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Clear Thoughts
The Balancing Act: People and Computers
| Mathematicians trust themselves and their computers most. |
Quantitative investing at Clear Asset Management is algorithm-based. This means we use a series of mathematical formulas to evaluate all of the earnings, cash flows, balance sheets, revenues and stock prices of all public companies every day. We also make comparisons within industries and investment styles to create our list of highest ranked stocks that we calculate to be the most likely to beat the benchmarks. These are the top 20 to 25 stocks that pass all of our rigorous tests to rank high enough for inclusion in one of our portfolios.
An investor called this week after reading our post last week. She has a 401k to roll over to an IRA and wanted to make a 2005 IRA contribution. She also asked a great question: if the computers select all the stocks, how do we avoid buying stock in companies run by really bad guys at really bad firms?
Essentially, she wanted to know if there is any human oversight. The answer? There is.
The human oversight began before we started managing money. Humans created each of our over 700 screens and developed the algorithms that score the results of each screen, and then rank and weight each stock. People tested and retested our hypotheses until we reached the stage where we programmed them into our computer systems.
Every new company that makes the top ranks is immediately evaluated by our investment committee. This takes a lot of work, especially as we rebalance the portfolios. It is our job to make sure that the data the computers are crunching via our algorithms is reliable.
- When we see a company that will materially restate earnings or other fundamental data, we may reject it.
- When we see a company where its CFO or its auditors have been changed, we may reject the company.
- If we see criminal activity, we can reject the company.
- If a merger is approved and the stock is approaching the merger price, we also can reject the company.
We carbon-based humans team up with our computers daily. This was comforting to the investor who called; she is entrusting us with the equity portion of her retirement account.
We work hard to earn, and we truly appreciate, the trust we receive from our investors.
P.S. It is six weeks until April 15. IRA contributions can be accepted until then, but all paperwork is due before then. Please contact us at customerservice@clearam.com to open an account or fill out our online form at https://www.clearam.com/broker/brokerSignup.aspx
P.P.S. If you missed our interview on Lowe's, the home improvement and housing sectors on Bloomberg TV this week, you can catch it here.
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