After reading a post from one of my buddy about his e-mails to his CFA mentor on technical, quantitative, fundamentalist and that sort of things, I was made to rethink deeply about what really differs quals and quants.
First, let's call fundamentalist as quals and quantitatives as quants. Just like Clifford Asness adress it in his section on How I Became A Quant. Please note that I am not going to discuss the obvious difference between quals and quants here (that quals think fundamentally and quants think quantitatively).
Okay, let me summarize several notes about quals first. Quals has several distinctive style of investing that obviously contrast to quants
First, they really understand what they are doing fundamentally. Just imagine that you want to start a business, a business with a fresh idea. Because you see that there is no Japanese restaurant in town and people has been talking a lot about having one in town, you decide to open the first Japanese restaurants in the town. It is because that you believe that this hot-new idea would gave you hot cash.
Second, they can drive without rear-view mirror. Though some of them do it because the trends is on, like the trend following trading, it is still possible to be the pioneer, to be the first to launch a business with a new fresh idea. You may take example of Coca Cola as a business that starts with brand new fresh idea. It is possible to test the merit of the ideas by just using your common sense.
Third, they could do it discretionarily, because it would seldom that what fundamentally happens in the past would happens exactly in the future. Some fundamentalist have pre-specified plan about what to buy, but I don't think that would cover all aspect of the pre-investing conditions they would face.
Now, let's talk about quants. Below are several of my thoughts about quants.
First, Quants understand quantitatively about what are they going to do. They would most likely follow the other participants of the market. They would follow the majority. They leave the fundamentals analysis responsibility to other market participants, because they don't want to bother themselves on doing the mumbo jumbo they do not really understand.
Second, Quants drive with rear-view mirror. It is obligatory for Quants to back tested their strategy. Because without back-testing, they would have no understanding at all about what they are doing, which would make the problem getting worse (that is trading with no understanding at all).
Third, they don't do it discretionarily at all. To me, it is ridiculous if you trade with ever-changing mechanical rules while those mechanical rules do not imply an understanding of neither fundamentals nor statistical probability.
Deeper thought about the topics lead me several opinions how both investing and quantitative investing should be done in order to be successful.
Two words that is important in successful investing: consistency and understanding. Both successful quants and quals have consistency and understanding in executing their investments.
A famous quals that I admire is Peter Lynch and Warren Buffet (although they are qual I think they still have some numbers on their analysis). One quants that I admire a lot is Clifford Asness, a great quant with very humble traits. All of them invest with consistency from what I read on articles about them and all of them invest with understanding, then quals with their fundamentals, and the quants with their statistic power.
One last note about quals and quants. Quals made big bet with great edge of winning their bet over fewer tables with great profits. While quants made small bet over so many tables with edge as well but with small profits from each table.
So if you invest without any understanding and any consistency whatever way you do it. My suggestion is that you don't even need to think twice. Don't ever think about investing!
