By Michael Carr, Money & Markets, LLC, 2024-05-22
I've spent time with many finance professors who view financial markets as nothing more than math problems.
Many years ago, a professor from the University of Colorado Boulder had spent years researching options prices and presented his insights at an academic conference I was invited to.
After the presentation, I asked him how he applied this to trading. He confessed that he didn't understand any of the practical implications of his work. And this wasn't the first professor who understood the math behind the markets but had no idea how to use their research.
There are a few reasons for this. The most common might be “publish or perish.”
Professors must write and publish their work, or they won't get promoted. Instead, they perish in academic obscurity.
This culture leads to excellent research. However, instead of determining the next steps for their study, professors sometimes just turn to their next paper.
As I learned about this, I realized that their work held untapped investment ideas. Often, professors (and especially newly minted Ph.D.s) would publish a unique strategy or system in an obscure journal to claim they published. It's just a matter of finding these ideas…
I'm not the only one who understands this. My colleague Adam O'Dell has taken this to heart as well.
And some of that obscure research he found formed the basis of his Green Zone Power Ratings system.
Uncover the Biggest Winners With the Right Factors
Adam designed Green Zone Power Ratings to identify stocks with the potential to outperform the broad stock market.
He discovered that the biggest winners from the past shared specific characteristics. In the academic community, these characteristics are called factors.
A factor is a specific attribute that can influence a stock's performance.
Now, remember that “publish or perish” idea? Well, the drive to get a byline in an established publication has led to research on hundreds of factors. Many of them don't hold up under scrutiny.
Factors are defined mathematically. Understanding the math can help determine how likely the factor will be significant in the future.
Some factors, especially those published by professors at smaller schools, will use bad data. Good data is expensive, and not all schools can afford it. When the goal is to publish, you use what you have.
Starting with insufficient data leads to bad results, but that doesn't mean the paper won't be published. Hundreds of journals need content, and even weak findings can find a home.
The first step for an investor is to review the factor research. If it's low quality, we need to ignore it. This is a challenging step but also an important one.
That's why Adam set out to simplify things with Green Zone Power Ratings…
In building his proprietary system, Adam drilled down to only the most important factors from journals. He found six that explained the outperformance of big winners and focused on those.
Those factors are Momentum, Size, Volatility, Value, Quality, and Growth. We'll look at each in the next few weeks.
Until next time,
Mike Carr
Chief Market Technician
P.S. Everyone is bracing for NVDA‘s earnings report that's scheduled to drop after markets close today, and for good reason. The company is driving the AI mega trend to new heights. But Adam has identified an AI shock that could play out following NVDA‘s call. If you're looking for one action to take before quarterly numbers come out, click here.
