Dan: Hello and welcome to QuantBeats. I’m Dan Hubscher, managing director and founder of Changing Market Strategies and your resource for all things Quant. My co-host is current QuantPedia CEO and head of research and former 300 million euro Quant Portfolio Manager, Radovan Vojtko. Say hello, Rado.

Rado: Hello. Hello everybody.

Dan: Click that Q logo on your screen to hear our backgrounds in episode one, or check out the QuantBeats website for our backgrounds. Now we welcome our guest from Methodical Investments, David Kaiser. Please just give us a Hello David.

David: Hello.

Dan: Thank you, David. So now, if you are a fundamental investor who just can’t relate to quant strategies, well, we have something special for you today. But first, as a registered representative, I need to show you a few disclosures on the screen now, and at the end of the episode we’ll be giving you ways to contact me if you have questions for any of us about anything that you’ve heard here. Let’s dip our toes into quantitative finance to help investors, quants, and anyone just curious to gain new insights into quants strategies, market dynamics, and the future of algorithmic trading.

So, David, can you please give us the one minute version of who you are, who your firm is, and what you do? And then Rado will take the discussion deeper into your background from there.

David: Sure. So my name’s David Kaiser. I run Methodical Investments and our goal is to use fundamental and data-driven rules-based investing to change the way value investing is done.

Dan: Very good. All right, thanks. So Rado. Over to you.

Radovan: Thank you then, and thank you David. Thank you for joining us. As I know you started as a fundamental investor and now you are a quant. Which is, like, interesting journey. So if you can give us an overview how it happened and why it happened.

David: So I actually, when I got into finance, I was a little more of a quant. And I was always looking at ways to, you know, automate and kind of gain an edge with technology. And originally, and this was probably 2003, when I really got serious about it I was looking at momentum and growth investing and had ridden some programs to kind of, you know, exploit those things in the market.

And after a couple years, I started working as a fundamental value analyst. And I found value and I realized, you know, like John Lennon said, “whatever gets you through the night”, and for me that’s value investing. I found something and I think it’s important for anyone to do something that speaks to them, that they relate to and that they’re comfortable with.
And so I started as a fundamental, you know, qualitative value analyst. And after about six years, and this was I guess 2011. I have the thought that, you know, value investing by nature is not that complex, and it’s really about consistency and patience. And if you could take some of the core tenets of value investing, you could probably create a structure and a system to remove the subjectivity, remove the bias, and consistently take advantage of tendencies in times when value investing is really… when valuation matters, I should say.

Radovan: Okay. Now I have like a lot of the questions, so I will start with the top-down questions. How do you see the place of the value or quantitative value in the portfolio in the current situation?

David: I think that the market ebbs and flows, right? There are times when growth, yeah, is important. And there’s times when value is important. And the times that value is important, very often follows irrational exuberance. And I think a little bit that’s what’s going on now just from looking at valuation.

So when you look at valuation and you look at the opportunities that exist. They’re not as plentiful as maybe they could be. And that tells me, hard to quantify, but it tells me that sooner than later value will matter again, because people are gonna want to know what they own and they’re gonna want to have some safety.

And they’re not just chasing returns, they’re thinking about risk reward. And that’s really what value investing is about. So I think value investing, it’s like a spring ready to pop, right now. Has it been great for value? No, but that probably means it will be great for value.

Radovan: In this case, I will probably agree with you because I see it probably in the same way because I think we are maybe a little overexcited with the technology and stuff like that. Here is the question, so how best to capture the value? So, I mean, should I have like big portfolio with a lot of the names, small portfolio concentrated. I mean, how to structure quantitatively the value portfolio to capture the next shift the best or how you would do it? What’s your idea?

David: So you bring up an interesting point, which is, you know, concentrated versus more diverse portfolio. And in my estimation, from a quant standpoint, you want a more diversified portfolio. Not huge, but large enough that you can take advantage of the trend of value investing and value mattering and reverting valuations reverting more towards the benchmark. So you can take advantage of that without concentrated in a way that you could be if you were doing the qualitative analysis. The way I look at it is if you cast a wider net, but you’re still within that realm of value and discounted companies that have strong operating metrics, those kind of things. I think you can really excel and you talk about how do you take advantage of that and I think that’s why being consistent and keeping your portfolio kind of the word is fresh, discounted, not allowing it to get outta hand and kind of drift into to growth. So you need to be consistently, not often, I should say, adjusting your portfolio, but you need to have a rules to keep it fresh and keep it discounted. And patience when it happens, you’re gonna be rewarded. But don’t lose hope. Don’t lose sight of what matters, which for a value investors is a valuation.

