About the Mechanical Investing category

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. On average, U.S. equity hedge funds are down 15% through the end of September. The long stocks in U.S. long-short hedge funds are, on average, down 31% year-to-date, while shorts are down only 20%. Tiger Global lost 4.4% in September, extending its year-to-date decline to 52%.

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Mechanical Investing uses well-defined quantitative rules. Many different MI strategies have been described and tested, including fundamental screening, timing methods, and tactical asset allocation.

"Mechanical Investing as practiced here is the use of pre-defined procedures or algorithms for choosing financial securities to invest in: deciding what to buy, how long to hold, when to sell, what to buy next. This definition is intentionally broad, meant to encompass a range of investments: mutual funds, bonds, options, futures, options on futures, ETFs, REITs, etc. Someone who is using a timing system which tells him when to go long on NDX index futures and when to go short, is practicing Mechanical Investing. Someone who is using the Fed Ratio to tell her when to move from equity funds to bonds, is practicing Mechanical Investing.

The features of a “mechanical” investing system are that the pre-defined process tells the investor:

• exactly what to buy
• when (under what circumstances) to sell
• what to buy next

Someone who is Dollar Cost Averaging by putting $100 every month into SPY is practicing Mechanical Investing: the implied holding period is “forever”, or “sell never” (or at least not until you need the money, or are old enough that your recommended asset allocation changes).

A Mechanical Investing program is specified with enough precision that anyone could execute it the same way. It is objective and repeatable. If you described your mechanical system to me and then went on vacation, I could (if I had access to the same dataset) make exactly the same trades for you that you would yourself; if I described my system to you, I could go on vacation and you could make exactly the same trades I would. The opposite of Mechanical Investing would be Discretionary Trading."
The above text is from JimZipCode’s 2006 post: MI1: Intro, Math

There is more at MI Background.


This posts brings forward the full FAQ (wiki) for Mechanical Investing. Unfortunately many of the old posts will be unavailable once TMF shuts down boards.fool.com. Those interested in preserving the history through scraping, copying here to discussion.fool.com or another location are more than welcome to do so and contact me to update the wiki.
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