Trading and Investing - According to Jim Simons and Warren Buffett

  • Nov 18, 2019 AEDT
  • Team Kalkine
Trading and Investing - According to Jim Simons and Warren Buffett

Jim Simons, regarded as one of the greatest investors till date, has invented quant-based investing which removes the human element out of investing. The strategy uses quantitative models based on huge data which identify the price patterns from the market and considers the smallest volatility in the prices of stocks, commodities and currencies. The models are designed on the basis of algorithms which accounts for maximum portion of day to day trading. Due to the evolution of quant trading system, there has been increase in liquidity within the market, which is helping investors and the broader market to take positions in a higher number of stocks. The quantitative techniques look for the trading pattern of the stocks and tries to understand the behavior of the market and acts accordingly. Jim is a Mathematician by profession who takes the help of data warehouse to evaluate the probabilities of the market direction. He uses complex mathematical models to analyze trading strategies as per the current scenario. The strategy is based upon random price movement of different stocks and assumptions arrived at on the basis of the historical price-movements.

The investment approach is based on the chart patterns, direction of price movement and study of the behavior of the class of traders. Those data are used in projecting the direction of the stocks with the help of several mathematical formulae. The art of trading and investing is measured by synthesizing terabytes of day to day trading data signals. This was invented much before the invention of big data and data analytics to the modern world. Theories and strategies developed hereby can be applied to hedge funds across the globe. Apart from the equity segment, these strategies are extensively followed in case of commodities as well as currencies.

Thorough the above strategies Mr. Jim Simons has provided guidance regarding the trading patterns to emulate. By following these strategies accompanied by a minimum level of market insight, one can attempt to create wealth. These principles do not suggest holding a stock for the long-term period and provides emphasis on short term -trading gains.

Warren Buffet is known as one of the leading investors of all times. His investment philosophy is widely followed across the globe. The philosophies of Mr. Warren Buffet are based on fundamental research of businesses and the valuation of the stocks. The primary investing philosophy which he follows, is the analysis of the business model and acquiring stocks during bear market because of comparatively lower valuations. Buffet gives emphasize on the quality of management, superiority of products, debt component of the business with respect to the owners’ capital, profitability margins, etc.

The primary component, which Buffet hunts for is the durable competitive advantage of the business based on the fundamental factors of the business. Buffet tries to identify the moat of the business which creates an advantage over the its competitors. A moat helps the firm to retain its profitability irrespective of the sector outlook. During the tepid times, the strength of a business is can be identified.

The debt component is an integral part of any business. The business has to pay a percentage of the interest on the total amount of debt. Thus, higher debt means higher interest expense which lowers down of profitability. Mr. Buffet looks for the companies which has zero or low amount of debt and have enough amount of reserves in their balance sheet. The company needs to generate profit and should have higher free cash flow component as part of total cash flows generated with respect to its competitors.

Mr. Buffet also looks for the dividend history of the stocks as dividends are meant to be tax-free. The companies which distributes higher dividend to its shareholders are taken into consideration. He compares dividends along with the risk-free returns of the bonds. During tepid market scenario, income from the dividend gives better returns to the investor.

Buffet always hunt for stocks which consumers used in their daily lives and the usage of these are irreplaceable. This is one of the primary reasons that he remained invested for more than forty years in The Coca-Cola Company. His philosophy suggests that soft drink is consumed as a matter of habit, which is consumed by a juvenile as well as an elderly person and the demand is expected to remain stable across the lifecycle of the consumers. He remained aloof from technology-based stocks till his mid-career. But, during the recent past, Buffet made investment in the shares of Apple Inc as he finds the products to be very appealing to the consumers, irrespective of their premium pricing.

Valuation is one of the major factors, which Mr. Buffet focuses on. A fundamentally good stock must be bought at a correct price. The entry to the stock must be in a good juncture. He highlights that a good stock bought during the bear market phase has given premium return during bull markets. According to him a P/E of 18-20 times is extremely high while a fundamentally good company can be bought within the P/E multiples of 8X -to 10X.

There are few expenses which Warrant buffet avoids such as, expenses related to patents, research and development and interest costs. Higher amount of these above expenses is avoided while choosing a company for investing. As per his philosophy, the higher proportion of these above expenses results in fading of durable competitive advantages for a company. As the company requires extra effort to retain its market-share, it does not guarantee that the same market share can be retained by the business during changes in consumer trends in the long-run.

A company must be a low-cost buyer of raw materials ac compared to the competitors within the market. Lower costing allows the business to manufacture at a lower cost as compared to the industry and enables it to sell at a competitive rate which results in both margin expansion and higher volumes for the product. Higher volume and low costs create margin expansion and higher profitability for the business.

As per Buffet’s investment philosophy, he believes of holding a stock for the long-term while he believes creation of wealth requires patience and as well as the determination to remain invested with the business in its high and low. The moat of the business is likely to create higher profitability for the business and as well as create return to the shareholders in the future.


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