Research Paper: Creation of an Investment CEILING
The idea that would ultimately becoming the core concept of Novatero Investments began about four years ago. I was a student in the Master of Financial Engineering program at the UCLA Anderson School of Management, currently working as a Research Analyst at Los Angeles Capital Management. As a recovering chemist turned analyst and as quite possibly the least-experienced member of my MFE class, my first few months in the program were spent essentially drinking from the fire hose in terms of concepts, programming, and research of anything and everything quant-based. When I wasn’t in class I was working on homework, when I wasn’t working on homework I was in the library, reading about as much as possible on the subject I had decided to refocus my career on.
Out of all that reading came an initial spark, a kernel of the shape of an idea. Born out of the works of Meb Faber, Mark Spitznagel, and Jason Hsu, I started asking “yeah, but what if?” What if you could be contrarian without the risk of waiting for the market to act rationally? What if you could invest on a global scope, but with more certainty on how markets would shift in the near-term? What if you could build a factor model that dynamically shifts its weights based on market inputs instead of plowing ahead in a predetermined fashion? After years of late nights and weekends, setbacks and steps forward, and a reliance on coffee that would make James Holden blush, I think I’m finally ready to show one of the things I’ve been working on.
”Not All Heroes Wear CAPEs: Creation of a Global Stock Investment CEILING” is a product that was spun out of the core concept behind Novatero’s incubator fund. Essentially, while the fund approaches the concept from the investment angle (i.e. focusing on only the optimal way to invest via the mispricing output), CEILING approaches it from a “here’s what the overall picture of the global markets is at this moment in time”. Country stock markets are charted on a 2D plot based on how well they fit into a value or growth investment. Global Scores focus on the country as it stands at that point-in-time relative to other countries in terms of value/growth, while the Country Score focuses on the country as it stands relative to historical placement within said country. The higher the score the better it is for a value play, the lower the score the better it is for a growth play, and the more the two scores agree with one another (the closer they are to the diagonal) the stronger the play. CEILING also shows some promise out-of-the-box as an investment strategy, though that will be dependent on a user’s ability to enter some of the less-accessible markets contained within CEILING’s data.
The paper can be found here: Not All Heroes Wear CAPEs. Please do not hesitate to contact me about any questions, comments, concerns, or discussions you’d like to have about this paper. Enjoy!