Retail investors may lack time to master investment behavior.
  • An advisor can bring professional distance to emotional decisions.
  • The advisor's value is concentrated during market crises.
  • Behavioral coaching can matter as much as portfolio selection.

“find yourself a good financial advisor who could sort of serve as your wingman.”

Jim O'Shaughnessy · 14:30

“Five percent of the time that is where they earn all their money.”

Jim O'Shaughnessy · 15:02
#financial-advice#behavioral-finance#market-crisis