Why is Company Analysis
important for equity investment decision? What are
the different methods of
quantitative analysis used for equity investment decisions?
With so
much at stake in the finance and investment world, there are constant debates
about
investment performance, asset allocation, active vs. passive approaches,
and more. In
this
article, we review recent articles on the application of quantitative models to
the
investment
world - and look at the stock market's technical outlook. History can tell us
where
we have been -- and a scientific and mathematical approach can help guide our
investment
decisions going forward. Quantitative analytics can be applied to many areas
within
finance, ranging from asset allocation and risk management to trading /
investment
strategies
and the growing interest in alternative assets.
In the July/August 2012 issue of the Financial
Analysts Journal, Charles Ellis, CFA
wrote
an interesting article entitled, "The Mystery of Underperformance (Murder
on the
Orient
Express)". Ellis writes how various funds -- including mutual funds,
pension funds,
and
endowments -- have a consistent pattern of underperformance. He states that
"…investment
policies and decision-making processes -- no matter how complex they
might
be to implement -- were all too often oversimplified, documented with
'selected' data,
and
then crisply articulated as convincing 'universal truths'…" The article
says that even
with
the best intentions, investment practitioners systematically underperform due
to varied
interests
and motivations of each relevant party -- and that "many investment
committees
have
misdefined their objectives and are organized in ways that are
counterproductive."
In fact,
analysis performed at the actuarial firm Kwasha Lipton (now a part of
PriceWaterhouseCoopers),
quantified the level of potential underperformance for pension
plans
and defined contribution plans. While at Kwasha Lipton, my team used a
"utility
function"
analysis to show that certain investment committee preferences could reduce
long-term performance.
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