STOCK MARKET WATCH -- Wednesday, 28 March 2012

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29. The Farmers Are Beating The Hunters In The Stock Market {i don't know what this is}

http://www.businessinsider.com/the-hunter-and-the-farmer-whose-side-are-you-on-2012-3

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The Hunter – or stock picker

Everyone loves to pick stocks - who doesn’t enjoy getting deeply ensconced in the story of a stock and seeing it multi-bag. There’s nothing as wonderful as being right and knowing that you knew it all along. And fortune has followed for the investors who’ve been skillful enough to pick and hold onto the right stocks for an entire career. Such luminaries as Anthony Bolton, Bill Miller or Warren Buffett have become legends in our time as the long term greats of the art.

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The Farmer – or quantitative portfolio investor

There is though a rapidly growing group of investors that are far more interested in ‘characteristics’ than companies who seek to ‘harvest’ systematic mispricings from the rough of the stock market through quantitative techniques. In a stock market that’s predominantly dominated by the far more numerous hunter, these quants have found they have a lot of easy crop. Hunters tend to be a very emotional lot prone to both chasing prey to unsustainably lofty heights and discarding them too hastily aside which allows the quants to profit from their over reaction.

While many think of quants as modern hedge fund employees even Ben Graham, the original guru of mid 20th century value investing, can be regarded as one. Graham bought up the kinds of stocks you wouldn’t even wish on your mother in law seeking safety in numbers. Individually these stocks looked like train wrecks, but collectively they offered him something special - excessively beaten down assets selling at less than their liquidation value which were in aggregate likely to be re-rated.

This approach has been mirrored far more often in recent years by a variety of quantitative techniques such as those espoused in the ‘Magic Formula’, designed to pick up good cheap companies, or the scoring techniques of Josef Piotroski which aim to highlight companies that have a high probability of turnaround. While these simple techniques can work well, hedge funds have taken the quantitative model and put it on steroids - targetting all kinds of ethereal areas to profit from that we won’t go into here.

Read more: http://www.stockopedia.co.uk/content/the-hunter-and-the-farmer-whose-side-are-you-on-65034/#ixzz1qPZboZAH