Qualitative v. Quantitative Analysis
A Video Primer on Generating Investment Ideas
Reminder: Swing Trading Using The LongVol Report, Next Friday w/ Sam Evans
In this post I am going to get into why the use of Portfolio Management with multiple positions, both short-term tactical and longer term ideas is the ideal approach for those running portfolios that are larger.
I started in the business in 2006, became a index prop trader in 09 then ended my career as a L/S Equity portfolio manager at a hedge fund and run one today.
What that means is I’ve seen both worlds of: short-term trading and then portfolio construction with longer term ideas. I’ve worked with hundreds of retail investors over the years and I can tell you know that most of them are tunnel visioned into Quantitative approaches to trading as the only route to generating BOTH trade ideas and P&L and it usually never ends well.
Some learn faster than others and those that do tend to make it out alive. If you’re one of the hard headed ones then your chances of making it out alive or listening to anything in this post are going to be tough. If you’re not one of the hard heads then before we get into it there are some things to cover.
If you are new to The LongVol Report it’s critical to understand the views and the context behind them in this post so please read the following:
We are going to cover Qualitative v. Quantitative Analysis
For the average/beginner investor diving into these concepts is never really a thing and at first glance it might seem complex or more made-up, esoteric concepts about investing only to confuse you - I assure you it’s a) Not that complex and b) Not made up - but a framework to give you perspective on how to think about doing one thing:
Generating more trade ideas across short-term and medium term holds in a more efficient and confident manner.
Setting The Table
Before we get into defining both of these ideas and why they matter we need to set the table to answer a few questions first. Then, once we do that we’ll get into going through a few examples through a video below of trades from this year using both analysis frameworks.
Let’s start with the first part to this:
Question: why does it matter to use both?
Answer: For me and what we do in the FOPT, it’s predicated around the following core ideas for investing:
We generate short-term tactical trades that last 1-20 days
We generate swing trades that last 7-90 days
We may invest into an idea/sector that may be 6-12 months
The portfolio has a mix of these ideas and cash is put to work, spreading it out into the ideas
To summarize this we trade portfolios and generate ideas to put the capital to work and not let it sit OR (as most amateur traders tend to do) put most of the money to work in one idea which leads to the right side of the table below.
If you read the paragraph above: “This is vastly different from most retail trading nonsense such as “back testing” to find win ratios that are high and not paying attention to the why”
Again, before you take offense to this please read the primers/articles above to understand why we hold this view - there is back testing that goes on but it’s more around data (what share buybacks do, stocks added to indices/removed etc).
We apply both in the FOPT frameworks which are a combination of three things:
Macro driven investment ideas
Fundamentally driven investment ideas (including event-driven/turnarounds/value)
Technically driven trade ideas
There is a need for the Quantitative analysis framework but it’s not the sole framework because we don’t take the approach that the amateur retail trader takes which are themes such as:
Rely heavily on one idea to generate P&L
Keep a large cash balance in the account waiting for the perfect idea
Try to back-test to find a high probability setup so that you can size it larger and time it perfectly to generate P&L
I realize this is the majority approach that use when they’re new and they either pivot to understanding that other factors matter or end up quitting the business.
You can get away with it too - in fact, I could just trade futures to be a “consistently profitable trader” but there are other factors to consider once you’re at a certain point - and we call that being Risk Adjusted and you want that when you want to do this:
With larger amounts of money
Year after year consistently
Without having to sit at the desk 8 hours a day 5 days a week
The point of both is that it leads to the idea that Portfolio Management is required meaning we are spreading out the capital risk into multiple ideas long/short, short-term, long term into a portfolio to be a “consistently profitable trader” (risk-adjusted).
Portfolio Management
The idea of portfolio management is a subset of investing and doesn’t fall under the idea of being a “trader” because most traders are trading expectancy or setups, they’re not building a portfolio of ideas.
If you asked me when I was a prop trader back in 09’ if this mattered to me I’d say no because we were trading setups, order flow and levels. Some setups/market situations you swung for the fence (what I call sledge hammer trades) and some you had to be like a surgeon and be nimble in your pursuit for P&L. But, as a futures trader (or any day trader) you’re not building a portfolio of ideas as a futures trader so the discussion of Qualitative analysis never even comes into the picture nor does Portfolio Management.
Stop here: if you’re only a day trader or using a small portfolio then the rest of this post honestly is pointless to read but the choice is yours.
Question: why does Portfolio Management matter to us/me/ mentees in FOPT?
Answer: For me and what we do in the FOPT we need to have the following ideas solved and those are solved through Portfolio Management:
We want to spread out the capital into various ideas v. relying on one or two ideas to generate the P&L
We want the ability to trade cross-asset to find asymmetric investments (Primer: Asymmetry: The financial secret)
We are mercenaries in our views; meaning we look at situations/sectors/stocks independently which requires Qualitative analysis then put those ideas into a portfolio
Your idea flow is generated by being able to pick from the most asymmetric ideas v. having to wait for your “favorite” setup
The idea of Portfolio Management takes on (just like generating trade ideas) many different views so it’s important to understand there is no “right” way, it’s more important to understand WHY it’s even needed in the first place.
That photo above is a map (again it can have small iterations to adjust to each portfolio/investor) to allow for:
Risk-adjusted returns and a smoother equity curve
Not solely being dependent on day trading or volatility to make money
The ability to adjust the portfolio based on the investor and their goal(s) and capital amount they use
This is really important to unpack here so let me do it in a way that makes sense to me.
I have friends that I traded with on the futures desk that to this day still only trade futures - they trade them daily and here and there may buy some stocks that they think have sold off enough to rebound. There entire ecosphere of investing is to put money to work, go back to cash, put it work work go back to cash - this is trading there’s no PORTFOLIO THERE.
I did that for 2 years - that changed as a PM and it has changed since then because the view of markets now is predicated around the idea of generating ideas cross-asset that have the most asymmetric return outcomes while putting a larger portion of the portfolio capital to work so it’s not dead money.
Plus, sitting at the desk for 8 hours a day 5 days a week is the NPC/noob approach to any of this.
There are other benefits as well which I am going to cover in the locked section of this post for members but maybe you are already seeing them yourself.
Putting it Together
I’ve had the strange career trajectory to been able to see both sides of the coin in the investment world: as a trader and as a Portfolio Manager and my views are that having both is paramount to generating consistent returns but also being able to constantly generate trading ideas for BOTH short-term and long-term term horizons.
It has also helped me to have more confidence when I can overlay the Quantitative approach with a Qualitative approach because I understand the why behind the move and am less likely to get shaken out when it takes a technical blip.
So, with this out of the way we’re going to get into the video (and some text) lesson to explain these approaches using ideas/trades from 2024 so far.
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