Radovan: Yeah. What does it mean is that in this case is value, which is build more like a factor and less like a concentrated portfolio. So it’s like more the value factor, but then we are moving. So once we have a value. We have like different tiers of the companies so we can find the value in the large cap stock. We can find the value in small cap stock, in the micro cap stocks, and which of those universes is in your opinion like the best for the value? That you can find the best opportunities and at the end, I mean, it pays the best.

David: I like SMID caps.

Radovan: Mm-hmm.

David: The reason I like SMID caps is they’re small enough and generally undercover in many cases enough by analysts that there’s room for growth due to inefficiency. Right. So because of the inefficiency, because of the size, they can grow noticeably. And there can be a real discrepancy between what they’re trading at and what they’re really worth.

They’re also liquid, so you can see that in small caps and micro caps. But where’s does the liquidity come from? So if you run a fund or you’re an investor. You want liquidity. It doesn’t have to be insane liquidity, but you want liquidity. If you go into really small, certainly micro caps, it’s hard to create that and to scale. So I think SMID caps are kind of the perfect balance of discrepancy or inefficiency, and therefore good discounts, but also liquidity. So..

Dan: Rado, just before your next question, if I could jump in, let’s make sure everyone knows what you’re talking about. So SMID caps are small and mid cap.

David: Small and mid cap, I’m sorry. Yes.

Dan: Right. Yeah. We’re taking it for granted that everybody wants liquidity, but why?

David: So liquidity allows you to scale.

Dan: Hmm.

David: And that’s really the issue. It’s not about how quickly you can get in-out of any one position, but if you have a portfolio and you’re gonna scale it and you’re gonna serve a large group or high net worth individuals, funds, institutions, you need to be able to have positions that you can convert to cash. And with something like your quant value, where you’re trying to keep things discounted and with strong operating metrics, so there’s that inefficiency and room to come up to the market and maybe then some, kind of convert a value stock to a growth stock, right? In that realm. You wanna be able to have some flexibility and you wanna be able to scale. And both those things are important.

Radovan: Got it. Okay, so if you have the mid cap value, and I mean in this case, I once again agree with you that, I see this as a potentially very interesting part of the market, especially for the future. So if you have the mid cap value, now the question is, I mean, how to build a portfolio that will differentiate from the benchmark? Because you can buy mid cap value relatively easily by buying ETF or something. But those ETFs there are like somehow systematic build on one or two ratios or something like that. So, I mean, if I want to build portfolio smarter, how to do that? Not just buy some simple index, but how to do that like better.

David: Yeah. I think it’s important before I start to define how I define differentiation, and for me that’s partly is exposure. You know, how much of the benchmark you’re exposed to a weight and you know, number of companies, that sort of thing.

But what’s really important is. What does your portfolio look like on a characteristics basis relative to the benchmark? And if you’re a true value investor, you’re gonna see a very stark contrast with the valuation of your portfolio, the operating metrics of your portfolio relative to the benchmark and that’s the first thing, right?

You really need to be differentiated in terms of valuation. I like to look at a portfolios of discounted companies of value stocks, especially if you’re doing quant, as a one company portfolio. So if you take that high level and you look at the characteristics of the portfolio, each company that’s in there is important, right?

There are a brush stroke in a painting. That’s a beautiful piece of art. The most important thing is not each brush stroke, but what the painting looks like in aggregate. And I think people often get caught up in individual companies that are in an index that a portfolio manager owns. You know, owns in a strategy, and they lose sight of if you’re buying an index, if you’re buying portfolio and a hedge fund or a mutual fund or an even ETF, you’re buying that whole portfolio.

So it’s really important to take that top level view. And we talked about being diversified. So you take a top level view of that portfolio and what are you paying for that portfolio and that exposure. And it should be discounted on PE, price to book, higher return on equity, good for cash. All those things are important. And that leads me to my final point, which is: don’t focus on one metric. There are different times when different metrics will be in favor. There are also different metrics for different reasons. So you might like a discount metric like P being discounted can be advantageous because of growth and reversion.

