A Turn-of-the-Decade Review of a Qualitative-Quantitative Approach to Investing: 2011-2021

Qualitative : Quantitative: A Year-in-Review of the Qualitative processing of forward-looking data to Quantitative expressions

ROFFEL INVESTMENTS: SGX-Focused Decade

In 2011-2021, Roffel Investments achieved a Compound Annual Growth Rate (CAGR) of 8.59%. During the same period, our benchmark STI Index, returned a CAGR of -1.1423% sans-dividend.

The methods introduced into the system we employed was an intricate mix of Qualitative and Quantitative principles and techniques. Stock-picking & Asset Allocation proved itself as the key differentiator of determining outsized returns.

 A general premise of the system used during the period of 2012-2019 was as follows:

1. Conduct top-down Macro-to-Micro economic analysis (Qualitative)

2. Conduct research on short-listed companies within industries of interest (Qualitative)

3. Due diligence on fundamentals, technical analysis, market psychology, and portfolio compatibility (Qualitative & Quantitative)

4. Compute odds, weighted probabilities, and Bayesian reasoning analysis (Quantitative)

5. Pseudo-Markov analysis and technical analysis to enter position after ensuring favorable odds and positive expected value (Quantitative)

6. Right-size position with a proven allocation principle such as the Kelly Criterion (Quantitative)

7. Repeat step 1-6 and allow Law of Large Numbers to ensure a net positive value given a long enough timeframe

Within the framework of the investment process set above, it is through experience that proved for us that:

The Odds of Positive expected return is dependent on the Qualitative Fundamental Analysis conducted in the initial stages of the investment lifecycle, along with the subsequent adjustments and re-evaluation of the fundamental thesis. Outsized returns however, coincided with the Quantitative techniques and principles applied to the investment.

Fundamental Thesis | Odds of Positive expected return

Quantitative Techniques | Outsized returns

Quantitative Techniques Employed 

A Bayesian approach was used in determining the odds of the investment position. Prior probability distributions were established through the fundamental analysis and qualitative methods conducted. These probability distributions were then further processed through techniques such as the Kelly Criterion, or in our case, a proprietary formula.

It is in our experience that the determination of the prior probability distributions were key and pivotal in determining both the Odds of Positive expected return and therefore, the degree of outsized returns given a long period of time.

It is as much the qualitative judgment of the underlying investment as much as the quantitative practice of sizing the investment for optimal risk-return.

In 2016, we formalised the one-dimensional assumptions in the qualitative sphere and gave volume to its significance via Weighted Probabilities.

In total, a formalisation to the methods of determining Potential Returns, Potential Losses, and via extension, the odds of the investment. Potentiality was weighted and expanded (with numerous qualitative and quantitative techniques) and key multipliers were built in to adjust for risk (think Half-Kelly in the Kelly Criterion).

It is through reframing our thought process in terms of fundamental analysis to account for quantitative considerations that our proprietary asset allocation formula took shape.

Links & References:

Bayesian Statistics

https://www.youtube.com/watch?v=yvWlpwnT1nw

https://en.wikipedia.org/wiki/Gambler's_ruin

http://www.columbia.edu/~md3405/BE_Risk_3_17.pdf

https://sciencing.com/calculate-weighted-probabilities-5959518.html

Kelly Criterion

https://en.wikipedia.org/wiki/Kelly_criterion#:~:text=In%20probability%20theory%2C%20the%20Kelly,the%20expected%20geometric%20growth%20rate.

https://www.quantstart.com/articles/Money-Management-via-the-Kelly-Criterion/

http://www.edwardothorp.com/wp-content/uploads/2016/11/TheKellyCriterionAndTheStockMarket.pdf

https://www.pinnacle.com/en/betting-articles/betting-strategy/fractional-kelly-criterion/gbd27z9nljvgflgg

Markov Chain

https://www.youtube.com/watch?v=i3AkTO9HLXo&t=202s

https://www.investopedia.com/terms/m/markov-analysis.asp#:~:text=What%20Is%20Markov%20Analysis%3F,not%20by%20any%20prior%20activity.

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