# Stock Lists for Quantitative Portfolios

Use state-of-the-art Quant Algorithms to build Quant Portfolios that have the best chances of beating the market, while requiring low maintenance.

Quantitative Investors use Quant Algorithms to build diversified stock portfolios that are set to beat the market over the long term. The algorithms are based on academic research and tested rigorously using advanced statistical tools. The algorithms prune thousands of stock filings and perform fundamental analysis at a scale that no human can perform manually. Quant Investors buy the stocks that the algorithms output, without further judgement. Thus, investors avoid errors and cognitive biases which impair returns. The use of a time-tested system based on sound research gives investors confidence in holding their portfolio during turbulent times. We avoid selling at the worst of times due to our inherent emotions of fear and greed.

## Step I: Decide on a number of stocks to hold

Quant portfolios are typically well-diversified. They make money from the phenomena, such as Value, Momentum, Low Beta, Quality or a combination of those, but not from the idiosyncratic characteristic of any single stock. There is no way to know a-priori which stock will thrive and which will go bust. Yet we can say with adequate confidence, that over the long-term, the group of stocks selected using quant algorithms will do well.

The minimum number of stocks for a quant **Value** portfolio is 20 stocks (15 for Graham's Defensive Investor). **30 stocks is the sweet spot** for most investors. 40 stocks is a good choice for investors with larger sums of money who which to invest in small caps and keep sufficient liquidity. More than 40 holdings is not advised, as it dilutes the excess return potential of our quant algorithms. The considerations for selecting the number of stocks are *portfolio size* and *minimum fixed transaction costs*. Small portfolios investing with a brokerage that charges a relatively-high fixed minimum amount for a buy/sell transaction (say $5) would benefit from holding a lower number of stocks, so that the effect of transaction costs on the portfolio will be reduced. Larger portfolios would be easier to maintain with a higher number of stocks, as it would reduce the effects of small-cap illiquidity.

Many Investors (us included) build diversified **Value **& **Momentum **portfolios. Those possess lower volatility, so returns are more consistent over time. A Value portfolio of 20, 30 or 40 stocks should be the basis for any quant portfolio that uses our algorithms. Adding Momentum stocks dampen the ups and downs, and enhance the risk-adjusted returns potential. The Momentum portion should be between 25% and 40% of the Value portion. For example, if you have a 20-stock Value portfolio, you may want to add between 5 and 8 Momentum stocks. We have found that a portfolio of 50 stocks equal-weighted, with a Value portion of 30 stocks, and a Momentum portion of 20 stocks - yield the best results.

## Step II: Select Your Strategy

Take the time to browse through our strategy pages and learn about the various Value & Momentum strategies we have. First pick a Value strategy to form the baseline of your portfolio. popular choices are *Quantitative Value (QV)*, *Deep Value (EV/EBIT)* and *Deep Value (VC2), *or the* Magic Formula (MF)*. Some investors diversify between several strategies. For example, A 30-stocks Value portfolio comprised of 20 QV stocks and 10 EV/EBIT stocks. Or 10 QV, 10 EV/EBIT and 10 VC2. Diversifying between strategies protects you from temporary under-performance in any one strategy, but on the other hand, adds maintenance effort (as you will need to track which stock belong to each strategy and re-balance them separately. In my personal account (Tal Davidson here), I hold 30 QV stocks and 20 QM stocks.

Then, decide if you wish to diversify your portfolio with Momentum stocks. *Quantitative Momentum (QM)* is the popular choice, but also *Microcap Trending Value (MTV) *can be considered as More-Momentum-Than-Value strategy, and used for diversification of a value portfolio.

Conservative Investors, and those who are just starting out with Quant Investing, may want to build a portfolio entirely using *Graham's Defensive Investor (GDI)* strategy. Such a portfolio consists of only 15 large and prominent stocks, re-balanced yearly. The portfolio incurs low volatility, and is considered the safest of all quant portfolios.

The Microcap Trending Value (MTV) strategy is a unique one, as every stock is selected both its Momentum and Value qualities. Thus. it is a combination of both Momentum and Value. Since the final sorting is done on Momentum (52w returns), it can be argued that it has more Momentum than Value. Historically, it was more volatile than other highlighted portfolios. Therefore, it is recommended for Enterprising investors, or those who wish to use it to diversify another Value portfolio.

## Step II: Buy Stocks

portfolios should be equal weighted - same $ amount for each holding.

Use the tables below to make your Buy list. Don't forget to keep a record of which stocks belongs to which strategy. It will come handy when you rebalance.

#### Magic Formula

#### Quantitative Value

#### Deep Value (EV/EBIT)

#### Deep Value (VC2)

#### Microcap Trending Value (MTV)

#### Quantitative Momentum (QM)

#### Graham Defensive Investor (DGI)

## Step III: Rebalance Periodically

The act of rebalancing is selling stocks which do no longer meet a strategy's criteria any more and buying other stocks instead. The Value stocks being sold are typically those that have risen in price and are no longer the cheapest or meet the quality criteria. Momentum stocks being sold are typically those that stopped rising.

We have designed our strategies to minimize asset turnover, and thus reduce transaction costs and even the tax bill. The rebalance lists are different than the Buy lists, as we are not quick to sell stocks that meet our strategies' criteria, even if they are not in the top 20,30 or 40 stocks.

The best returns are achieved were portfolios are rebalanced **yearly **(every year and a day - to avoid short-term capital gains tax). The exception is *Quantitative Momentum (QM) *strategy, that should be rebalanced every **6 months**.

Instructions: use the table below to search for the tickers/names of the stocks you own. If those are present in the table, hold the stock. If the stock are not present in the table, sell the stock. Follow Step II to buy stocks instead of the ones you sold.

(Rebalance tables are available to Premium members only)