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Portfolio Strategy

The Performance Of Process

In this guest post from Alpha Theory Data Analyst Justin Harris, he discusses how discipline impacts your investments and portfolio.

We would like to welcome our first blog post from our very own Justin Harris, Data Analyst here at Alpha Theory:

With markets more volatile than we’ve seen in years, it’s easy to give into emotional biases that affect good decision making. It may be gut wrenching to see positions lose value but avoiding mental pitfalls and following a disciplined investment process can improve returns by 4x based on our research. Here’s how we measured it.

Alpha Theory provides software and consulting to help firms build a repeatable decision process. The process driven software suggests position sizes based on an asset’s expected value and set of constraints set by the client. Essentially, users create their own rules-engine for efficiently sizing positions by determining what factors matter most. Users input their price and probability forecasts which are translated into a suggested position size by comparing it against the user’s constraints.

Across our client base, users can log into the app to see expected value changes, can update their forecasts, and can add new forecasts. We rate engagement with the app based on login count, how many of their current holdings have a price target forecasts, the freshness of those forecasts, and the correlation of the current book’s position sizes to optimal position sizes.

All these metrics would show how disciplined an investor really is. For example, users who run a book closer to the optimal position size, given the process they’ve outlined, would be more disciplined than those that ignore the position sizing recommendation. Those who log in frequently to measure deviations in position sizing can make regular adjustments to optimize the portfolios expected return.

We did a study to see how users with higher app engagement scores ranked against those with lower engagement scores. The sample size was 48 clients. The results of the study show that adherence to process and monitoring valuations more closely, as measured by forecast freshness, coverage and logging into the app, was rewarded. The table below shows that each quartile outperformed all lower quartiles.


Discipline is difficult when our natural instincts are working against us and that is why adherence to a methodology that optimizes a funds expected value using a process based, disciplined approach is key to differentiation as market turmoil attempts to shake out those less disciplined.

Portfolio Strategy
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