Computers, quantitative techniques, and the struggle for the correct investment decision

Abstract

In the past decade several statistical studies have upset traditional security analysis theory. Some of their conclusions are: 1. (1) growth stocks don't continue to grow, 2. (2) the stock market is so efficient that only new information not yet public is of real value in predicting stock prices, 3. (3) errors in forecasting company earnings are unacceptably large. However, there appears to be some successful techniques for guiding investment strategy. Many of these are proprietary but the most significant contributions made to date can best be described in association with the problems of forecasting, dealing with the ‘defficiency’ of the market and portfolio diversification. The main body of this paper will include discussions of some of the major applicative techniques involved in the contemporary investment selection process. Among them are econometric models to forecast critical information about a company's financial statements, the use of algebraic representations of profitability called “operating margin constructs”, and an elaboration of the “efficient markets” hypothesis. The surface has been barely scratched. The major schools of business now produce a graduate thoroughly trained in contemporary methods of security and stock market analysis and probably more will be learned about the true capital market mechanism over the next decade than in the last one hundred years.