But price to book may give you a margin to safety. Or a low price to book, I should say. So it’s important to look at the portfolio from a holistic standpoint. And from value from a holistic standpoint. Don’t get caught in one metric, but really you wanna paint a picture, like I said, or a piece of art that represents discount, good operating metrics. That’s really important is not to focus on any one thing or any one company and really focus on the bigger picture.

Radovan: Yeah. So on the portfolio construction at the end. Yes. So that’s the important part of that. And once again, I agree. And here comes the question. So if the portfolio construction is important and there are like a lot of the different valuation ratios, PPB, return equity, et cetera, et cetera. I mean, how to combine them nicely into one portfolio optimization, how to mix them together and build that optimal portfolio of the stocks.

David: I don’t think you can look for a perfect company or even have a perfect portfolio, and I think this is important. First of all, we’re talking about portfolio construction. You want companies that are discounted in certain metrics or you know, high return on equity, things like that. You don’t want the absolute cheapest or most discounted company. Necessarily, right. That could be suspect. So I think one of the important things to do in portfolio construction is to remove outliers. And really be in a position where you’re looking for good companies that are, you know, good discount, but not the most discount. I think that’s number one. Number two is complimentary metrics and putting a portfolio together where everything and the portfolio has a reason to be there and would be considered discounted, but they approach it from different ways. So you talk about, you know, metrics. I think combining metrics are complimentary and looking kind of at that intersection and then ranking companies that way. And having a variety of metrics that you use and combinations, and then combining them at the end to create a portfolio will give you that kind of holistic portfolio as if it was one company.

Radovan: Here is like the split in between the quants. So when you look on more of the metrics, we can figure out 20 of them.

David: Sure.

Radovan: And some of the quants, they like to combine all of those metrics together and then create one average metric, or let’s call it this way. Sort all the companies base on that and pick the cheapest one, or what is it. There is like competing point of view, which is like, okay, let’s treat every metric separately. Let’s treat them as individual factors or something like that. And let’s be diversified between the metrics. So let’s buy 10% of the best stocks from this metric and from this and from this and from this. And then optimize them together. So do not combine those metrics into one final metric. But treat them separately. What is your preferred way, how to slice the portfolio?

David: I think it’s important to figure out what metrics are the most important. I remember I said, what helps you sleep at night? What drives things is maybe risk reward is the most important. Where does the reward come from? Where does the risk come from? And how do you mitigate the risk and create opportunity, right? So when you’re looking at portfolio construction. I think they’re both kind of right. So you need to rank and you need to compare, right? You can’t just say, okay, these are the lowest PE and these are the lowest price to book.

And like as you said, find a spot where you’re comfortable, like a cutoff and combine them. And that leads me to the next point, which is, it is important to be disciplined and be consistent, but it’s okay if you’re shooting for that lower, whatever you wanna say, quadrant of discounted companies to kind of take what the market gives you.

I think it’s important to be invested in most cases, but that means you need to take what the market’s giving you and not have absolute true. You know, I won’t pay more than five times earnings.

Radovan: So, and then comes another question. So long only or long short? Or long and short, just like, I don’t know, 40% short or something like that. What is your point of view?

David: My point of view is if you’re good at going long, go long. And it is hard if you look at the market, certainly recently to bet against the market at times. So for me it’s long only.

Radovan: Radovan: Mm-hmm.

David: I don’t think that if discounted companies are in favor you’ll necessarily win by buying companies that are exuberant or have high valuations. They can get away from you. And the inverse is true, right? Value stocks aren’t maybe excelling. There’s still something there. They’re not falling apart. It’s also about not just what you’re good at, but being a value investor in my mind means you’re also patient and understand that these things cycle and try to play both sides of the coin isn’t necessarily, I think, consistent with that creed, right? With that way of investing. I think it’s really about knowing there will be opportunities, being ready to take advantage of those opportunities. Understanding that the risk reward ratio and value investing can be very good and not trying compete in every environment. You’re not gonna win every game. And so I think, I think long only.

Radovan: Long only. Okay. I understand that the long and short side it’s mostly about, what is the, anybody comfortable within. So there are people who are comfortable with being long only. There are people who prefer to be long short.

There are people who prefer to be long mainly, and some small part of the short. So at the end, I mean, it’s mostly about being consistent with what is the process. That’s probably also your case.

David: So, yeah. I mean, stick with what you’re good at. Be consistent. And I don’t think from a quantitative standpoint, that if discounted companies have a good risk reward can go up reverting back to, you know, benchmark valuation and maybe then some that the inverse is necessarily true. That you can just reverse those algorithms and have the same result on the short side, I don’t see that.

