Back in the late 1980s and 1990s, algorithmic trading – or "black-box trading” – virtually changed the paradigm for stockbrokers and traders at the New York Stock Exchange. Whether this change happened for good or for ill, it is common knowledge that the process of choosing shares, bonds and other securities to meet specified investment goals is at best a tedious, arduous process for the investor.
Enter Ken Jones, founder and president of PSS (Portfolio Selection Systems) and author of PSS Release 2.0: with Digital Portfolio Theory engine, a state-of-the-art software package that makes the whole selection process easier and safer for investors. The software enables users to find optimal diversified portfolios of investments while controlling calendar, systematic and fundamental risk.
“The process of selecting a portfolio may be divided into two stages,” wrote Nobel laureate Harry Markowitz in 1952, in a paper called “Portfolio Selection.” “The first stage starts with observation and experience and ends with belief about the future performances of available securities. The second stage starts with the relevant beliefs about future performances and ends with the choice of portfolio.”
And as a student working on his Ph.D. at the University of Colorado, Jones was able to meet with Markowitz, the “Father of Finance,” at a conference in New York City. Jones explained to him that the dissertation he was writing was about defining risk in signal processing terms, which added a time dimension to his portfolio selection model, limiting Markowitz’s non-linear portfolio selection problem into linear programming.
“The dissertation was the development of the idea and then as I continued to work on it – it evolved to the point where I felt the best thing to do was to build a software package,” said Jones about the incipient stage of PSS. “So I developed a software package with the help of computer science students while I was a professor.” Markowitz encouraged him, and Jones went into business for himself. “Modern Portfolio is strictly a short-term model. However, it’s now being used by all portfolio managers,” said Jones. “This new Digital Portfolio Theory is useful for long-term investors with holding periods of more than a year. The longer the holding period, the more relevant the portfolio solution the Digital Portfolio Theory finds.”
PSS gives the investor the ability to efficiently achieve market timing and optimal diversification by applying digital signal processing to Markowitz’s classical Modern Portfolio Theory. And when the market took a nose dive – all of the investors in Jones’ theory saw their portfolios revert to the means.
“The crash of 2008 and the following great recession – which now is what we’re still recovering from – was a wishing in disguise for Portfolio Selection System (PSS),” said Jones. “Let’s say you buy a stock and sometime later the thing falls down below the point where you bought it, but with our portfolio selection system, the stock risk is counteracted– it reverts back down. It can be at different periods. It can be short-term, long-term. So, that’s included in the model.”
For more information, please visit: www.portfolionetworks.com
