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Implementation

Implementation is the most important part of the whole process, but once you have a strategy, it is generally easy to do. For example, if you chose a strategy such that you are investing in stocks with PE ratios between 0 and 10, all you’d have to do is open a brokerage account and divide your money equally between the stocks returned by the screen.

In theory, it sounds easy, but in practice, myriad complexities would arise, most of which are specific to a given individual. For example, the screen might return 500 stocks, but you only have $5,000 to invest, making it cost-inefficient to divide your capital evenly between the screened names.5 Some of the more common concerns (such as quantitative investing with limited capital) are addressed in Chapter 14, “How Do You Actually Make Money Now? A Brief Guide to Implementation.”

So we’ve outlined the general steps for devising a quantitative investment strategy: screen, backtest, and implement. However, numerous specific questions remain. These could include the following:

  1. How do I get started developing my own strategies?
  2. Why did you choose stocks with PE between 0 and 10?
  3. What if I look at other backtesting horizons (for example, five years instead of ten years)?
  4. Why is the rebalancing period a week?
  5. Why am I comparing my strategy against the S&P 500?
  6. Can’t I find a strategy that does better than this in backtesting?

These, and other, questions are what the rest of this book is about. Chapter 2 discusses the tools needed to help you start creating and backtesting your own quantitative strategies (Question 1) before the rest of the book fills in the answers to the other questions.

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