Radovan: You are right. Because there is a value in buying discounting company doesn’t mean that there is like inverse of the value when you’re shorting something which expensive and it can be like dangerous.

David: Yeah, I agree. At least I haven’t figured out a systematic way to short growth stocks and bet against growth.

Radovan: Okay, another question. What about alternative data? How to base our decisions? What is discounted? What is not discounted? So I mean, can we just use the fundamental data which are available or should we use also other types of the data calls from the managers? I mean, or what are the data that we can use when we are building our decision? Whether this is value company or it is not value company.

David: So how do you define value, right?

Radovan: Yes.

David: It’s generally not paying too much. So what can you lose versus what can you make and what does that ratio look like. Or realistically lose, I should say. Fundamentals, in my opinion, it’s all about fundamental. If you are diverse, as we talked about earlier, if you are removing subjectivity and focusing on the data, you do not have to talk to management. You don’t have to read analyst’s opinion and news. And in fact, I think it’s an advantage not to. Don’t get biased. Don’t get caught up in the minutia or worried about macro trends and micro trends. Your opinion in quant investing isn’t important.

What matters is being nimble, having a strategy. So if X happens, you do Y you’re not trying to figure things out on the fly, you have procedures. That’s the point of quant, is to be consistent and to have a plan, so to speak. So if you’re doing that, the data and fundamentals is what matters. And if you’re diversifying, not again so much like you’re the benchmark. But enough that a company comes in, maybe not that the data is inaccurate, but that the fundamentals are misleading, I guess is the best way to put it. You’re not gonna get killed by that company, but by focusing on the fundamentals, focusing on the data. And I think also important, which we haven’t talked about is buying profitable companies, right? Because profitable companies not only tend to outperform over time. But profitable companies, very importantly, will give you all the metrics you need.

You’re not gonna just focus on price to book, right? If they’re not profitable, don’t ever return on equity. You don’t have PE. You might have price to cash flow. There might be some cash flow. Sorry, not after tax. And so what you wanna do is focus on profitable companies so you have the most metrics.

Focus on the fundamentals, not worry about the noise, what’s going on with the company, what’s going on in the news. No. Discounted companies over time will all things being equal revert to benchmark valuation or higher, and so it’s very important to focus on those fundamentals and not get lost in other things, in my opinion.

Radovan: Yeah, basically in the noise. So..

David: Yeah.

Radovan: Then here comes the question. So I mean, what does it mean is that in this case, if you are this kind of investor, you are not rebalancing your portfolio very often because fundamentals change, but they do not change on a daily basis. How long does it take, I mean, for the companies to revert back to those fundamentals? So if I’m the value investor, I buy the company, I have diversified portfolio, how long does it take for average company to get back to benchmark average? So if it’s get discounted.

David: I think it’s highly variable. So I think what’s important is to have a system for how often you rebalance, but also a system where you’re not kind of throwing out the baby with the bath water, right?

So you want to keep companies that are still discounted, that’s still contribute an overall risk reward profile and you wanna let new companies in that meet those criteria and you can sell companies that no longer meet that criteria. So it’s actually more about when you rebalance and how often you rebalance than it is, how long it’s gonna take a company to reach its potential or be too expensive. Right. And that’s another point I think we should touch on, which is if you’re a value investor. Own value companies own discounted companies to investors in most cases, you are not gonna be their only investment. So you’re a piece in the puzzle. So stick with what you’re good at, stick with what they’re paying you for, which is to be a SMID cap and value investor to be a SMID cap value investor. It’s important to, as you said, rebalance, to keep the portfolio fresh and discounted. It’s a balance. Okay, so first of all, you don’t wanna do it too often. Because you want to give companies that are starting to go up in price and therefore sometimes valuation, give them a little room to run, but a short leash.

And second of all, you really need to, as I mentioned, not hold companies that no longer meet your criteria and get out of your lane and chase growth and that sort of thing.

Radovan: Yeah. Still. I mean, what does it mean like not very often? It’s quarterly, half a year. Monthly, or I don’t know, once a year.

David: I think a year is a good balance for rebalancing. That doesn’t mean you’re not paying attention to the portfolio and making adjustments, but a big rebalancing, I think once a year and tax loss selling happens at the end of December. You can get some real values at the end of December, into January. That’s, I think, an important factor. Things that are discounted that have maybe gone down for the year. People are getting rid of, you can get ’em even cheaper than you could a month earlier. So I think being, being consistent, not only in how often time of year, but again, don’t lose sight, that you need to do regular reviews in terms of what does your portfolio look like in terms of valuation?

