I noticed an introduction on xueqiue about GVAL ETF the other day. I got intrigued by its strategy and had a look. Its issued Cambria is run by Meb Faber, who runs the podcast on iTunes and quite well-known among investors. I watched his interview with Ed Thorp before. It is a good one.

Roughly speaking the fund’s strategy is to value the countries or regions by Shiller 10 year CAPE ratio and pick the bottom 25% as the universe, and then select the top 30 stocks by the market cap and filter them further by traditional P/E, P/B, P/FCF, EV/EBITDA etc. The final picks are about 100 stocks and rebalance the portfolio every year. For the detail, you could check the prospectus

And the pie chart for the regions and countries like this.

Since fund’s introduction mentioned Graham and Dodds. I couldn’t help to link that with Graham’s net-net strategy, to use a bag of extremely low value to bet it statistically would “somehow” reverse to the mean. I know Graham in general encourage to hold it for 3 years, if nothing happen then sell it. However, seeing the fund’s underperformance in the last two years, I couldn’t help to list a few of the reasons that may not happen.

1. Country suffers longer than individual company from the structural reason. You could insert new management or somehow an earning quarter activate the hidden value. But country’s policy move slower. New bill need to be passed, and cabinet need to be formed in any of democratic regimes.
2. Comparing to the companies in the same currency zone, the international flow of the money is decided by too many factors. If the money not flowing in those countries then the value wouldn’t recover. There has to be some reason to flow in, and merely undervalue may not be a strong enough reason.

I tried to make another list by the data compiled by Damodaran. I removed the countries that has too few stocks listed, and sorted the list by from high to low by ROIC, then ROE. and low to high by EV/EBIT. The reason to make this sorting is that I think marginal investment return would be a stronger reason to attract the money to flow in, but not simply low value. The list is like the following:

For the top 20 there are some overlaps, but the rankings that was in the low Shiller 10 year CAPE are ranked lower. This ranking somehow matches with some of my private findings of good value company globally. I would argue this ranking should be a relative good pool to fish. But not the simply low multiple ranking. With that said, I didn’t do thorough research to do back-testing etc. It’s simply my hunch though.

This is just a rundown of my thoughts, not a rigorous research.

To me this is the book of the year 2019.

I can barely recall when was the first time I heard about the name of Renaissance Technologies. It is probably back in 2010 when I got intrigued by the world of Quant and I was reading Derman’s book: My life as a Quant. I googled a little bit of the development of the financial modeling and tried to know the landscape of the hedge funds that are quantitative funds. It didn’t take too long to run into the name of Jim Simons. As a STEM student growing up in Asia, his associate with Shiing-shen Chern and Chern–Simons theory immediately brought my attention. By further digging up the techniques adopted by Renaissance Technologies. The names of Peter Brown and Robert Mercer came up, they are the students of Frederick Jelinek, a figure you must know if you were in my topic of research: Speech Recognition. The rumor that they were using Hidden Markov Model at the time of early 90s excited me, where HMM was the model you could not skip in my field. Most of the research was trying to build adds-on to the core HMM infrastructure.

This book isn’t about to tell you about the skills adopted by Renaissance Technmologies, but a biography of Jim Simons by Gregory Zuckerman. Renaissance Technologies has stayed low-key for a long time and their secretive style makes few people know the history of the fund. Gregory did a good job to piece together the history, the challenges and the crisis where Jim has faced, and key figures helped establish the foundation of the company. It shed more humanity colors to the stereotype that a group of mathematicians and scientists should be run the company rationally and pursue the path of philosopher king as described by Plato. However, it is far from what was happening in the fund. Drama and crisis was no different from other companies.

The book is so much fun to read and I would like to put down a few notes and thoughts in bullet points.

• It sounds to me the most important thing to quantitative fund is cost estimation with control and risk management, unlike the most of the people intuitively think it is the precision of the prediction. It reads like Renaissance Technologies have its moat because its early setback so Simons was more risk-aware than others like LTCM, so they are less susceptible to the tail risk.
• On the cost end, apart from hiring the talents to discover signals, a new breed of quantitative fund like World Quant is to shift the cost of the mathematicians and scientist to Asia, where they only need to pay half of the salary than in the USA, which reduce the expense ratio for a fund to succeed. It sounds so much like running a bank where the metric is to check the expense rate.
• The early pioneers of the quant is more connected than I thought, Kelly’s criterion was known and was applied by Berlekamp to their trading models.
• They also look for the statistically significant signals that don’t necessarily obvious in its logical cause, which is a surprise to me. But it seems that it made them a moat since they have a scaling bet strategy that could safely try it out and shrink it back if the signal fade away.
• Ed Thorp was almost to invest in Renaissance Technology, but he decided not to when he found Jim was a chain smoker.
• Statistical Arbitrage, though so obvious on the paper, there are so many details to take care to put into the practice it seems.
• George Soros and Jim Simons are neighbors. In the congress hearing during the financial crisis, you could see that Soros and Jim were sitting together in the picture. It seems that Jim agrees with the worldview of Soros. In the epilogue, a MIT student asked Jim which investor’s advice they should listen to on the path of learning investment. Jim pondered and replied George Soros. The same answer was given by Nassim Taleb.