A Quant’s Take on Innovation: ‘Data Can Only Take You So Far’

(Bloomberg) -- When Gregg Fisher sold his drum kit to buy a computer and start an investing firm in the 1990s, the notions of passive factor investing and quantitative strategies were still in the embryonic stages.

Fast-forward three decades and those types of strategies are everywhere, but Fisher has moved on to a new approach: Blending his quant background with the lessons he’s learned as an entrepreneur to find attractive small-cap stocks at his new firm Quent Capital.

Fisher joined the “What Goes Up” podcast this week to discuss why he’s making the switch to a more active stock-picking strategy. Below are some edited highlights of the conversation. And click here to listen to the full podcast.

So how do you tie together the ideas of data-driven quantitative investing with looking for innovative new companies?

I started my original firm (Gerstein Fisher) back in 1992. And back then there was like one index fund that nobody used. There were no ETFs, no text, no emails, you know, barely an Internet. And I was 21. I sold the drum set my father bought me for 900 bucks, bought a computer, hung up a shingle, opened up a phone book and started calling people, asking if they would allow me to manage their assets using this sort of data-driven investment strategy. It was sort of a funny thing. It kind of worked out and I was successful for my investors and myself too. It was a great time. I’m now 50. When I was 46 I sold the company, to take a little break and work on this new thing.

And I think the motivation was, when I think about quantitative investing, I think people’s minds immediately go to, you know, algorithms and complexities and high-frequency trading and all this jazz. But I think about it more as evidence-based investing, where you have an idea and you can go back looking at data to sort of prove out that idea. That at least you can show that this has worked in the past with a large sample of data so that it’s not completely a judgment around your predictions of what will happen in the future. We never know what will happen in the future, but using evidence-based investing is how I think about quantitative investing.

I’d been managing portfolios of growth stocks, largely, globally. And what I found was that when you’re trying to invest in growth stocks, it’s very difficult to put a number in the numerator and a number in the denominator and compare things to one another. There’s a lot more ambiguity to the valuation of these businesses, particularly in the last 10 years. Data can only take you so far with these small, innovative, disruptive entrepreneurial-style businesses. You mentioned TikTok earlier, the kids are watching TikTok. And I noticed you didn’t say Facebook. You sort of need to be, like, genuinely a resident of the universe you’re thinking about to really understand it. And I do think that being an entrepreneur myself my whole life does make me a better investor in these entrepreneurial activities.

Did high-frequency trading destroy the notion of quantitative investing as you knew it when you launched your firm?

Initially it didn’t. I mean, I think that to the extent that a lot of things that happened in the industry made costs lower and liquidity higher, to some degree that sort of helped me personally, in my firm for my investors, as costs continued to be driven down. But I guess there’s always this argument that if there’s some good idea, like let’s just use the oldest one. We all know value investing is a good idea, right? So, you know price to book, I could teach my nine-year-old how to do that. And I guess it took a while for people to realize that that was a powerful signal. And then all of a sudden one day everybody knows that this thing works. Everybody starts doing it, doing it faster than everyone else does. The benefit of that style of investing goes away.

I wonder, has passive investing sort of jumped the shark? Has it become a crowded trade?

So if you’re in an environment where lots of people are indexing and there’s fewer people paying attention to what the price should be, if you’re in an environment where the difference between winners and losers is greater, you know, it’s my belief that at least for some portion of someone’s portfolio -- and probably not the majority of it, by the way -- but for some portion of someone’s portfolio, having a strategy that could take advantage of those themes and trends, I think, is important. So that’s how I got here today. I’d still say that most investors should have like 75% of their portfolio in a market-based strategy of some capacity. But if there was ever a time to give this thing a shot, I think it’s probably now, which is why I’m doing it.

Could you tell us some of the stocks that have you excited these days?

One in particular, there’s this company that we’ve invested in called Smart Eye. I would say there isn’t any one company I would necessarily hone in on in this conversation, but just to use them as an example. It’s a company in Sweden that basically has created technology that looks at your eyeballs while you’re driving in your car. And it helps to, in advance, determine if you’re falling asleep or you might get in an accident.

So a lot of the cars you buy today will have this technology in it. And it’s a pretty fascinating, small little company. Most people have never heard of it. It’s done quite well. It’s volatile.

Another one that I think most people probably would have heard of by now -- a couple of years ago, they would not have -- is Fiverr. It was like, you know, a couple of people in a basement in Israel somewhere came up with this idea of being able to offer consulting services online for a very small fee relative to hiring like big consulting firms.

Now I really could relate to this. When I was building my company, I spent millions of dollars on my brand. I remember paying a lot of money to come up with this idea and months of strategic analysis and brand strategy and stuff that I totally value that is really important these days. But now, if you want to do that stuff, you go on Fiverr and type in what you’re looking for. And within minutes you’ll get, you know, retired McKinsey executives, PhDs from great schools, and everybody else you could imagine bidding on this project.

To listen to the entire podcast, click here.

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