Studies of Life

Learning by doing.

Quant Investing vs Passive Investing

03 August 2015 by Jim

Maybe all the work you do screening stocks, reading up on quantitative stock picking strategies and other investment details is wasted. Did you ever think about that? John Bogle thinks that Index ETFs are the only way to go for ‘normal people’, i.e. you and me. And he’s smart, really smart (Princeton guy, founded Vanguard) so what he says should be listened to.

I’ve been talking a lot about different investing strategies on this blog, and I’m currently using a portfolio made up of 35% bonds / gold and 65% stocks chosen using the Trending Value strategy (+Piotroski F-Score) presented by O’Shaughnessy. Maybe everything I do is worthless, and the return of my portfolio can be entirely explained by the underlying asset allocation.

To test whether this could be true, I put together a portfolio of index ETFs with the same allocation as my current portfolio. Since my strategy has changed a bit in the past months, I am not yet ‘fully formed’ as an investor and my portfolio has not been working the exact same way all the time, which makes comparing it to an index ETF portfolio very difficult so far, but the result for this year is visible at the top of this article. The two curves are very close to each other. Based on this very small sample, the conclusion would be: picking individual stocks adds very little value over using an index ETF. I believe that to be close to the truth. But I still hope that quantitative investing can beat an index. But the sample used here is too small, and my strategy has been varying. Just recently, I finally found a new system for deciding when to sell stocks in a systematic and evidence-based manner, so it changed again.

A useful comparison will have to use more than 6 months of data, I’m guessing at least 2 years’ worth, and it will have to be carried out on a portfolio that did not change (or change as little as possible) during the sampled time period.

Comparing not my entire portfolio but just the stocks to a combination of German and US indexes (DAX + SP500) I get the following:

Comparing my stock selection to US & DE indexes

Again, it’s much too early to tell, but at least in this comparison I don’t seem to be loosing to the indexes yet.

‘Gut Ding will Weile haben’ (‘Good things take time’), as the Germans say, so I’ll have to wait for more conclusive data.

But if index ETFs turn out to be better than me I will have to adjust my approach. Indexing has many advantages on paper: simpler, fewer transactions & commissions, fewer positions to track, … So maybe that would be a better choice.

We’ll see. What do you think?


4 comments | Categories: Investing | Tags: , , , , , , , ,

Comments (4)

  1. hi, the odds are not very high that you will beat the market (most professional funds managers cant do it after fees). and even if you do, it could be because you took more risk.

    • Yes, that is possible. If I find that I really don’t get any better results than the market I will switch to passive indexing. It would certainly mean less work. 😉

  2. are your figures total return (including dividends)?

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