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tech quant portfolio

Now Introducing: Moby's Quant Portfolio and Algo Trading

portfolio strategy Feb 28, 2022

Today we’re introducing our newest quantitative based portfolio – The Tech Sector GARP strategy (growth at a reasonable price).

This strategy uses machine learning and algorithms to select the stocks within the portfolio. This is used by the top hedge funds and banks in the world!

What's A Quant Strategy:

While we do give you a lot of individual recommendations on stocks and cryptocurrencies that are primarily based on fundamental research, this strategy (and many strategies to come) are based on algorithms that we’ve built!

Don’t know what an algorithm is? In a nutshell, algorithms are a set of computer based rules built by engineers & computer scientists. In this instance, our in-house team analyzes large data sets and makes their investments (aka rules) based on a ton of technical indicators that are constantly changing.

So rather than the humans making the decisions, the computers are the ones doing it. This is a much newer investing style that the top hedge funds and banks in the world use everyday. This is one of the few ways that the best investors in the world consistently beat the market.

How To Use It:

Rather than just give you individual ideas in isolation, the way these strategies work is by recommending a basket of weighted stocks/cryptos that are meant to be used as a portfolio!

So in the example below, rather than just buy a stock blindly, our algorithms recommend how much of that stock to buy.

With market dynamics changing so often, these strategies are designed to update once a month (and we will notify you once they do).

Therefore, what we’re doing is picking a set amount of money and then allocating that money in percentages across the stocks the algorithm recommends.

So if we choose to invest $1,000 and the algorithm recommends 20% of Stock A, then we would put $200 in Stock A, and the same for Stock B and so on – until the entire 100% of our $1,000 is invested.

The Strategy:

Using our Tech Sector GARP strategy we can find stocks with large upside that are not overpriced in our favorite sector.

Growth at a Reasonable Price (GARP) is a strategy meant to gain exposure to companies with above average growth, but avoiding the most overvalued companies relative to their sector.

In this way, we are getting growth, but at a reasonable price!

For example today's growth stocks often trade at insane multiples of revenue. Look no further than a company like Snowflake. They're trading at 80x sales whereas stocks like Apple are trading at 7x sales.

The reason for this massive discount on Apple is because their sales are predictable -- to an extent. Whereas with companies like Snowflake, investors are willing to pay up because they believe the company is still young and has huge potential upside.

But in an environment where growth stocks are getting hurt, GARP strategies like this allow us to invest in stocks that are still growing but at a reasonable price!

How It's Constructed:

To implement our Tech GARP strategy, we look at Large Cap Tech Sector stocks with strong historical earnings growth relative to their peers as our starting universe.

Then using financial ratios, such as the PE Ratio and PEG ratio, we look for the stocks that are not overly expensive.

This way we can expose ourselves to strong growth names, in a sector we like, without overpaying. The overall goal of this strategy is the long-term excess return.

Then we factor in another 100+ unique indicators based on internal tools we've built.

In today’s environment where expensive names are getting hurt, this is a perfect way to get good exposure to the tech industry!

Expected Return:

Based off backtested results this portfolio is expected to have a 10-year annualized performance of 23.98%.

This means that this portfolio is expected to make ~24% every year (on average) for the next 10 years -- which makes this is top decile performer.

Benefits & Risks:

Although there is risk in any investment, the GARP strategy is inherently meant to protect us from investing in stocks that have a higher likelihood of losing value in the near term.

The strategy also inherently reduces turnover, making it more tax-efficient than pure growth strategies. 

Reduced turnover (how often we buy/sell our positions) is a side effect of our relative earnings growth filtration, as this group of stocks is less likely to change than if we were to select the stocks with the highest valuations or the highest short term earnings growth.

As selling a stock creates a taxable event and potential tax liability in the future, we want to limit the number of unnecessary sales in our portfolio.

So if we sell a stock but then buy it again shortly thereafter we are creating unnecessary taxable events.

A tax-efficient strategy will limit the creation of these events, while maintaining the potential gains.

So in the end you pay less taxes and reap the benefits of holding the stock.