Is everything profitable? Is everything liquid? Those are all important factors, but in my mind, and you know, I’ve looked at it from all different angles, I think a year is a really good balance. It’s giving things time and not letting things run away from you in terms of valuation.

Radovan: I like this trick that looking for discounts in December.

David: Well, it’s not secret, it’s just, it’s being consistent about it. Right?

Radovan: I mean there are a lot of the people who either appreciate that there are calendar trends in the market and there really are calendar trends. So if you are aware of that, I mean it’s possible to use them. Definitely there are better times of the year when to buy something than the other times of the year.

David: On that. When you talk about rebalancing. It’s important to be consistent, as I mentioned, and when you do it, but it can be tempting at certain times to not wanna do it or to be excited to do it early and that sort of thing. And again, if you’re a value investor, your creative is patience. And that means I’m gonna be consistent. I’m gonna rebalance regularly, I’m gonna take advantage of times when I can really, really get those discounted companies and valuation matters. And being quant, you have a system, right? And you have a time when you do that. And it can be tempting if the market, you know, what was it in.. In March, some market was down substantially.

Right? Time flies, but I think it was March, right? The market was down substantially February into March. And you could have said, oh, well maybe I get better discounts now. Okay, but then you’re off kilter and then what you do the next year? And what’s the inverse of that? And so I think just being consistent is really important. And you also asked about discount. What does that mean? What does value mean? And I think that means buying things that relative, right? I said not absolute earlier, relative to the benchmark in the market have discounted metrics and strong operating metrics. Again, not an absolute, but relative is really important.

Radovan: And how do you see the absolute valuation at the moment? Do you see opportunities to buy stocks or are all of the stocks, I mean, more expensive than they were in the past?

David: No, I think on a relative basis, there are still opportunities. On absolute basis. Yeah. They’re probably quote, you know, more expensive, right?
You’re paying more for them. But on a relative basis, there’s always opportunity, but if you look like through the first nine months of the year, what performed, it was not low PE companies, for example. If you look at, I think the Russell 3000 has roughly 2000 companies that are profitable in it, which is, I think, that’s over 90% by weight.

And if you take the bottom quartile, which is you know, about 500 companies, the cutoff was, you know, below 14. Basically. Which you can say absolutely as high, whatever. Those companies basically didn’t move the first nine months of the year. Profitable companies. Low discount. That was not a market driver. It’s not about not finding opportunity. It’s about when those opportunities play out, and that goes back to patience.

Radovan: Yeah, yeah, I understand. So there, on a relative basis, there are opportunities, but on absolute basis it’s more expensive and yeah, the value is basically about, we need to wait for the market to understand, and I mean get in line.

David: But also if you’re buying on a relative basis, it doesn’t really matter, right. What your opinion is on the absolute.

Radovan: Yeah.

David: If you’re a quant, in my mind, being quant means you’re removing the subjectivity. But if you’re relative, then it is what it is. This is what the market’s given us.

Radovan: Yeah. Yeah.

David: And there’s certainly times when you might say, well, this seems like an expensive time, and if you said that two years ago, where would you be? If you pulled out of the market. So, you know, and that’s when I go back to what I said earlier about being invested. That’s important. How you invest and what you own is important, but trying to guess can be a difficult game.

Radovan: And it’s different when you know that you want to be invested in your benchmark is basically small cap or mid cap index or mid cap value index and you’re on a basis trying to beat that index is something different than you’re trying on absolute basis. Yeah.

David: And also that goes back to what I was saying about you’re a piece of the puzzle, right?

Radovan: Yes. Yes.

David: So if you have an investor and you’re a piece of their investment puzzle, of their greater allocation, if they wanna be in greater cash, they’ll be in greater cash. You know, if your job is to give them exposure to something, I think you should be invested pretty heavily most of the time.

Radovan: Yeah, definitely. Okay. And what about, I mean the relative size? So I mean if you have 100 companies in a portfolio, so is it better to stick with approximately equal allocation between all of them or, I mean, is it better to have like priority list? Those 10 are my top 10 picks and I will give them quarter of the portfolio. Half of the portfolio or what is your, I mean, point of view on this?

