Putting a Quant Approach to Work in Your Portfolio
Jeff Remsburg
5 min read
Ken Griffin’s quant fund crushed in 2022 … what’s behind Luke Lango’s quant-driven trading service … the power of a “stage analysis” market approach … Luke’s live event today at 4 PM
While 2022 was horrendous for the average investor, billionaire hedge fund manager Ken Griffin and his investment shop Citadel enjoyed their most profitable year ever.
Griffin’s flagship Wellington fund returned 38% in 2022.
Meanwhile, Citadel’s overall revenues came in at $28 billion, crushing the firm’s previous high of a little more than $16 billion in 2021.
But last year’s gains, even in a down market, is hardly new for Griffin.
Here’s Forbes with his track record:
Griffin is a big-picture guy whose track record is nearly unparalleled on Wall Street.
He’s had only two down years in the past 31, earning his investors an average of 19% per annum.
The obvious question that races to mind is “how?”
Well, like so many of the world’s most successful hedge fund managers, the answer points toward one thing…
In 1990, at age 22…Griffin launched what would eventually become Citadel Investments, an early “quant shop” with one computer, two employees and $4.6 million in funds….
[Today,] Griffin employs smart mathematicians and scientists who harness cutting-edge technology—predictive analytics, machine learning and artificial intelligence—to analyze huge amounts of data in real time.
The article goes on to reference Griffin’s “genius quants” and their “market-dominating algorithms.”
The reality is that smarter computer algorithms make for better investment results
That’s, in part, why Luke Lango and his team of CalTech engineers launched their own quant-based trading service last fall.
Here’s Luke, describing the process and mindset that went into it:
Over the past year, my team of data scientists and myself have developed, tested, and fine-tuned a quantitative trading system to help crush the market.
We realized that the era of human-driven investing is drawing to a close. The era of machine-driven investing has arrived.
And if 2022 taught us anything, it is that investors who fail to leverage the power of quantitative finance to uncover the best stocks, will get crushed by those who do…
We want to be the investors doing the crushing, not the ones getting crushed.
So, we built a quantitative trading model to help us do just that. With it, we leverage the power of machines and big data to always beat the markets.
Five months ago, they beta tested their system, and while markets bounced up and down, trading flat overall, Luke’s quant system flagged stocks that jumped, 25%, 36%, 73%, and one even exploded more than 1,000%.
In terms of actual, current portfolio returns, in yesterday’s Digest, we brought you a few examples. We highlighted open gains of 27% on a trade beginning on October 25th… 39% on a trade originating on October 4th… and 76% on a trade opened just seven weeks ago, on November 29th.
What is it that these computer algorithms are finding that’s resulting in these double-digit returns?
Like most successful market approaches, Luke’s system is simple in theory, but challenging in application.
It involves something called “stage analysis.”
From Luke:
There’s always a bull market somewhere. You just have to find it.
And the best way to find it is by performing something called “stage analysis.”
Long story short, every stock at any given point in time is either going up, down, or sideways.
To that end, every stock is always in one of four unique stages: 1) going sideways at a bottom, 2) going up, 3) going sideways at a top, or 4) going down.
Stage analysis is the science behind figuring out which of these four stages a stock is in at any given point in time.
Chart showing the four stage of a "stage analysis" investment cycle
Obviously, the key to scoring consistently big returns in the market is to find stocks on the cusp of entering Stage 2 – or stocks that are about to break out.
This is exactly what Luke and his team did.
They created a computer system programmed to find stocks on the cusp of entering a Stage 2 “break out.” The model scans the entire U.S. stock market every single week, checks every stock against a set of parameters consistent with a Stage-2 breakout, and returns the stocks that fit the profile.
If you tried do this by hand, it would take you thousands of hours. That’s the benefit of harnessing artificial intelligence.
One of the aspects of this system that I find so appealing is it relieves investors of having to explain “why?”
When you invest or trade, you’re making a guess.
When you boil it down, you’re predicting that the stock will rise based on some theory…
Maybe the company is entering a new market that promises more revenues
Perhaps it’s launching a breakthrough technology that should attract scores of new buyers
Maybe the stock price simply appears too low relative to earnings
But how many times have you identified a compelling reason to buy a stock, yet it lost you money? Even if your theory was correct?
That’s one of the challenges with investing/trading – even if your analysis is correct, the market has a mind of its own and can refuse to “play nice.”
Well, this points us toward a benefit of stage analysis trading.
Knowing “why?” a stock or sector is surging is great – but it’s unnecessary and largely irrelevant.
When you’re utilizing stage analysis, your focus is the one thing that matters…
The price action itself, and whether it’s headed in the direction you want with robust momentum.
Knowing “why?” a stock is climbing is just icing on the cake. But at the end of the day, it really doesn’t matter. The only thing that matters is that the stock is moving north, making you money.
Think about it…
Imagine that Stock A was losing customers, losing market share, and hemorrhaging cash – yet its stock price was surging higher.
Would you prefer to stay on the sidelines because you know that Stock A has all of these fundamental warts associated with it? Or would you prefer to jump into the trade based purely on its surging price, and ride the momentum higher for as long as it runs? Even though there’s no great reason why the stock is surging.
At the end of the day, the only thing that matters when it comes to wealth creation is the market price – and whether your exit price is higher than your entry price.
Today at 4 PM ET, Luke is holding a special live event to dive into all the details of his stage analysis system
When you better understand stage analysis, you’ll see the market through a new lens that can help explain some of your past, underwhelming stock picks.
I suspect you’ll recognize that – even though you had a sound reason to invest – you simply bought during the wrong stage.
If you’re interested in learning how to make serious money in the stock market by leveraging the power of quantitative finance, you need to learn about this model today.
Fortunately, I’m going to host a tell-all broadcast about this quant model this afternoon.
At 4 p.m. Eastern, I will be going live with a presentation and demonstration of the model.
I may even give away a few new picks that the model just recently identified as “Strong Buys.”
