Customer Reviews

Quantitative Strategies for Achieving Alpha (McGraw-Hill Finance & Investing)

5 star:		(4)
4 star:		(2)
3 star:		(0)
2 star:		(1)
1 star:		(0)

 

 

In order to do this book review, I have to compare the book to five others that I have reviewed.

1. Trend Following, (2), (3), (4), (5)
2. Beat the Market: Invest by Knowing What Stocks to Buy and What Stocks to Sell
3. The Fundamental Index
4. The Alchemy of Finance, and Soros on Soros
5. What Works on Wall Street

I chose these five, because they deal with factors that affect stock performance. With 1 and 4, you can learn a great deal about price momentum. With 4, you learn how price momentum and mean reversion interact, and even get taste of why even fundamentalists should grab onto this.

Today's book, Quantitative Strategies for Achieving Alpha, takes a mix of factors, including price momentum, and attempts to show how investors can achieve above average returns. That is similar to what was posited in books 2 and 3 in rudimentary ways, and in book 5 in more sophisticated ways. The book that is most similar to this book is What Works on Wall Street. More on that later.

The author has seven "basics" that must be applied to all investments:

1. Profitability
2. Valuation
3. Cash Flow
4. Growth
5. Capital Allocation
6. Price Momentum
7. Red Flags

These are the building blocks of good investment strategies, and the best strategies use 2 or more of the "basics." This is consistent with the book What Works on Wall Street. The most important "basics" are Profitability, Valuation, Cash Flow, and Price Momentum. Good strategies will look at most of them.

Quibbles

* The data period for the analyses was short -- a mere 20 years 1987-2006. As time has gone on, data collection has gotten richer, but the 20 year period chosen was one of a big bull market, and not necessarily representative of the next 20 years.
* Data mining -- when testing a wide number of similar hypotheses, data snooping is a problem. If theory A works well, why not test theories A', A+, A-, A*, etc? That happens in this book, but it does not make the error of What Works on Wall Street, because it does not make claims that the best strategies from the sample period will be the best strategies for the future.
* Also on data mining, in the price momentum section, analyses are done to see which momentum strategies did best over the sample period, and then those strategies are applied. Someone starting out in 1987 would not have had the benefit of that knowledge.
* Strategies that favor increasing debt worked well, but that is a relic of the Greenspan era, where overages of debt were never punished.
* Cash flow was an important variable, and there were variables for capital allocation, but there was not much discussion of earnings quality by itself, which has significant predictive powers.

The book is data and statistics heavy, but not equation heavy. If your eyes glaze over from numbers and statistics, this is not for you.

Wrong way to use the book

Look for the strategies that gave the highest excess returns, Sharpe ratios, etc. Follow those strategies religiously. If you do this, you will mimic the excesses of the period 1987-2006. Those won't recur in the same way 2009-2028.

Right way to use the book

Use the book to guide your strategies. Look at how you currently analyze stocks, and see if you aren't missing significant factors that could improve your performance. Look to balance your strategies such that all of the main factors get some representation.

Also, the summaries of each chapter are simple, and give the main thrust for those who get tired. Tortoriello does a good job boiling it down for those needing a summary. He also does not overpromise; the book is free from overselling, in my opinion.

The author actually stated in the book that this is not a book for "Quants", but I read that sentence only after I bought the book.

This is a book with a compilation of 100 or so back-testings. For almost any professional quant, he/she would have probably done back-testing on 95% of them. There isn't much of new idea in the book - all factors are pretty standard and have been around for a long time. Very little recent academic literatures have been included, if at all.

The author overly used top-bottom quintile as pretty much the only back-testing methodology. We all know that many factors don't really have the linear payoff pattern, i.e, middle quintiles could outperform both top and bottom quintiles.

Strategy turnover isn't covered in the book. The author assumed annual rebalance, so turnover is probably not much of a concern. Most professional quantitative managers probably would do at least monthly rebalance, if not daily or weekly... at least revisit your positions on a much higher frequency if not more frequent rebalance.

There isn't any sophisticated way to build a multi-factor model other than the traditional "widsom" approach definited by the author.

Overall, if you want a book that gives you an overview of typical and traditional quantitative factors, this is probably a book you need. If you are quant, most likely you don't need to buy this book.

First, let me say that I don't know if mechanical investing works. I am just starting to use it. I do more modern portfolio investing, and Warren Buffet moat style investing. That being said, I have read the following books on Mechanical investing. What Works on Wall St., Screening the Market, Investment Fables, Your Next great stock, and The Future for Investors. This is the best book on Mechanical Investing.

One thing to keep in mind. Free screening software won't let you get the most out of this book. You need something like aaii's stock investor pro, for 200.00 per year, to maximize the results from this book.

Having read quite a few books on fundemental and technical analysis, I always finished more confused than before I started. This book finally ended the confusion for me: both fundamentals and technicals matter, and can be used together to create an investing (and not trading) system. Like William O'Neil's books, this book does show that you can use fundementals to focus on WHAT to invest in and the technicals on WHEN to invest in them. BUT, unlike O'Neil you don't need to use charts and chart patterns - great time and money saver IMHO.

Very well done to the author and I hope you publish more of your excellent research and work in the future. If possible, please cover a longer time span e.g. 50 years.

If you are a more advanced investor and you have been trying to figure out how to find the keys to profitability, this book will get you several steps closer to finding yourself at the top tier of money making. The screening techniques and combinations are spot on and you even gain insight into the best shorting strategies. A must have in your library.

Richard Tortoriello leaves no stone unturned in a thoroughly documented search for strategies that allow portfolio managers to deliver market-beating returns. The book offers something for analysts of all levels. By employing a building-block approach to quantitative analysis, Tortoriello provides a "how-to" manual for the novice. By providing detailed, backtested results of more than 20 proven investment screens for generating winning investment ideas, based on 42 single-factor and nearly 70 multi-factor models, Tortoriello presents the experienced quant with a host of ideas to improve their own modeling.

This book is a breath of fresh air in the investing world. Written in easy to understand language backed up by extensive research, it provides a working investment strategy for different equity market conditions for a range of investors, from the inexperienced to the very experienced. I have read a lot of investment books in my time, and this is one of the best, highly recommended.