The Security Analysis Podcast

Ryan Telford: Quantitative Microcap Investing

Wed Apr 03 2024

investingquantitative investingmicrocaps

Description

This episode covers Ryan Telford's investing journey, the Portfolio 123 backtesting platform, factors for investment decisions, quantitative investing strategy, microcaps investing and gut strategies, and tips for quantitative investing.

Insights

Ryan Telford's Investing Journey

Ryan Telford, an engineer and DIY investor, achieved a Kager of 37% over the last four years with a quantitative approach focused on micro caps.

Portfolio 123 Backtesting Platform

The platform allows users to screen for stocks based on various criteria like value, momentum, and custom universes.

Factors for Investment Decisions

Growth metrics such as revenue growth, earnings growth, and margin growth are crucial indicators for evaluating stocks.

Quantitative Investing Strategy

Backtesting since 1999 showed a 60% annualized return, while live deployment from late 2019 yielded around 42% for the main strategy.

Microcaps Investing and Gut Strategies

Investing in microcaps entails higher potential returns but also higher volatility and bigger drawdowns compared to large caps

Tips for Quantitative Investing

Building a network of quant investors can provide valuable insights and experiences in navigating different market cycles.

Summary

Transcript

Ryan Telford's Investing Journey

00:04 - 08:06

Ryan Telford, an engineer and DIY investor, achieved a Kager of 37% over the last four years with a quantitative approach focused on micro caps.
Telford's investing journey involved starting with passive investments through employers, transitioning to value investing inspired by Joel Greenblatt's book, 'The Little Book That Beats the Market,' and experimenting with quantitative software like Portfolio123.
Telford learned from his mistakes, including a failed attempt at real estate investing, emphasizing the importance of adapting to changing market dynamics and avoiding over-optimizing strategies based on back tests.
As an engineer seeking objective rules in investing, Telford appreciated 'The Little Book That Beats the Market' for providing a systematic strategy combining classic value investing principles with quantifiable rules.
Telford's experience highlights the challenges of maintaining successful strategies over time in dynamic markets and the risks of data mining and over-optimization in back testing.

Portfolio 123 Backtesting Platform

07:38 - 16:11

Portfolio 123 is a web-based backtesting platform that helps eliminate survivorship bias in backtests by including stocks that no longer exist.
The platform allows users to screen for stocks based on various criteria like value, momentum, and custom universes.
The speaker's strategy evolved from primarily using value-based metrics to incorporating technical signals and timing considerations.
The speaker uses a composite of different factors for value, profitability, technicals, sentiment, and ranks stocks based on these factors.
Timing in buying and selling stocks is considered crucial in the speaker's strategy, with momentum, trading volume changes, and industry characteristics playing key roles.
Sentiment analysis includes monitoring analyst ratings, EPS estimates, stock recommendations, short interest levels to gauge market sentiment dynamics.

Factors for Investment Decisions

15:42 - 23:17

Analyst sentiment improvement is a key factor to consider in investment decisions.
Monitoring short interest and its changes can provide valuable insights into market sentiment.
Growth metrics such as revenue growth, earnings growth, and margin growth are crucial indicators for evaluating stocks.
Timing plays a significant role in identifying cyclical booms and avoiding potential pitfalls in investing.
Balancing sustainable growth with temporary spikes is essential for long-term investment success.

Quantitative Investing Strategy

22:49 - 30:44

The strategy involves weekly rebalancing based on key variables like growth, undervalued timing, and sentiment.
Average turnover is about 300% per year, with most strategies managed in tax-free accounts to minimize taxes.
Backtesting since 1999 showed a 60% annualized return, while live deployment from late 2019 yielded around 42% for the main strategy.
Robustness testing and adjusting factors over different time periods and countries are crucial for strategy optimization.
Mainly investing in micro and nano caps, with a focus on illiquid but promising businesses in the Toronto Stock Exchange's Venture Exchange.

Microcaps Investing and Gut Strategies

30:14 - 38:14

Strong back test performance of microcaps attributed to fundamentally strong companies with good growth, balance sheets, and margins
Investing in microcaps entails higher potential returns but also higher volatility and bigger drawdowns compared to large caps
Quantitative investing focuses on measurable factors but may not account for soft factors like emotions influencing stock movements
Screening out dubious businesses in the microcap universe involves using multiple factors like sustainable growth, balance sheet strength, and positive market sentiment
High insider ownership does not always guarantee high returns as alignment with shareholders is crucial

Tips for Quantitative Investing

45:01 - 53:03

The process of quantitative investing involves a significant amount of work and learning curve, requiring both analytical skills and understanding of investor behavior.
Newcomers to quantitative investing should focus on understanding market history, industry changes, and investor sentiment to avoid common pitfalls.
Building a network of quant investors can provide valuable insights and experiences in navigating different market cycles.
Notable quantitative investors like Jim O'Shaughnessy and Tobias Carlisle offer valuable resources through books, podcasts, and community engagement.
The underperformance of the magic formula since 2010 may be attributed to factors such as increased efficiency in value identification and the shift towards capital-light businesses.
Engaging with Brian Telford on Twitter or Seeking Alpha provides avenues to learn more about his quantitative models and analysis.