Quantitative vs. Qualitative

Quantitative Analysis - A business or financial analysis technique that seeks to understand behavior by using complex mathematical and statistical modeling, measurement and research. By assigning a numerical value to variables, quantitative analysts try to replicate reality mathematically.

Quantitative analysis can be done for a number of reasons such as measurement, performance evaluation or valuation of a financial instrument. It can also be used to predict real world events such as changes in a share price.

In broad terms, quantitative analysis is simply a way of measuring things. Examples of quantitative analysis include everything from simple financial ratios such as earnings per share, to something as complicated as discounted cash flow, or option pricing.

Although quantitative analysis is a powerful tool for evaluating investments, it rarely tells a complete story without the help of its opposite - qualitative analysis. In financial circles, quantitative analysts are affectionately referred to as "quants", "quant jockeys" or "rocket scientists".

Qualitative Analysis - Securities analysis that uses subjective judgment based on nonquantifiable information, such as management expertise, industry cycles, strength of research and development, and labor relations. This type of analysis technique is different than quantitative analysis, which focuses on numbers. The two techniques, however, will often be used together.

While most investors and analysts rely largely on quantitative measures, metrics such as the debt-to-equity and price-to-equity ratios, supplementing the analysis with qualitative analysis increases the insight into the company. Using qualitative factors will often give analysts an edge since key factors, such as management, does not show up in quantitative analysis.

Source: Investopedia

Security Analysis

Fundamental Analysis - A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management).

The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security's current price, with the aim of figuring out what sort of position to take with that security (underpriced = buy, overpriced = sell or short).

This method of security analysis is considered to be the opposite of technical analysis.
Investopedia Says
Investopedia explains Fundamental Analysis
Fundamental analysis is about using real data to evaluate a security's value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security.

For example, an investor can perform fundamental analysis on a bond's value by looking at economic factors, such as interest rates and the overall state of the economy, and information about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth. In terms of stocks, fundamental analysis focuses on the financial statements of the company being evaluated.

One of the most famous and successful fundamental analysts is the Oracle of Omaha, Warren Buffett, who is well known for successfully employing fundamental analysis to pick securities. His abilities have turned him into a billionaire.

Technical Analysis - A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

Technical analysts believe that the historical performance of stocks and markets are indications of future performance.

In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, the technical analyst's decision would be based on the patterns or activity of people going into each store.

Source: Investopedia

Stock Analysis - A place to start

Narrowing the field:

1. Domestic securities.
   
2. Pick a style. Leaning towards Income (Dividends) and Mid-Cap Growth stocks.
   
3. Find top mutual funds with the style of choice and limit to their holdings.
   
4. Narrow down focus using different valuation and risk metrics.
   
5. More sector research needed.
   
6. Find suitable stocks to invest in.

Probably analyze a few different approaches. Goal: long-term stability and either growth or dividend yield.

Risk

Risk Adjusted Return - A concept that refines an investment's return by measuring how much risk is involved in producing that return, which is generally expressed as a number or rating. Risk-adjusted returns are applied to individual securities and investment funds and portfolios.

5 Technical Risk Ratios:

1. Alpha - A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.
   
2. Beta - Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.
   
3. Standard Deviation - Standard deviation is a statistical measurement that sheds light on historical volatility. For example, a volatile stock will have a high standard deviation while the deviation of a stable blue chip stock will be lower. A large dispersion tells us how much the return on the fund is deviating from the expected normal returns.
   
4. R-Squared - R-squared values range from 0 to 100. An R-squared of 100 means that all movements of a security are completely explained by movements in the index. A high R-squared (between 85 and 100) indicates the fund's performance patterns have been in line with the index. A fund with a low R-squared (70 or less) doesn't act much like the index.
   
   A higher R-squared value will indicate a more useful beta figure. For example, if a fund has an R-squared value of close to 100 but has a beta below 1, it is most likely offering higher risk-adjusted returns. A low R-squared means you should ignore the beta.
   
5. Sharpe Ratio - The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed.
   

Bollinger Bands - A band plotted two standard deviations away from a simple moving average, developed by famous technical trader John Bollinger.

In this example of Bollinger bands, the price of the stock is banded by an upper and lower band along with a 21-day simple moving average.

Because standard deviation is a measure of volatility, Bollinger bands adjust themselves to the market conditions. When the markets become more volatile, the bands widen (move further away from the average), and during less volatile periods, the bands contract (move closer to the average). The tightening of the bands is often used by technical traders as an early indication that the volatility is about to increase sharply.

