Karen has written about her experience starting up at Quantopian and learning about algorithmic investing. I’ve had a similar experience over the last 5 months. I came in as a product manager in November, without a lot experience in finance and immediately began working on our data business. With our release of fundamentals data, I used that as an opportunity to learn about value investing.
Coming into this experience, I expected that the algorithms I would see in use on Quantopian would use “fancy math”, machine learning and other advanced topics. Those types of algorithms are certainly there. Seeing the response to every blog post Thomas writes validates that preconception. But I’ve also seen some relatively simple algorithms based on easily understood hypotheses. Often times following the tenets of value investing, these algos cite influences all the way to Benjamin Graham.
So as part of my learning process, I did some reading and reached out to a modern advocate of value investing in the modern quantitative world: Tobias Carlisle, author of Deep Value and Quantitative Value.
Tobias suggested that we prove out his assertion that the Acquirer’s Multiple (described in Deep Value) can outperform the well known Magic Formula. With guidance from Tobias, Seong Lee, David Edwards and I collaborated on implementing both the Magic Formula and the Acquirer’s Multiple. We built a a single algo that could be switched between the two strategies. That was pretty easy to do because the Magic Formula at it’s core ranks stocks with two simple ratios. Acquirer’s Multiple uses just one of those ratios.
With some effort, we were able to confirm Tobias’ assertion about the performance of the Acquirer’s Multiple. View the notebook to follow our work each step of the way.