Dr. Vinay Nair This article was authored by Dr. Vinay Nair, Founder and CEO of Ada Investments, an equities-based investment platform with offices in New York, Mumbai and Rio de Janeiro.
Financial research has observed that stock prices move too much to be justified by changes in cash flow related or fundamental inputs.
This observation suggests that a successful short-horizon investing strategy should focus on non-fundamental aspects. A valuable implication of focusing on short horizons is the availability of rich and frequent data. A daily trading strategy generates hundreds of observations in a few short years, but a monthly trading strategy only generates dozens. It is then easy to see why the quantitative world has been attracted to and largely succeeded in designing short-term trading strategies.
In many cases, they have done so with a team that has little expertise in fundamentals, economics or finance but are well versed in statistics, physics, computer science and mathematics. In this data rich world of short term strategies, the availability of a large enough sample size can often substitute for a good economic intuition or framework.
As the horizon gets longer, this is no longer the case. Understanding economics and the underlying mechanics of valuations become critical for at least two reasons. First, with longer hor......................
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