This is one of the most popular technical analysis techniques. The closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market.

• Moving Average - Moving averages are used to emphasize the direction of a trend and to smooth out price and volume fluctuations, or "noise", that can confuse interpretation. Typically, upward momentum is confirmed when a short-term average (e.g.15-day) crosses above a longer-term average (e.g. 50-day). Downward momentum is confirmed when a short-term average crosses below a long-term average.

Source: Investopedia

Analyst Forum CFA

Analyst Forum

Institutional Investor Rankings 2009

2009 Institutional Investor Rankings

Benjamin Graham - 'Father of Value Investing'

'The Wheel'

I've noticed more and more recently how classic rock lyrics reference 'The Wheel' as a metaphor for life. It connotes a sense of helplessness or lack of control, e.g., getting 'caught up in the wheel', or the 'wheel keeps spinning' despite our efforts to the contrary. It is often associated with 'The Man' or 'Big Brother', and it is implied that 'The Wheel' can be avoided if one chooses to lead a counterculture lifestyle instead of a traditional 9-5. Similarities can be drawn to use of 'The Game' in hip hop culture.

Here is a growing list of songs that reference 'The Wheel'.

1. 'Wheel in the Sky' - Journey
   
2. 'Jet Airliner' - Steve Miller Band
   
3. 'Proud Mary' - Credence Clearwater Revival
   
4. 'Sweet Home Alabama' - Lynard Skynard
   
5. 'Eminence Front' - The Who
   
6. 'Take it Easy' - The Eagles
   

Valor Power Rack

http://www.overstock.com/Sports-Toys/Valor-Fitness-BD-7-Power-Rack-Exercise-System/3355372/product.html

http://www.overstock.com/Sports-Toys/Valor-Fitness-BD-4-Safety-Squat-Bench-Combo-Rack/3276038/product.html?sec_iid=33969

Plumas County Trout Fishing

Plumas National Forrest Quad Maps
Separates Lassen and Tahoe National Forests

North Fork Feather River:
Connects Lake Almanor to the northern tributary of Lake Oroville. Spans the following quads in the map above:

• 6, 15, 14, 13, 24, 37, 36, 49

Middle Fork Feather River:
Connects the Sierra Valley Channels to Lake Oroville. Spans the following quads in the map above:

• 44, 43, 42, 41, 40, 39, 38, 51, 50, 58

NORTH FORK FEATHER RIVER, BELDEN
Located off Highway 70 and Caribou Road, this is the best stream fishing option in the county. Because it is heavily stocked through early summer, the fishing stays decent through July.
The water directly below the forebay is the best place to start, but access is good downstream past the campgrounds. Bait or spinners best attract these planters. This is a good spot to bring the kids because of the number of fish in the river. For a more challenging task, head down Highway 70 to the Middle Fork of the Feather.


MIDDLE FORK, FEATHER RIVER
Flyfishermen consider this one of the best trout streams in California. It's not easy to get to because the best stretches are in the Feather River Canyon. But those who do the extra work to get to this federally designated Wild and Scenic River will be rewarded with beautiful wild rainbows to 20-plus inches and larger (and rarer) browns.
Any type of water is available on this river. Whether it's pocket water, pools, riffles or deep runs, you'll be able to take your best shot at it with little competition from other anglers.

Be careful of rattlesnakes and give yourself enough time to scramble out of the canyon.


GOLD LAKE BASIN
There's no more picturesque setting in the northern Sierra than Lower Sardine and Upper Sardine lakes below the Sierra Buttes in the Gold Lake Basin. The fishing is also pretty good at Lower Sardine and a number of the other lakes in the basin, particularly Gold Lake.
The lakes are accessible from Highway 49 and the roads to many of the lakes are excellent. There are also numerous backcountry options here.

Lower Sardine is fishable by boat, shore or float tube and is best fished with bait or spinners. The part of the lake where the waterfall from Upper Sardine enters the lake is a top spot. Boat rentals are available.

Upper Sardine, less than a half-mile above Lower Sardine, is best used as a hiking and swimming destination.


