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Human Insight, Computer Power: What is Quantamental Investing?

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Quantamental Investing

Quantamental Investing

What is Quantamental Investing?

The world is awash in data like never before. From a person’s morning Uber ride and favorite coffee spot, to the emails sent from their office—all these activities create massive amounts of data, but also behavioral and investment insights.

Warren Buffett’s investment style exemplifies the fundamental approach: “Which companies offer the best returns?”

On the other hand, hedge fund manager James Simons of Renaissance Technologies is a notable example of the quantitative approach: “What is the best way to predict returns?”

Both techniques have one thing in common—they seek excess return from the marketplace, or what is known as “Alpha”.

Quantamental: Combining Quantitative & Fundamental

Today’s infographic from GoldSpot Discoveries outlines quantamental investing as the blending of these two styles, human insight with computer power.

Despite both methods seeking excess returns in the market, there are some key differences:

Quantitative Analysis Fundamental Analysis
  • Seeks to understand behavior by using mathematical and statistical modeling, measurement, and research
  • Aims to represent reality in terms of a numerical value
  • Can measure or value a financial instrument, and/or predict real-world events
  • Trading focuses on broad market factors (data)
  • Attempts to measure a company’s intrinsic value based on its earnings outlined in its financial statements
  • Can identify securities that are not correctly priced by the market
  • If the fair market value is higher than the market price, then the stock is undervalued and a buy recommendation is given
  • If the fair market value is lower than the market price, then the stock is considered to be overvalued and a sell recommendation is issued
Cons Cons
  1. Takes financial data at face value to assume an economic reality
  2. Lacks in offering unique insight
  1. Analyzes a small subset of the investment universe
  2. Chasing glamor stocks or holding on to losing stocks which reflect behavioral biases
Pro Pro
  • Analyzes the investment universe, quickly
  • Offers deep, proprietary insights

The arrival of advanced sensor technology and computer processing power is creating huge opportunities for capturing the complexity of human activity on a larger scale.

Could these two distinct methods be fused together?

A New Frontier for Data: Combining Man and Machine

On a larger scale, tracking and storing data can reveal economic patterns over long periods of time. For example, satellite images of a mall’s parking lot can determine the mall’s sales volume. In the finance world, software can track sentiment in earnings call transcripts, and detect word patterns of executives.

The applications of sensor technology stretch across various cases, and could improve overall performance in different industries.

Case #1: Sabermetrics

Picking a winning baseball team is a lot like investing: with limited capital, one needs to optimize player selection and performance to beat the competition. That is why the Major League Baseball Association installed StatScan in 30 ballparks for 3 seasons (2015-2017).

These radar and camera systems captured the raw skills of players in ways that were previously available to or only understood by the baseball scouts.

Scouts are the stock pickers of the baseball. They know the ins and outs of a potential major league player, and consider health, family history, body mechanics and even personalities.

Team managers can use a scout’s insight, against the vast amounts of data collected during a baseball season, to uncover the exact metrics to predict the success of the next great home run or strike-out king.

Case #2: Mineral Exploration

Resource companies spend huge amounts of money on exploration to collect data. However, the volume of data generated is too much for one geologist, or even a team to sift through in a reasonable time.

Machine learning in mineral exploration can take in training data to help identify prospective land for a mineral deposit.

Computer Power with a Human Touch

Quantamental investing seeks to understand the depth and the breadth of the investment world. The goal is to produce superior returns in the marketplace by answering two questions.

  1. What are the best metrics for predicting success?
  2. Which are the companies performing the best on these metrics?

Quantamental investing harnesses the raw power and scale of data, coupled with human insight — increasing market returns by finding the next great investment.

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Mining

Volatile Returns: Commodity Investing Through Miners and Explorers

The companies that mine or explore for metals offer additional leverage to commodity prices, creating opportunities for astute investors.

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Volatile Returns: Commodity Investing Through Miners

Investors consider gold and silver as safe haven investments. But the companies that produce gold and silver often offer volatile returns, creating opportunities for astute investors.

Volatility is a double-edged sword, particularly when it comes to commodity investing. During the good times, it can create skyrocketing returns. But during bad times, it can turn ugly.

Today’s infographic comes to us from Prospector Portal, and shows how investing in precious metals equities can outperform or underperform the broader metals market.

Capitalizing on Volatility: Timing Matters

Just like most investments, timing matters with commodities.

Due to the complex production processes of commodities, unexpected demand shocks are met with slower supply responses. This, along with other factors, creates commodity supercycles—extended periods of upswings and downswings in prices.

Investors must time their investments to take advantage of this volatility, and there are multiple ways to do so.

Three Ways to Invest in Commodities

There are three primary routes investors can take when it comes to investing in commodities.

