The Paradox of Dumb Money

This chapter discusses various aspects of value investing. It seeks to take the best aspects from quantitative investment and value investment and to apply them to stock selection and portfolio construction. Such an approach has several important advantages over pure quantitative investment, or pure value investment. This chapter focuses on the key to both investment styles, which is a valuation of the target security based on imperfect information, and the consistent exploitation of the differential between the valuation and the pricing available in the market. The power of quantitative investing is in its relentless exploitation of edges. The objective nature of the quantitative process acts both as a shield and a sword. As a shield, it serves to protect an investor from its own cognitive biases.