Alejandro Jimenez Rico (username: MrKnoot) is a Popular Investor on the eToro platform. Alejandro is a data person and enjoys using mathematics to model complex systems. This interest has led him to create an investing system and strategy in which he uses the human intellect to find companies with growth potential in their field, but a machine learning system to decide the fair price for that stock. But we’ll let Alejandro explain it in his own words. Enjoy our conversation with him!
Tell us a little about yourself!
I graduated with a BSc in Physics from Universitat Autonoma de Barcelona back in 2016 with an emphasis on the Mathematics of Climate Physics. There is something about using mathematics to model complex systems that excites me. I decided to get some experience in the banking world before returning to school and completing a Master’s degree in Financial Mathematics and another one in Mathematical Modelling and Data Science.
After finishing my degrees, I started to work as a data scientist for various industries such as Finance, Insurance, Gaming and even Pharma. I also provide consulting services for research groups; overseeing the statistical methods that are used in studies.
These experiences have given me a deep insight into how to use mathematics to model real-life complex systems, like the financial markets. Investing was always a point of interest for me, something I’d read about during lunch breaks. Then, I would work on applying machine learning algorithms to trying to understand how share prices behave. I started to work late into the night and weekends tinkering with the algorithms, developing a methodology that would be reliable and profitable.
I spent a lot of time testing the methodology, making use of the toolkits and rigour I used in research, until the results were reliable. I spent a couple of years investing my savings using this method, achieving surprisingly positive results! Therefore, I decided to put some skin in the game and make it public. I joined eToro in 2019 and started this project.
Tell us about your financial background
I hold an MSc in Financial Mathematics and have worked in the finance and insurance fields. I have also collaborated in a couple of research projects on the optimisation of financial strategies.
What is your strategy and have you changed it recently to adapt to the volatile markets?
My strategy consists of a combination of value investing and quantitative analysis. This may sound contradictory to some, but it’s actually not. Let me explain it quickly.
Value investing is all about finding good companies at a discounted price, so, if the price is below what we’d consider their “fair value,” you buy it. If you are correct, the market will eventually recognise it and the price will match the fair value, so you’ll make a profit.
To do that, you need to follow a two-step approach. First, you need to identify valuable businesses, with growing competitive advantages. Then, you have to put a price tag on them. The first part is inherently qualitative. No machine can do that for you. That’s the part of the equation where human intuition excels, while algorithms are terrible. Ideally, the objective here is to find companies with such growth potential that you can blindly buy them at whatever price they’re currently selling at. If you’re right, their competitive advantages will keep increasing and their “fair value” will also keep increasing.
Warren Buffett and Charlie Munger are the GOATs (Greatest Of All Time) at this. I’ve learned most of what I know about investing by reading what these two geniuses have been doing for decades.
The second part of the equation is about pricing. How much should we pay for the company? And here’s where I believe most people get it wrong. Nobody wants to hear this, but humans are kind of bad with numbers. We need a calculator for the simplest of operations and our intuition betrays us for anything that’s not smooth and linear. If we struggle to make sense of the correlation between two mere variables, it’s no wonder that interpreting financial statements with dozens of metrics feels like cryptography. Unless you’re an outstanding genius, an algorithm will most likely be better at calculating this stuff.
Acknowledging this, I decided that we should be smarter and use other, newer tools — deploying all of my machine learning arsenal. I developed a piece of software that automatically downloads all the filings that public companies have presented to the SEC. That data gets processed together with the historic prices of all the public companies listed in the United States. This way I can use advanced statistics to train models that can assess what would be the fair price of every company.
The combination of these two philosophies is what essentially forms my strategy. I start by filtering companies using a purely business perspective, with no numbers. Only then do I use those complicated algorithms to crunch the numbers and estimate their fair price.
Have you changed it recently to adapt to the volatile markets?
My strategy is not built for short-term investing. It’s built for long-term investing based on the two principles I mentioned: qualitative analysis and my machine learning valuation model. I am confident in my strategy and, therefore, price fluctuations over the course of a few months or even a year won’t change the way I see the market. I am confident enough in my strategy that I invest my own money based on those principles, and have been fortunate enough to see good returns.
How has eToro impacted the way you trade?
It has forced me to refine my investing strategy, which has been a very good thing for me. Before joining eToro, my ideas and experiments had never really been publicised. I’d share them with some friends and discuss with colleagues, but never in public. Joining eToro meant that I had to explain my ideas and my investing strategy to the public. The exercise of writing down and explaining the way I invest and the fundamentals of my strategy has had a very positive impact on my thought process. It has essentially refined my thinking. When people on the eToro platform began following and copying me, I developed a strong sense of responsibility. People started to take my advice seriously and put their savings in my hands. Everything became very real.
Now, I put a lot of effort into explaining my decisions publicly. People ask me why I buy this stock or why I don’t buy the other stock instead. Copiers get worried when the market is down and I have to go out and give explanations. I need to be sure of everything I do because now I have to justify all my decisions. And it is a good thing.
What was your favourite trade over the past 12 months?
It has to be Brookfield Asset Management. It is a company that contrasts the more high-tech and innovative parts of my portfolio and works in the kind of sector that tends to be overlooked by most investors. We all love discussing the hot trendy companies like Palantir or Square, and I certainly see the value in them. But part of a balanced portfolio needs to be in these boring traditional businesses that can deliver 20% yearly return without appearing in the news.
Do you invest in any asset classes outside of stocks, commodities and crypto?
Not really. Many people my age invest in illiquid assets like buying a home or purchasing a piece of land, but I find that extremely risky. If I want to get exposure in real estate, I’d rather invest in $O or $BAM rather than going all in into a single illiquid property.
What is your long-term trading goal?
In generic terms, to build wealth. More personally, so I can be financially independent. I grew up in a lower-class family, comfortable enough so that I could get an education, but never forgetting that the risk of utter ruin might be lurking around the next corner. It is a constant state of alertness and fear.
I invest so I can build enough wealth so I don’t need to worry about losing a job or having an accident that could bankrupt my family. I intend to accumulate wealth so I can become Financial Independent and be able to Retire Early (FIRE). The objective is not to stop working. The objective is to build a passive source of income so I don’t need to.
That’s my dream. And I intend for my copiers to achieve the same goal.
Any message to copiers or potential copiers?
“The stock market is a device for transferring money from the impatient to the patient.”
There will be hard and uncertain times, as have been in the past. That’s why I make a strong point of explaining all my thoughts and decisions. Conviction comes from understanding. The market often gets chaotic and confusing, and we become victims of our own emotions and fall into rushed decisions. True conviction and understanding of what we’re doing is what protects us from that. This is a journey we take together, with the same goals and the same worries. Never hesitate to reach out. I will do my best to make everything understandable.
And thank you. The trust many of you are putting in me really touches me. It is an honour that I take very seriously.
This communication is for information and educational purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without taking any particular recipient’s investment objectives or financial situation into account, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the contents of this publication.
This communication is for information and educational purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without taking any particular recipient’s investment objectives or financial situation into account, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to the past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the contents of this publication.
Cryptoassets are highly volatile and unregulated in the UK. No consumer protection. Tax on profits may apply.
This communication is for general information and educational purposes only and should not be taken as financial product advice, a personal recommendation, or an offer of, or solicitation to, buy or sell any financial product. It has been prepared without taking your objectives, financial situation or needs into account. Any references to past performance and future indications are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the contents of this publication.