Machine Learning from Big Data for Optimal Portfolios with Highstreet Asset

Management Inc.
Charles Ling and Tanner Bohn
Data Mining (DM)/ Machine Learning (ML) Approach
- Non trivial extraction of implicit, previously unknown and potentially
useful info from data (pattern finding)
Classification and Regression
- Learn from historical inputs and outputs
- Predict outputs from given inputs
Brutal Truths about DM/ML
- To learn anything useful, you need some quides:
o Experience
Lots of data alone will not help you learn (try learning
Arabic just from thousands of books written in Arabic)
Specialized, training data is used
o Web/books, background knowledge, common sense
Using common sense, we can determine how high a ball
will bounce
How much is built into my brain, how much is learned?
(face recognition is inherent in babies)
o Good teachers
Take you from N to N+1. They know your base level and
take you to the next step
Right knowledge, best books, critical and useful training
data instead of piles of sometimes redundant and
unnecessary examples
Predicting the Market
- Efficient market hypothesis (some Nobel prize laureate said markets
are not efficient)
o Market cannot be predicted because it is not efficient
Insider trading exists, information is not always timely and
available to all investors, people make rash and emotional
decisions
o Amount of noise
We do not know if a stock is predictable. We have historical
data, but this does not always mean we can predict the
future. Take a roulette table. Even if the ball landed on the
red 5 times consecutively, the 6th will still be random.
- Valuation set subset of original data used to validate prediction
models

Advantages of ML/DM
- Combine domain (human) knowledge and data to train/improve models
- Lots of data helps with not stumbling upon incidental patterns, such as
IBMs price being correlated with carrot prices for a month
- Can select different target objectives
o Predict 1 month into future vs predict 1 year into future using the
appropriate data
- Many algorithms/models
- Can optimize target functions
- New data to update models quickly with efficient algorithms and fast
computers
Two projects that students can reach out to Charles Ling about: Highstreet
Project, GlucoGuide
Value Investing Who, What, Why?
George Athanassakos, bengrahaminvesting.ca
Value investing is finding and buying stocks trading below their implicit value
Who are Value Investors?
- Long-term investors
o Fundamental value bottom up approach
Market price vs intrinsic value (IV is not affected by short
term noise)
Competitive advantage
Management performance
Type of financing
- Short-term investors (not value investing)
o Fundamental value bottom up
Working with current price
Forecast change
Very reactive to news events, press releases,
beating/missing expectations
Key Principles
- A stock is a piece of a company. You need to understand the company
to value invest
o This implies narrow, concentrated portfolio
o Dont care about diversification
Diversification fails when it is most needed (recession)
- Be greedy when others are fearful, be fearful when others are greedy.
Market should be used, not followed
- Always look for a margin of safety
o Downside protection

Process
1. Look for possibly undervalued stocks, could be but not limited to:
a. Obscure/undesirable companies
i. Small cap
ii. Law analyst coverage
iii. Low P/E, low M/B
b. Companies with sustainable competitive advantage
2. Value intrinsically
a. Balance sheet, replacement value of assets (Net Asset Valuation
method)
b. Current earnings, earnings power (Cash Flows method)
Only in exceptional cases value investors factor in growth (when there
are sustainability, competitive advantages, and barriers to entry)
3. Stock selection
a. Margin of safety: stock price should be 2/3 of intrinsic value or
cheaper
b. Be disciplined and patient
Low P/E value stock
High P/E growth stock. High growth is inherent in high P/E. This reflects
over optimism
Value stock returns are on average greater than growth stock returns
Risk does not drive performance
- There is no evidence to support the claim that a high reward must
have a high risk
- Value portfolios fall less in reaction to bad news
- Value stocks beat growth stocks even in recessions
So, why doesnt everyone value invest?
- Your biggest enemy is you
- Humans are not perfectly rational
- Individual investors who trade more underperform in comparison to
those who do not trade often, found by study
- Institutional traders will lose jobs if a value investment is
underperforming too long, no incentive to value invest long term
Human Nature Downfalls
- Investors become risk averse when they win, and risk takers when they
lose. We sell our winners too early, we hand on to our losers for too
long. This is the pain of regret.
- Extrapolate past price trend naively

Overconfident, over optimistic

Over reactive to news
Misinterpret accidental success to be the result of skill
Tend to herd buy or sell at the same time
Herding exists among analysts as well

Advice
- Have reasonable, good intelligence
- Understand the business
- Discipline, patience
- Unless you are willing to put a lot into an investment, do not expect
much out of it
- Firmness of character
o Understand human weaknesses, see them in yourself, develop
strategies to deal with them