NOTES FROM THE FIELD: The Cassandra Model: “Quant Lite”

The Wall Street Journal has been running a series of articles on the rise of the “quants” on Wall Street and how Wall Street is being run by the quants. There definitely does indeed seem to be a more recent trend in that direction, as Wall Street loves chasing fads! The Wall Street Journal series is entitled, The Quants: Machines and their masters are the undisputed new kings of Wall Street.

Quantitative investing involves investment with the assistance of a computer and algorithms. Many quantitative investing models use only a computer; while others use both computers and humans. Wall Street has been hiring the best and the brightest quants it can find – even competing with Silicon Valley for the best talent. Many of these quants have PhD degrees in mathematics and computer science from the likes of MIT and Cal Tech. They often are not finance people at all. As you can imagine, the algorithms these quants write are quite elaborate and complex. But how good are they at picking stocks? Most of these models are too new for one to make an accurate assessment of how well they perform at this time. It will take years, and several market cycles, to come to any kind of a reasonable conclusion. And one should be wary with any new approach that is not easily understood. Does anyone remember what happened with Long Term Capital Management?

The Cassandra model that I developed in 1994 is a quant model. It has a twenty-three year history of performance and an excellent track record. It is a quant model algorithm that incorporates both human and computer input; and number crunching analysis. The proprietary algorithm that I developed for the Cassandra model looks at the health and financial strength of a company; assesses the growth prospects for the company; and tries to ensure that one is paying a reasonable price for the company. It could be considered a “growth at a reasonable price” model (a term popularized by legendary investor Peter Lynch). It is a quant model in every respect that is designed with a very sophisticated algorithm of its own; but it was designed not to get carried away with factors and formulas that have nothing to do with a company being a company. It is a more reasoned approach to investing based on fundamentals that drive a company’s performance and valuation. Accordingly, I have dubbed the process I use with the Cassandra Model Quant Litebecause at the end of the day, you are investing in a business, not an objective function. (Note: an objective function is a term used in the mathematical modeling process known as linear programming).

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