In God we trust, all others bring data.
W. Edwards Deming
The algorithms behind COLOBUS are built on the principles of Quantitative Value Investing. As the name suggests, this style of investing has two important characteristics:
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Value investing aims to systematically find stocks that are “cheap”, i.e. that have a low price with respect to the intrinsic value of the business they represent. The idea is that - even though there may be short-term fluctuations - in a public market the price of these stocks will eventually rise to reflect their true value.
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Quantitative methods use algorithms and automated screening to analyze large quantities of financial data, e.g. quarterly reports of thousands of companies. This is in contrast to traditional qualitative methods, where humans do mostly manual research and forecasting for a few hand-picked stocks.
In the following, we explain a couple of things you should know when investing with a quantitative value service like COLOBUS.
Back-tested strategies
At COLOBUS we recommend investment strategies that have proven to yield excellent long-term returns in the past. We test these strategies over an extensive history of financial data (up to 20 years) in which investors were exposed to all ups and downs on the European markets (incl. the stock market crash of 2008, two sideways markets etc.). Only when a strategy proves successful throughout all of these “difficult” times do we recommend it.
Therefore, the question is not whether you will earn money with a COLOBUS strategy but how long it will take. In contrast to short-term speculation you will need a bit of patience and most importantly discipline. Successful long-term investing is not difficult. But the most important rule is: Once you have chosen a strategy - stick with it. In the words of the successful quantitative value investor James O’Shaughnessy:
Value strategies work, rewarding patient investors who stick with them through bull and bear markets and through bubble and burst. But it’s sticking with them that is extraordinarily hard.
James O’Shaughnessy
To help you commit to a strategy for the long term, we offer attractive discounts for multi-year packages (see “Why should I invest for several years?”).
Master your own emotions
The biggest challenge with long-term investing is a psychological one: How often do you check your portfolio - once per quarter? Once a month? Or every week? How do you feel when your portfolio outperforms the market? And how do you feel when it performs worse than the market, for weeks or even months? How do you feel during these times when your friends tell you about the spectacular stock returns they earned?
But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.
Benjamin Graham
The study of historic investment decisions (even those made by professional investors) reveals time and again: As consequently and rationally as we, as human beings, would like to manage our money - we are always influenced by our emotions. If you invest in stocks you will feel the ups and downs of the market. You need to ask yourself how many “downs” you can handle emotionally. How many percent of temporary loss could you stomach? And for how long could you endure this feeling before giving up and abandoning the strategy?
Experience shows that investors who let their emotions influence their decisions tend to enter and exit a strategy at the worst possible time. For every strategy recommended by us we show you in great detail how many times the strategy performed below market in the past years, how high the temporary losses were and how long you would have had to endure this loss. This way you can make a fully informed decision whether the volatility would have been bearable for you.
Why invest in quantitative strategies?
A traditional analyst may look at quarterly figures and stock prices but also at the evaluation of a company’s management, the perceived quality of assets, forecasts of experts as well as other soft factors (market climate, sector trends etc.). A certain amount of “intuition” of the investor and her experience with past price dynamics of the company may also play a role. This results in the recommendation of a few promising stocks.
In contrast, quantitative strategies only consider the published financial data and the stock prices of companies. They can always be formulated as an algorithm (e.g. “buy all stocks with a market cap of X and a price-to-book ratio of Y”) and thus allow for the automated screening of thousands of companies with the given criteria. The advantages of such an approach are numerous:
- A quantitative strategy always works in exactly the same way.
- It is not influenced by emotions or subjective evaluations.
- It can be applied to thousands of stocks without additional effort.
- Its performance can be validated thoroughly with historical financial data.
At COLOBUS we only recommend quantitative strategies. We evaluate many possible combinations of different factors and test them against up to 20 years of stock market history. As mentioned above, the best strategies are those that do well even during “difficult times” in the stock market, yield attractive annual returns and exhibit a lower risk (volatility) than the market itself. It is only these strategies we let you choose from. If you decide to go with a COLOBUS strategy you can be sure that year after year you’re putting your money into a single, consistent method, whose historic performance you can review in detail.
Want to learn more?
If you have become curious about quantitative value investing, check out our reading recommendations. You may also want to read the answers to frequently asked questions.