McGraw-Hill

14 Introduction
reduce these costs. Electronic trading generally entails lower commissions
and less market impact than traditional trading altematives,
and is also able to incorporate more factors, including trade
urgency and market conditions, than a trader can be expected to
bear in mind. Nevertheless, traditional trading is helpful at times
when liquidity is not available electronically.
Although our investment process demands intensive computer
modeling, for us computer modeling does not mean the type
of %lack box" models used by some quantitative approaches. Selection
of variables to be modeled, for example, relies heavily on in- an
tuitive understanding of how stock prices respond to factors as such
changes in interest rates or announcements of earnings revisions. It
also relies critically on the generation of new ideas, whether motivated
by new data that open up new vistas, or by new statistical and
modeling techniques that provide better predictive tools.
Furthermore, our performance attribution process provides
transparency to the investment process. A performance attribution
system that is customized to the stock selection and portfolio construction
processes allows the manager to see how each component
of the investment engine is working. Continuous monitoring of
each portfolio determines whether selected insights are paying off
as expected. A feedback loop between performance attribution and
research helps to translate the information gleaned from performance
attribution into improvements in stock selection and to ensure
that the system remains dynamic, adjusting to the market's
changing opportunities.
Profiting from Complexity
John Maynard Keynes (1936) observed, more than half a century
ago, that the stock market is like a beauty contest in which the objective
is to pick the contestant the judges deem be the to most beautiful.
Success in such an endeavor requires more than your own
subjective evaluation of beauty. You might study historical depictions
of beauty in art and literature to amve at a more universal
standard of beauty. You might seek to adapt historical standards to
contemporary tastes by studying current movies, magazines, and
television. But it will also help to learn something about the idios
crasies of the contest judges. What characteristics does of each them