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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Friday, August 11, 2006

Can Quant Funds Make Certain Markets Less Efficient?

Today I am thinking about being an analyst. Much of what analysts do is, well, analyze. Ha ha.

But, the numbers we see on income statments and balance sheets rarely tell the full story. Today, while trying to estimate numbers for one of my companies, I am forced to move numbers around, back out other numbers, and try to compare apples to apples. This particular company looks like it trades at a P/E of 19. But, really, the true number is 22. Forward P/E looks like 31. But really it is 20. Return on equity should be near 20%, but it only looks like 14%. This has everything to do with non-cash numbers like options expense, and a few others that I won't bore you with.

My point is not that this is hard, nor am I complaining that these companies do these things.

Rather, my thought is the following - since the numbers typically need adjustments, who does this for "quant" funds? Furthermore, do the quant funds have the ability now, with their size, to move markets? How big have these funds gotten, exactly? If quant funds do have such power, do lumpy numbers make markets more inefficient? For example, a company that has had a continous ROE of 25% might suddenly fall to 10% and show declining EPS. Boom, the computer says sell, sell, sell and price falls, falls, falls. If so, FAS123 might be creating mispricings, no?

I have not looked inside many quant fund engines; in fact I am only slightly familiar with the algorithms of one fund - albeit that fund is large and fairly famous, but I would like to know more.

We know stocks can trade fairly far from their true value. Last I checked, machines can't interpret a conference call and adjust an income statement. So maybe they sell when they really should buy...and maybe they've gotten too big for their own good?

Food for thought.


At August 13, 2006 10:52 AM, Blogger NO DooDahs said...

"We know stocks can trade fairly far from their true value." The problem with that statement is that stocks DON'T HAVE a "true value." Value is subjective. There is only the value YOU think it has, and the price that it's trading at - which is somewhere BETWEEN the value that the last seller and the last buyer think it has.

At August 13, 2006 11:13 AM, Blogger rvb1977 said...

Point taken.


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