Thursday, October 21, 2010

Aldridge & Krawciw, The Quant Investor’s Almanac 2011

First came the Stock Trader’s Almanac, then the Commodity Trader’s Almanac. The latest arrival is the Quant Investor’s Almanac 2011: A Road Map to Investing by Irene Aldridge and Steven Krawciw (Wiley, 2010). It is not, let me be quick to point out, a product of the Hirsch Organization nor does it rise to the standard of the other two almanacs.

The driving idea behind this almanac was to make “cutting-edge quantitative investment strategies accessible to all investors.” I suspect that few of the top-performing quants would line up to take credit for these strategies. The book focuses on economic data releases and the response of individual stocks or the market as a whole to positive and negative reports. The authors also share findings from academic papers appearing in such publications as the Journal of Finance and the Journal of International Economics.

Some of the correlations to economic news should be obvious—for instance, that Home Depot stock rises in response to increases in new home sales and falls when new home sales drop. Allstate’s similar relationship to increasing and decreasing construction spending may be slightly less intuitive. Then there are the non-intuitive choices for study. To take a single example: IBM’s response to retail sales news. Why analyze IBM, which derives most of its revenue from business and technology services and middleware software? Perhaps this is why the impact of retail sales data on IBM’s stock tends to be short-lived. (I wonder how the short-term performance of IBM’s stock compares to that of Best Buy or Wal-Mart or Nike.) Those not steeped in the currency markets will also learn that positive changes in the Johnson Redbook Report lead to a drop in the Euro relative to the U.S. dollar.

The authors assiduously avoid math, even tables. They do, however, provide line graphs that plot the average percentage return relative to price at announcement time on the y-axis and time to announcement (both negative and positive) on the x-axis. Each graph has three lines—all changes, positive changes, and negative changes. The graphs might be more helpful if we knew what time periods they covered.

This book is laid out in the standard almanac style, with an events calendar on the right-hand pages and text and graphs on the left-hand pages. It also has a useful glossary. Unlike its spiral-bound counterparts, however, this almanac is paperbound, which limits its effectiveness as a desk calendar.

In my opinion, if this almanac is to have a future it needs a major overhaul. First and foremost, it should be true to its title and provide quant studies, basic math included. It’s not enough to say that a stock goes up or down. The reader should be told how far it moves and how long the effect lasts. Moreover, the authors should move beyond economic reports even if this entails forcing an almanac style on non-calendar related data. After all, the cartoons in The New Yorker's highly successful desk diary are not time dependent.

No comments:

Post a Comment