NORTH FORK FEATHER RIVER, BELDEN
Located off Highway 70 and Caribou Road, this is the best stream fishing option in the county. Because it is heavily stocked through early summer, the fishing stays decent through July.
The water directly below the forebay is the best place to start, but access is good downstream past the campgrounds. Bait or spinners best attract these planters. This is a good spot to bring the kids because of the number of fish in the river. For a more challenging task, head down Highway 70 to the Middle Fork of the Feather.


MIDDLE FORK, FEATHER RIVER
Flyfishermen consider this one of the best trout streams in California. It's not easy to get to because the best stretches are in the Feather River Canyon. But those who do the extra work to get to this federally designated Wild and Scenic River will be rewarded with beautiful wild rainbows to 20-plus inches and larger (and rarer) browns.
Any type of water is available on this river. Whether it's pocket water, pools, riffles or deep runs, you'll be able to take your best shot at it with little competition from other anglers.

Be careful of rattlesnakes and give yourself enough time to scramble out of the canyon.


GOLD LAKE BASIN
There's no more picturesque setting in the northern Sierra than Lower Sardine and Upper Sardine lakes below the Sierra Buttes in the Gold Lake Basin. The fishing is also pretty good at Lower Sardine and a number of the other lakes in the basin, particularly Gold Lake.
The lakes are accessible from Highway 49 and the roads to many of the lakes are excellent. There are also numerous backcountry options here.

Lower Sardine is fishable by boat, shore or float tube and is best fished with bait or spinners. The part of the lake where the waterfall from Upper Sardine enters the lake is a top spot. Boat rentals are available.

Upper Sardine, less than a half-mile above Lower Sardine, is best used as a hiking and swimming destination.

Plumas County Trout Fishing

Notes from Joe Nocera's article, "Risk Management"

See my previous post for a link to the article.

The Black Swan: The Impact of the Highly Improbable - Nassim Nicholas Taleb

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets - Nassim Nicholas Taleb

mea culpa

Faulty historical data contributed to the failure of the existing financial models.

"People tend not to be able to anticipate a future they have never personally experienced."

charlatans

Black Swan Protection Protocol - Hedge Fund

VaR - Value at Risk. Risk Management model developed by "quants" at JP Morgon in the late 1980's to early 1990's. Designed to

"gauge the possibility that any kind of portfolio could lose a certain amount of money over the next 24 hours, within a 95 percent probability".

The model was designed to help

"make judgments about whether the firm should take on additional risk or pull back."

patrician

Roger Lowenstein - "When Genius Failed". The fall of Long Term Capital Management (9/1998)

schadenfreude

comeuppance

Liquidity Crisis

Quote:

In a crisis, Brown, the risk manager at AQR, said, “you want to know who can kill you and whether or not they will and who you can kill if necessary. You need to have an emergency backup plan that assumes everyone is out to get you. In peacetime, you think about other people’s intentions. In wartime, only their capabilities matter. VaR is a peacetime statistic.”

prosyletizer

CDS

Richard Bookstaber - "A Demon of Our Own Design"

Quote:

Ethan Berman says, “he recognized that he didn’t have the transparency into risk that he needed to make a judgment. VaR gave him that, and he and his managers could make judgments. To me, that is how it should work. The role of VaR is as one input into that process. It is healthy for the head of the firm to have that kind of information. But people need to have incentives to give him that information.”

Risk

My dad recently gave me a copy of "Against the Gods: The Remarkable Story of Risk", by Peter L. Bernstein. As I was reading this on a bumpy plane flight to LA, I was reminded of my company's blog on Risk. Reading through a some prior posts led me to this article on Risk Management by Joe Nocera, published in the New York Times Magazine.

The article begins with the following quote:

‘The story that I have to tell is marked all the way through by a persistent tension between those who assert that the best decisions are based on quantification and numbers, determined by the patterns of the past, and those who base their decisions on more subjective degrees of belief about the uncertain future. This is a controversy that has never been resolved.’

— FROM THE INTRODUCTION TO ‘‘AGAINST THE GODS: THE REMARKABLE STORY OF RISK,’’ BY PETER L. BERNSTEIN

I found this amusing, and the topic interesting.

USF Financial Analysis Graduate Program

USF Financial Analysis Graduate Program

• 22 Months
  
• Classes on Saturdays only (8-12, 1-5)
  
• August - December, January - May
  
• March 1 - Priority application date
  
• June 10 - Application deadline
  
• Cost: $49,980 for whole program
  
• Can apply to USF MBA program after 19 units
  
• Coincides with CFA curriculum.