Key Concepts

Essential concepts for using Parallax effectively. These are the key ideas behind every score, recommendation, and insight you'll see in the platform.

Essential Concepts (5-Minute Read)

Parallax Scores: Your Investment GPS

Every stock in Parallax gets scored 1-10 across six dimensions:

Value Score: How cheap is this stock relative to its quality?

Quality Score: How strong is this company's business?

Momentum Score: Are things getting better or worse for this stock?

Defensive Score: How much downside protection does this stock offer?

Size Score: What are the risk/return characteristics based on company size?

Tactical Score: Are there short-term market dislocations creating opportunities?

Why Six Factors, Not Just One?

Single-Factor Problem: Buying only "cheap" stocks (high Value) can mean buying failing companies. Buying only "high-quality" stocks might mean overpaying.

Multi-Factor Solution: Parallax combines all six factors to avoid these traps:

• Value + Quality: Cheap companies with good businesses
• Quality + Momentum: Strong companies getting stronger
• Defensive + Value: Protection with upside potential

Why Not Just Use One Variable?

Many investors focus on single metrics like:

• "I only buy low P/E stocks" (Value focus)
• "I only buy companies with high ROE" (Quality focus)
• "I only buy stocks making new highs" (Momentum focus)

The Problem: These approaches miss crucial information. A stock might:

• Have a high P/E ratio (appears expensive) BUT
• Show strong earnings momentum AND
• Have excellent balance sheet quality AND
• Exhibit defensive characteristics during market stress

A single-factor approach would reject this opportunity, while a multi-factor system can identify and properly weight such investments.

Factor Interactions

Factors don't work in isolation - they interact with each other in complex ways:

Investment Process Concepts

Quantitative vs. Qualitative Analysis

Quantitative Analysis (Our Primary Approach):

• Uses mathematical models and statistical analysis
• Processes large amounts of data systematically
• Removes emotional bias from decision-making
• Enables consistent, repeatable processes
• Can analyze thousands of securities simultaneously

Qualitative Analysis (Traditional Approach):

• Relies on subjective judgment and interpretation
• Limited by human analytical capacity
• Subject to cognitive biases and emotions
• Difficult to scale across large universes
• Often inconsistent across different analysts

Systematic vs. Discretionary Investing

Systematic Investing (Parallax Approach):

• Rule-based decision making
• Consistent application of investment criteria
• Automated execution and rebalancing
• Quantifiable risk management
• Reduced human error and bias

Discretionary Investing:

• Manager judgment drives decisions
• Flexible interpretation of investment criteria
• Manual portfolio construction and management
• Subjective risk assessment
• Vulnerable to emotional decision-making

Risk Management Concepts

Multi-Dimensional Risk

Traditional investing often focuses on a single risk measure (like volatility). Parallax considers multiple risk dimensions:

1. