Challenging Rakesh Jhunjhunwala and Warren Buffet is this Peter Lynch disciple

When she comes on screen donning her crisp off-white jacket in a well-lit frame, Mumbai-based Salonee Sanghvi brings with her the same confidence in her ‘work-from-home’ avatar as one would to a boardroom. She is a certified financial advisor and founder of My Wealth Guide, who has mastered the art and science of quantitative investing that uses statistics, not fundamentals, to select and play stocks in the markets. This is a clear departure from the value investing strategy that Rakesh Jhunjhunwala, her former boss, follows.

Not surprisingly, Sanghvi is not a Warren Buffet fan either. She rather prefers to quote American investor Peter Lynch that “Everyone has the brainpower to make money in stocks, but not everyone has a stomach.”

In an interview with Money9, she explains how retail investors can use these non-conventional quantitative investing strategies that employ complex algorithms but negligible human intervention to select and trade stocks. Edited excerpts:

Q. What is quantitative investment? How does it tackle fear and greed – the two emotions that have driven stock market trades forever?

Sanghvi: Quantitative investing involves using research insights from historical data to determine patterns and build a mathematical model.  A set of rules are defined based on selected parameters and their correlation to performance. Since it is rule-based without human intervention, it eliminates human biases and ensures the fund sticks to its predefined strategy.

Q. Quantitative investing is referred to as rule-based investing. What are these rules and how are these different from value investing?

Sanghvi: Quantitative investing is based on various factors or parameters and their relationship with price performance. The rules can be based on the correlation of factors like quality, value, momentum, volatility, growth, liquidity, size, etc. Value investing is only one factor that involves identifying stocks based on valuation mispricing and the expectation that valuation will go up.

Q. Quantitative investing is based on historic data. How can an investor be sure that it will hold true in the future too?

Sanghvi: While past data, of course, is no indication of future performance and there is a possibility that the underlying relationships may change or evolve, “History Repeats Itself.” Quant strategies are evaluated across various economic and market cycles to understand how they respond, building more robust models.

Q. How does quantitative investing compare to risks?

Sanghvi: The systematic process enforces discipline with regards to position sizing, entry and exits mitigating uncertainties and limiting the downside.

Q. Is there any human intervention at all in selecting stocks?

Sanghvi: The stocks are selected based on the predefined strategy with negligible human intervention.

Q. What are the various products/instruments through which retail investors can take part in quant strategies?

Sanghvi: Quant funds are still in a nascent stage in India comprising only 0.01% of the mutual fund industry. Nippon & DSP both have funds following this strategy. Another way to get exposure to quant-style investing for retail investors is via smallcase with multiple SEBI registered manager providing strategies.

Watch the entire conversation here