Investment MethodBenefitsLimitations
Direct physical investment
  • Purest form of exposure

  • Intrinsic value of a commodity and physical possession
  • High transaction costs (buying, shipping, transport)

  • Costs of physical storage limit the quantity and returns
Commodity futures
  • Commodity investment without the need for storage

  • Diversification benefits and inflation hedge
  • Complex and frequent transactions

  • Risk of contango—when futures contracts are more expensive than the underlying commodity
Commodity-related equities
  • Exposure to prices without storage or transaction limitations

  • Opportunity to benefit from commodity prices and company performance
  • Returns depend on the company’s valuation

  • Companies may mitigate risk by producing multiple commodities—reducing leverage to prices

Among these, commodity-related equities offer by far the most leverage to changes in prices. Let’s dive into how investors can use this leverage to their advantage with volatile metal prices.

The Fundamentals of Investing in Mining Equities

When it comes to commodity investing, targeting miners and mineral exploration companies presents fundamental benefits and drawbacks.

As metal prices rise, the performance of mining companies improves in several ways—while in deteriorating conditions, they do the opposite:

CategoryRising Commodity PricesFalling Commodity Prices
Outlook- Improved outlook- Deteriorated outlook
Stock Price Movement- Equity growth- Equity decline
Dividend Payouts- Increased dividends- Decreased dividends
Financial Performance- Increased earnings- Decreased earnings

With the right timing, these ups and downs can create explosive opportunities.

Mining companies, especially explorers, use these price swings to their advantage and often produce market-beating returns during an upswing.

But how?

The Proof: How Mining Equities React to Metal Prices

Not only do price increases translate into higher profits for mining companies, but they can also change the outlook and value of exploration companies. As a result, investing in exploration companies can be a great way to gain exposure to changing prices.

That said, these types of companies can generate greater equity returns over a shorter period of time when prices are high, but they can also turn dramatically negative when prices are low.

Below, we compare how producers and exploration companies with a NI-43-101 compliant resource perform during bull and bear markets for precious metals.

All figures are in U.S. dollars unless otherwise stated.

Mining CompanyCompany StagePrimary Metal
Produced
Market Cap.
Oct 31, 2019
Market Cap.
July 29, 2020
Bull Market Performance
(Nov. 1, 2019-July 29, 2020)
Bear Market Performance
(Jan 02 – Dec 31, 2018)
Banyan GoldExploration/
Development
Gold$6M$40M500%-44%
Renforth ResourcesExplorationGold$8M$10M11%-10%
Auryn ResourcesExplorationGold, Copper$181M$330M60%-39%
Wesdome Gold Mines Ltd.ProductionGold$1,104M$1,885M68%110%
Monarch GoldExploration/
Development
Gold$57M$148M139%-23%
Red Pine ExplorationExplorationGold$13M$22M29%-55%
Revival Gold Inc.Exploration/
Development
Gold$27M$74M113%5%
Erdene Resource DevelopmentExploration/
Development
Gold$36M$111M222%-56%
Endeavor Mining Corp.ProductionGold$2,622M$5,874M54%-13%
Yamana Gold IncProductionGold$4,572M$8,279M87%-22%

During the bear market period, the price of gold declined by 2.66%, and despite engaging in exploration activity, most companies saw a slump in their share prices.

In particular, exploration companies, or juniors, took a heavier hit, with returns averaging -31.66%. But even during a bear market, a discovery can make all the difference—as was the case for producer Wesdome Gold Mines, generating a 109.95% return over 2018.

  • Average returns for gold producers including Wesdome: 24.83%
  • Average returns for gold producers excluding Wesdome: -17.65%

During the bull market period for gold, gold mining companies outperformed the price of gold, with juniors offering the highest equity returns averaging 153.43%. Gold producers outperformed the commodity market, the value of their equities increased 69.61%—less than half of that of exploration companies.

Silver: Bears vs Bulls

Similar to gold mining companies, performances of silver producers and explorers reflected the volatility in silver prices:

CompanyCompany StagePrimary Metal
Produced
Market Cap.
Oct 31, 2019
Market Cap.
July 29, 2020
Bull Market Performance (Nov. 1, 2019-July 29, 2020)Bear Market Performance (Jan 02 – Dec 31, 2018)
Silvercrest MetalsExplorationSilver$694M$1,449M78%117%
Pan American SilverProductionSilver$2,973M$10,550M125%1%
Golden MineralsExplorationSilver$30M$80M80%-42%
Americas Gold and SilverProductionSilver$335M$482M10%-56%
Dolly Varden Silver Corp.ExplorationSilver$28M$74M152%-32%
Endeavour SilverProductionSilver, Gold$458M$837M72%-10%

During the bear market period for silver, its price decreased by 9.8%. Explorers and producers both saw a dip in their share prices, with the equity of silver producers decreasing by 21.63%.

However, the discovery of a high-quality silver deposit again made the difference for SilverCrest Metals, which generated a 116.85% return over the year.

  • Average returns for silver exploration companies including SilverCrest: 8.32%
  • Average returns for silver exploration companies excluding SilverCrest: -27.86%

On the other hand, during the bull market period, the price of silver increased by 34.33%. Silver exploration companies surpassed the performance of the price of silver.

  • Average returns for silver producers: 69.04%
  • Average returns for silver exploration companies: 95.36%

The potential to generate massive returns and losses is evident in both cases for gold and silver.

