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11 Apr 14

I believe that one source of alpha comes from integrating top-down modeling to bottom-up stock picking techniques. You have to be able to recognize the regime shifts and deploy the right combination of models out of your toolkit accordingly. In other words, you have to learn to be a market savvy strategist - because good quant techniques aren`t going to cut it anymore.

Call it what you will - factor rotation, top-down modeling, etc. The bottom line is, quants have to learn to be more intuitive about how they model.

11 Apr 14

A December 2013 study by Pimco’s Masha Gordon and Giuliano De Rossi examined the data on the countries in the MSCI Emerging Markets Index to determine if there was also a profitability premium in emerging markets. The study covered the period January 1998 to September 2013. Following is a summary of their findings:

Profitability persists. It’s sticky—both on a one- and three-year basis, there is a low probability that a highly profitable firm will migrate from a high quintile to a low quintile. This is consistent with evidence from the U.S. markets.
The annual return on an equal-weighted, long high-return-on-equity (ROE)/short low- ROE strategy was 5.1 percent, 

In terms of gross profitability, which research suggests may best be measured as revenues minus cost of goods sold, the premium was a statistically significant 9.0 percent (tstat = 2.79). The Sharpe ratio also improved to 0.71. Note that the emerging market equity premium during the period was 6.68. Thus, the quality premium was larger than the equity premium.
The gross profitability premium outperformed the value (based on price-to-book), size and momentum premiums, and had higher Sharpe ratios.
Profitability, or quality, strategies also provide diversification benefits, as they tend to be negatively correlated with the value and size premiums—profitable companies tend to be large and growth-oriented—though they are positively correlated with momentum.

This study adds to the growing body of evidence that the profitability/quality factor provides important explanatory power to portfolio returns.

20 Mar 14

The developers, the bureaucrats, the municipality, the politicians, the landlords, the banks, the lawyers, the real estate agents, the tenants, the financiers, the social activists, the courts, the brokerages, the constructors, the conmen, the media, the police, the society officers, the architects, the surveyors, the buyers, the public.

18 Mar 14

Successful investors need four abilities. First they must possess an interest in the process. It is no different from carpentry, gardening, or parenting. If money management is not enjoyable, then a lousy job inevitably results, and, unfortunately, most people enjoy finance about as much as they do root canal work.

Second, investors need more than a bit of math horsepower, far beyond simple arithmetic and algebra, or even the ability to manipulate a spreadsheet. Mastering the basics of investment theory requires an understanding of the laws of probability and a working knowledge of statistics. Sadly, as one financial columnist explained to me more than a decade ago, fractions are a stretch for 90% of the population.

Third, investors need a firm grasp of financial history, from the South Sea Bubble to the Great Depression. Alas, this is something that even professionals have real trouble with.

Even if investors possess all three of these abilities, it will all be for naught if they do not have a fourth one: the emotional discipline to execute their planned strategy faithfully, come hell, high water, or the apparent end of capitalism as we know it. “Stay the course”: it sounds so easy when uttered at high tide. Unfortunately, when the water recedes, it is not.

I expect no more than 10% of the population passes muster on each of the above counts. This suggests that as few as one person in ten thousand (10% to the 4th power) has the full skill set.

03 Feb 14

Here are the Periodic Table of SaaS Sales Metrics categories with a couple key metrics:

Business Development Reps (appointment setters)
- 2 months new BDR ramp time
- 10 sales qualified leads per week
Inside Sales Reps
- 3 months new ISR ramp time
- $630k-$720k annual recurring revenue annual quota
Field Sales Reps
- 6 months new FSR ramp time
- $800k – $1.3M annual recurring revenue annual quota
New Business Bookings
- 6% average commission on up-sell bookings
- 66% of companies offer a trial before buying
- 2% median renewals commission rate
- 50% of churn is uncontrollable
Professional Services
- 25% is the average professional services fees as percentage of 1st year contract
- 25% of companies give quota relief for professional services but no commissions
Account Managers
- 60% account managers responsible for up-sell annual recurring revenue
- 30% – 50% average net promoter score

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