David: I think when you’re ranking companies and you’re looking at it from different metrics, you probably have different lists, right? So you might have a list of complimentary metrics, A and B, or a bucket or a basket, whatever you wanna call it. And then here’s basket two with two other complimentary or maybe one of those in a different complimentary metric, whatever it is. The way I look at it is when you combine these lists, companies that come up in more or less should be given a higher weight. If there’s a hundred companies on your list and there’s redundancy in 10 of them, they would have twice the weight.

Radovan: Understand. So I mean, if the company scores better over the multiple ratios, it should have the higher weight at the end.

David: I believe that. Yeah.

Dan: Yeah. Which argues for your combined factor quant construction versus allocating different parts of the portfolio to different value factors.

Radovan: Yeah, there is some concentration, but it’s like small amount of the concentration when we compare it to really concentrated value, which likes to have 70% portfolio in 10 stocks. So, and at the end you win big or I mean, You do not win at all.

David: When you’re being relative. Again, 5% versus a 2.5% position is substantial, right?

Radovan: Yeah, yeah.

David: Okay. And the other thing is, in my estimation, being a quant value investor means you’re taking advantage of times when valuation matters and you’re not trying to hit the bullseye and pick, okay, this is the best company.

Right? Because you could be really right. You could be really wrong. Exactly. You could be somewhere in the middle. But if the trend is, ou, valuation matters. What we pay matters. Owning a fairly diverse, not overly diverse portfolio of discounted companies. That again, if it was a one company portfolio, it’s attractive. I think you can do very well, and you also don’t have that added potential risk of being biased and kind of falling in love with the company. Do you hold it too long? Are you rationalizing? You know, those things, people can win on that and they can lose on that, and it’s hard to be consistent. With that kind of approach.

Dan: Yeah, there’s a lot to pull apart in there. But I’m kind of glad that we arrived at this point and we’re certainly not done yet, but I am already starting to think about what are the takeaways gonna be. And what I’ve been trying to do is the discussions evolving is keep score, what are the important points for the fundamental discretionary, typical value investor or portfolio manager or analyst even versus, what are the important takeaway points for the quantitative investor portfolio manager analyst? And I lost track of the numbers, to be honest with you.

David: Am I winning?

Dan: Yeah. Yeah, I think you’re winning.

David: Okay.

Dan: One of the points that seems to keep coming out, and then a lot of what you’re saying is on the fundamental side, the fundamental data is the key. And even though you’re a quant, the fundamental data you’re looking at just to be a hundred percent clear to everybody, it’s the same fundamental data that a fundamental investor, portfolio manager, analyst would look at. Right? At the beginning.

David: A hundred percent.

Dan: Okay. So we’re not looking at different facts. We’re looking at the same facts. But to get to the point that you just made about biases, it’s not about having that high conviction pick for you. It’s not, I have a high conviction on this company. You seem like you’re trying to say it’s about a high conviction on the systematic process within which companies enter and exit the portfolio. And you’re bloody minded about it.

David: A hundred percent.

Dan: Yeah.

David: And, I’ll add to that, when you’re a quant investor, your strategy and your decision making, I should say, or lack thereof, is front loaded. You spent the time. Hopefully you’ve spent the time and research to create a strategy with rules and processes that you’re comfortable with, right? And that you believe in and have conviction on, as you said, Dan. So if you have conviction on your, the structure and the process and the rules and all those things.

Then you’re ready to go. You’re ready to implement instead of make decisions and be subjective. So I like to say it’s front loaded. It’s not that you haven’t made decisions. You’ve made decisions and been subjective to some extent, probably in kind of what you looked at and how you got to where you are. But, bias is not affecting, and subjectivity is not affecting your day-to-day operations because you’ve spent the time and the energy and the research and looked at the data to understand what is gonna work and what makes you comfortable. And as we mentioned earlier, what gets you through the night. So if you’re on that, and you’re comfortable and you have confidence and conviction, then it’s front loaded. And that’s how I like to look at it.

Dan: Right. But, if further you have high conviction, that value is important.

David: Oh, I have no doubt.

Dan: Paying a good price for what you own is the key thing. Does that necessarily make you a fundamental or does that make you a quant or is it possible to be both or either?

David: Uh, I think I’m both.

Dan: Hmm.

