Frequently Asked Questions

Q: What makes a good environment for your quantitative stock strategies?

A: Generally stock selection is more important in declining markets than in strong bull markets. Our quantitative equity strategies will typically lag in strong bull markets because the portfolios tend not to include the most speculative growth stocks that usually lead in such a scenario. In more difficult markets our quantitative approach is likely to perform better than the market. However, it must be pointed out that our strategies will generally follow the overall direction of the market.

Q: When does your quantitative stock selection method add to the returns?

A: Our quantitative strategies are designed to identify stocks with higher than average probability of strong performance. Most of the time, this probability does not materialize and our quantitative portfolios track appropriate benchmarks fairly closely. From time to time our bets do pay off. During those times our portfolios usually outperform their respective benchmarks.

Q: Who should invest?

A: Anybody who is seeking exposure to the US stock market, has a time horizon of three or more years and is willing to absorb typical monthly fluctuations of 5% or more in exchange for higher returns.

Q: How do you decide when to trade?

A: Our quantitative strategies are rebalanced approximately monthly. We generally do not adjust positions between scheduled trade days. Our stock screens do not incorporate any short term information and provide no advantage for short term tactical trading. Our research has shown that holding periods of one to a few months allow for enough time to ride out short term price fluctuations while still allowing the strategies to respond to changing market conditions.

Q: How do you ensure that all clients get the same execution quality?

A: On each trading day we rebalance a group of client accounts. All buys and sells are executed in aggregate and each client receives their trades at our average execution price. This ensures that all client accounts are treated the same.

Q: Do you rebalance all accounts exposed to a given equity strategy on the same day?

A: No, to reduce market impact of our trading, we divide client accounts into several groups that we rebalance on different days. The groups may end up with slightly different portfolios. We rerun the stock selection algorithm each trading day to ensure that we use the most recent information available to update client holdings.

Q: When is a good time to invest in these strategies?

A: Pivot Point Advisors is not aware of an effective method for timing the market. It is generally more important to decide how long the assets can be committed to a given strategy than when the investment is made. We recommend that clients should have at least a three year time horizon to consider our strategies. Longer time horizons generally reduce the importance of when the investment was made. This example may illustrate the point: Holding an asset for three years with a continuously compounded return of 10% gives you a 35% total return over the holding period. We consider it unlikely that picking the entry point could add or subtract more than 5% from this return.

Q: Why don't you use a stop loss to exit positions that are not working out?

A: In our experience a stop loss tends to hurt portfolio performance. To illustrate why consider the example of Par Technology (PTC). We simulate a strategy that consists of investing $100 in PTC on the first of every month. We either hold the position until the end of the month or we exit if the stop loss limit of 8% is reached. We assume no transaction cost and that we can exit the positions to lock in the 8% loss. In reality neither of these assumptions are even approximately true, which results in a greater loss being locked in. The average monthly return (4/85 - 8/05) for the stop loss strategy was 1.1% with a standard deviation of 13.7%. The same strategy without a stop loss returned 9.4% per month with a standard deviation of 8.2%. (A spreadsheet with the simulation is available upon request.) Other securities tend to behave similarly. Empirically a stop loss typically locks in greater losses than riding out the fluctuations would.

Q: How do you exit positions?

A: The Conservative Growth and Dynamic Value strategies use the same exit criteria. Positions that are not working out are exited if they underperform the market for a few quarters. Positions may also be exited if analyst's forecasts are deteriorating significantly. Finally, we take profits if a stock no longer meets our criteria for reasonable valuations.

Q:  Do you have separate entry and exit criteria?

A: For the most part no. If we fail to get a buy signal for a stock that is in the portfolio, we sell it. In other words, 'If you wouldn't buy it now, sell it.' Using the same criteria for entry and exit reduces the number of parameters needed to define the strategy. Sparing use of parameters is very important in the design of any robust systematic trading strategy. For a few criteria based on very volatile observables we allow small differences between entry and exit criteria to reduce the trading frequency.