I was discussing our model with someone close to the work, and I realize the value of this effort may be hard to see.
In short, there are many economic, philosophical, or even emotional ways to pick stocks. Some try to value stocks so they can 'buy low and sell high.' Some do cash flow analysis (at least they say they do...I don't know anyone who does this personally). Some look at growth rates, debt loads, new products, placement in an industry, and social 'quality' of the firm.
Others have a fear of missing out of the next big thing (I bid on the Google IPO at $85 / share and missed out...but probably could have bought it at $135 at the open). I missed out.
We leave those ideas to the thousands of analysts employed in selecting and recommending stocks.
We have a different idea and place in the investment value chain.
We look at how stocks move together. We believe that you can pick stocks that move together in a way that cancels out some of the risk in holding those stocks. Simply put, then some stocks increase in price, the others decrease, and vice versa. However, as a group, they move with the market. If the market is going up, these stocks go up, but in more of a straight line than other stocks would.
Why does this matter? Most people don't follow the stock market every hour or even every day. They buy stocks, or mutual funds, or bonds, or invest in variable annuities as they have extra income and hold it for either retirement, or a big expense like buying a car, a house, or paying for college. For that individual investor, they only care about the price of the stocks when they want to sell them, for example when they need the money invested in those assets.
A lower amount of movement up or down, because of this ripple effect, means that it is more likely that their investment is doing well, or at least moving with the market, instead of really high or really low when they need it. Since we don't know when that is...it is better to invest in a way that reduces the downside risk when you need the money.
How do we do this? We come up with a way to score stock portfolios (we call it the Chicago Quantum Net Score, or CQNS). We search for the best portfolio with the lowest CQNS score because the variance of that group of stocks, held together, is lower than the the profit expected from holding that group of stocks.
If there were only 5 stocks to look at (say we live on a very small island with 5 companies), there would be 2^5 combinations of stocks we could hold, or 32 portfolios to check. We could do that with pencil and paper or a spreadsheet. We have found a way to look at many more companies at one time.
As of August 31, 2020, we run 64 stocks through our checker at one time, and find portfolios with expected returns that outweigh the expected variance of the portfolios. Looking at 64 stocks at one time is challenging, because we have to search from among 18,446,744,073,709,551,615 portfolios. We do this in under a minute, and have taught a quantum annealing computer to do this in around one second.
Hope this helps to clarify why we are doing this work. We help people optimize a portfolio by finding the lowest risk, highest reward combination of stocks to invest in...so they can leverage the ripple effect and have volatility cancel out.
Jeffrey P. Cohen, President, US Advanced Computing Infrastructure, Inc.
September 2, 2020
We welcome client inquiries.
Strategic IT Management Consultant with a strong interest in Quantum Computing. Consulting for 29 years and this looks as interesting as cloud computing was in 2010.