The Investment Potential of Exploration

Mining equities tend to outperform underlying commodity prices during bull markets, while underperforming during bear markets.

For mining exploration companies, these effects are even more pronounced—exploration companies are high-risk but can offer high-reward when it comes to commodity investing.

To reap the rewards of volatile returns, you have to know the risks and catch the market at the right time.

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Mining

How to Avoid Common Mistakes With Mining Stocks (Part 3: Jurisdiction)

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Mining Jurisdictions

“Location, location, location…”

This famous real estate adage also matters in mining. After all, it’s an industry that is all about the geology—but beyond the physical aspects and the location of a mineral deposit, there are also social and environmental factors that create a mining jurisdiction.

Common Mistakes With Jurisdiction

We’ve partnered with Eclipse Gold Mining on an infographic series to show you how to avoid common mistakes when evaluating and investing in mining exploration stocks.

Part 3 of the series focuses on six signals investors can use to gauge a company’s preparedness for the jurisdictions they operate in.

jurisdictions

View the two other parts of this series so far, covering mistakes made in choosing the team as well as those made with a company’s business plan.

#1: Geological Potential: Methodical Prospecting or Wild Goose Chase?

It all starts with a great drill result, but even these can be “one-off” anomalies.

Mineral exploration is a methodical process of drawing a subsurface picture with the tip of a drill bit. A mineral discovery is the cumulative effort of years of research and drilling.

The key to reducing this geological risk is to find a setting that has shown previous potential and committing to it. Typically, a region is known to have hosted other great discoveries or shares a geology similar to other mining districts.

Signs of Methodical Prospecting:

  • Lots of geological indicators
  • Potential for further discovery
  • Sound science

#2: Legal Environment: Well-Paved Path or Minotaur’s Maze?

Now that you have identified a region with the prospective geology you think could host a discovery, a company will have to secure the permits to explore and operate any further.

However, a management team that cannot navigate a country’s bureaucracy will face delays and obstacles, costing investors both time and money.

Without clear laws and competent management, a mining company’s best laid plans become lost in a maze with legal monsters around every legal corner.

Signs of a Well-Paved Highway:

  • Existing laws encourage mining investment
  • Relatively low bureaucracy
  • Well-established permitting process
  • Legacy of mining contributing to economy

#3: Politics: Professional Politics or Banana Republics?

A good legal framework is often the outcome of politics and stable governance—however so is a difficult legal framework.

The political stability of a nation can turn on one election and so can the prospects for developing a mine. An anti-mining leader can halt a mining project, or a pro-mining leader can usher forward one.

A positive national viewpoint on mining may be enough to lure investment dollars, but local politics may determine the success of a mining company.

Signs of Professional Politics:

  • Positive history with mining companies
  • Politically stable jurisdiction
  • Rule of law respected
  • Changes in government have little effect on the mining industry

#4: Infrastructure & Labor: Modern or Medieval

Sometimes it is the discovery of valuable minerals that spurs national development, but this can also happen the other way around, in which development can encourage mineral discovery.

A mining company looking to build a new mine in a country with a tradition of mining will have an easier time. Access or lack thereof to modern machinery and trained employees will determine how much money will be needed.

That said, if a company is looking to develop a mining project in a new mining region, they must be ready to help create the skills and infrastructure it needs to mine.

Signs of a Modern Jurisdiction:

  • Developed roads to access and support operations
  • Trained labor for staffing and development
  • Well-established grid lines and back-up power systems

#5: Community: Fostering Friendship or Sowing Enemies

Mining operations have a significant impact on the local community. Good companies look to make mutually beneficial partnerships of equals with local communities.

Ignoring or failing to respect the local community will jeopardize a mining project at every stage of its mine life. A local community that does not want mining to occur will oppose even the best laid plans.

Signs of a Friendly Relations:

  • Operations bring community together
  • Local history shows support for mining
  • Understanding of local concerns and regional variety
  • Company contributes to economic growth and health of the community

#6: Environment: Clean Campsite or One Night Party

There is no way around it: mining impacts the environment and local ecosystems. But, mining operations are a blip on the radar when it comes to Earth’s timeline.

Mine sites can again become productive ecosystems, if a company has the capacity and plan to mitigate mining’s impacts at every stage of the life of a mine—even beyond the life of a mine.

Signs of a Clean Campsite:

  • Development plan mitigates environmental damage
  • Well-planned closure and remediation
  • Understand how communities use their environment

Bringing it together: ESG Investing

These six points outlined above point towards a more complete picture of the impacts of a mining project. Currently, this falls under what is labeled as Environmental, Social and Governance “ESG” standards.

Mining companies are the forefront of a big push to adopt these types of considerations into their business, because they directly affect natural and human environments.

ESG is no longer green wash, especially for the mining industry. Companies that understand and apply these concepts in their business will have better outcomes in the jurisdictions they operate within, hopefully offering investors a more successful venture.

Geology does not change on the human time scale, but bad management can quickly lose a good project and investor’s money if they do not pay attention to the other attributes of a jurisdiction.

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