Quantitative Investing

Seraphin Group designed an algorithm with the intention of exploiting the mistakes that humans make on a regular basis.  Our system combines the best quantitative tools that academia and the financial industry have to offer.  It then utilizes them in line with time-honored, value investing principles.  We believe that our models will consistently provide better risk-adjusted total returns to our investors.


The Stock Market: A Puzzle or Mystery?

 The difference between a puzzle and a mystery is that a puzzle is easier to solve with more information.  A mystery does not become easier with more information.  It only becomes more complex.  The stock market is a mystery.  There is no solution to the stock market, because the future is always rife with uncertainty.  Since we cannot predict the future, the market requires investors to think probabilistically.

In a probabilistic environment, computer models consistently beat experts in a wide variety of fields, including finance.  That is because experts are human and have natural disadvantages and behavioral biases that computers do not.  We will now examine why experts fail, explain how our strategy benefits from other investors’ mistakes, and tell you how you can become one of our investors.


Why Experts Fail

In mid-2014 CBS news reported that over the last 3 years, 85% of professional fund managers underperformed the market.  There are reasons why experts fail to outperform the market.  Here are a few of those reasons:

  1. Short time horizons – Investors these days have short time horizons. Fund managers are under a lot of pressure to beat the market each year, and even quarterly, or risk losing investors.  This leads to loss aversion.  As a result, they active managers may avoid good, long-term investments that pose short-term risks to their return numbers or become risk seeking in an attempt to make up for lagging returns.  These behaviors lead to missed opportunities, investment mistakes, and increased trading activity causing underperformance.
  1. Fear and exuberance – Markets have gone boom and bust since the Roman Empire. Fear is highest as the market is bottoming.  Optimism is highest after the market has risen long enough to put old fears aside.  Many investors, even professionals, get caught in this cycle and end up buying high and selling low.  This cycle is strengthened by numerous behavioral biases, including overconfidence, social proof, and regret aversion.  In other words, all of the things that make us human.  Still think you’re smart enough to avoid this mistake?  Sir Isaac Newton wasn’t, and he was one of the smartest people to ever live.
  2. Framing bias - People give different responses to the same question based on the way that information is presented.  Professional investors may be influenced by a CEO’s charisma or how earnings and corporate news is presented with a positive and enthusiastic slant.
  3. Herd mentality – Active managers and investment analysts frequently hold the same opinions as their peers.  It is easier to admit you were wrong when you can say that everyone else was too.  This comfort also serves as a kind of insurance for one’s career.

The lesson here is that humans make mistakes.  The behaviors described here are ingrained in our DNA, but they don’t work in modern situations.  These mistakes will continue to repeat themselves so long as people are making decisions in the marketplace.  Quantitative investing works, because computers follow cold, calculated logic.


How Our Strategy Benefits From Others’ Mistakes

Seraphin Group charges a 1% asset management fee for accounts under $100,000 and 0.69% for accounts over $100,000.  It’s true that you can invest in an S&P 500 index fund for as little as 0.1%, and we’ve already said that’s a better option than most.  However, an index fund is simply an emotionless, diversified stock strategy much like ours.  The difference is that an index fund is naive and our algorithms are smart.

We expect our strategy to do better than an S&P 500 index fund in the long-run, because it not only aims to avoid mistakes but to benefit from the mistakes of others.  Here’s how we do it:

  1. Use forensic accounting to eliminate potentially manipulative and fraudulent companies.
  2. Eliminate any company that may be at risk of bankruptcy.
  3. Rank the remaining stocks based on their price and quality.
  4. Buy the top 25 highest ranked stocks.
  5. Rebalance annually.

Our system will pick sound companies selling at low prices, because investors’ views on those selections are overly pessimistic due to behavioral mistakes.  It is possible that some of our picks will go lower.  We are dealing in a world of probabilities, not certainties.

You may be wondering why we make very little effort to try to eliminate losers beforehand.  This brings us to what is called the broken-leg syndrome.  It is the key to quantitative investing.  The idea behind the broken-leg syndrome is that if you were betting on horses then you obviously wouldn’t choose the horse with the broken leg.

The problem is that human beings are genetically gifted when it comes to pattern recognition.  In fact, we are so good at identifying patterns that we even see patterns where none actually exist.  This is especially true when it comes to the stock market.  As a result, professional investors see many more “broken-legs” than actually exist.  That is why some stocks are punished unjustifiably more than they should be.  Our algorithms exploit this mistake and profit from it.

Backtested Results January 1999 – 2015

Backtested returns from investing in Seraphin Group's strategy


Summary of Seraphin Group's Model Portfolio Investment Results

These are computer modeled results that reflect what an investor could have expected had this strategy existed in 1999.  From this, you see that our investment model would have beaten the S&P 500 for the period Jan. 1999 through Jan. 2015, returning 14.58% annually versus 3.27% for the S&P.

Please note that all results shown above exclude the impact of dividends and include the impact of trading costs and slippage.  Also, be mindful that past results do not guarantee future returns.  There is always a risk of loss when investing.  Seraphin Group recommends staying invested for a minimum of 5 to 7 years to maximize your probability of gain.

For a complete explanation of our investment strategy please see The Strategy page.


How to Get Started

If you have $50,000 or more to invest,  follow the application link below, select the type of account you’d like to open, and fill in your information.  Afterward, you will be asked to verify and fund your account.

Your money is handled by our custodian, Interactive Brokers.  We have no access to your money except to direct the investment decisions.  Interactive Brokers will send you quarterly statements, but you can also check your account online at any time.  You can rest assured that your money is safe and that your statements are true and accurate.

Once opened, your new investment account can be funded through your bank account or by rolling over an IRA or old 401(k) either in part or in whole.  After that, your investments will be managed by our quantitative systems.  For more frequently asked questions visit our FAQ page.

Start Your Application


 

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