David: Yeah. And, and I think also to your point, Dan, am I looking at the same data as everyone else? Yeah, but that’s not the trick, right? And there isn’t a trick. It’s about being consistent and being patient and sticking to the criteria that you know works. And even if it doesn’t work today, having confidence and knowing that sooner than later, you will benefit again from what you’re doing. And because you Rado talked about, well, right now the value isn’t really in favor and he’s absolutely right. But what if I decide, well, I’m gonna try to figure out some other way to do this or chase this or do this, which isn’t my area of expertise and I don’t have conviction on. I think you can get away from what’s important, but again, I’m looking at the same data. It’s about being consistent and how I look at that data, not that I have special data.

Dan: Right. So tell me again, what’s the big deal with style drift, which is I think whew you are leading to.

David: I think there’s two things that are really important looking at style drift. One is what are you being paid for? Right. So if you’re SMID cap value investor, be a SMID cap value investor. Don’t start owning larger companies or growth companies, ’cause that’s not true to, you, know, what you’re supposed to be doing, so to speak. And I think it’s important to be transparent also in certain ways, you know, like characteristics and showing investors that you are true to your creed.

And two is what are you good at? If you’re good at value investing? Be a value investor. If you’re comfortable with value investing, be a value investor. It’s not about pleasing everyone all the time. It’s about being true to who you are and what you’re good at. If you told me, alright, you have a year to develop a quant strategy and exploiting growth opportunities, even if I could do it, I wouldn’t necessarily be comfortable with it or have the conviction I do about discounted companies. So.

Radovan: I think you are definitely right. At the end, the reason why there is value factor is because, I mean, it doesn’t have to be always shining. That’s the reason why it pays off to be the value investor. There is a risk of being the value investor because you do not know whether that value will pay off next quarter.

But I mean, at the end, over the long time, yeah, it’ll be paid off. So as you said, I mean it about the conviction. Every portfolio manager and at the end, every investor, they must find something that they are comfortable with and if they stick with it, they’ll be paid off. But they’ll be paid off because they stick with the process. When the other people, I mean they’re not convinced at the end is not without the risk. And in this case, the risk is, I mean, the absolute benchmark. Yeah, there are the few years when you are trailing the S&P 500. At the end if you do not care about S&P 500.

David: When you have a belief system, any belief system, whatever it is. It is important to know that you’re going to be tested at times. There are gonna be times when it’s hard to have conviction, when it’s hard to have faith and relying in as a quantum investor on data and having patience and realizing that you have conviction for a reason. That’s, when it’s important. And those are the most important times when you’re tested, right? That’s what separates people who are gonna be successful in investing and from people who aren’t. And it’s that conviction and understanding that, look, I’m not gonna win every game, but I might win the World Series, the Super Bowl, whatever, but I don’t have to go 19 and 0 to win the Super Bowl. So.

Dan: Yeah, that kind of is how quants think. Right? I know I’m gonna be wrong a lot, but as long as I’m right. More often. And it can be just a little bit.

David: Well, that’s the great thing about investing, right? If you buy a hundred companies and 45 go up and 55 go down, but those 45 go up substantially more, those 55 go down, you’re still right at the end of the day. So it’s not being right on every bet. It’s about being right in strategy and implementation and that’s what matters, right? Again, I talked about the whole portfolio, right? If someone buys your portfolio they’re not buying five names that you have high conviction on. They’re buying the whole portfolio so they don’t care if 60 names are down and 40 are up. If they make money at the end of the year and you do your job, they’re gonna be happy.

Dan: Yeah. And that’s the magic of asymmetrical returns too. ’cause they don’t even have to be right more than half of the time if the, yep. If the winners pay for the losers.

Radovan: I like the last quote. So yeah, it is really about the conviction. A value investing is about the conviction. I like how you said that the very investors and every investor will be tested and at the end, I mean, how you end up during the testing will deliver that returns at the end. Because only those that stay focused on the process will end up profitable. So that I liked it, because It’s is absolutely true.
Really. Thank you very much.

David: Thank you, Rado. Thank you, Dan.

Dan: That’s very good. Okay, so with that, let’s go back to the studio. So thanks Rado. Thanks David. Especially for teaching us something today. So now to me, David, from Methodical Investments, or to tell us if you would like David back again to teach us some more. Or to meet Rado from Quantpedia or to join us as a guest, or if you’re interested to otherwise support the channel. Contact me, Dan Hubscher at these details right down here. Just note that any questions regarding investment offerings will be deferred to an email follow-up for compliance purposes, as these videos are not intended to be about investment offerings.

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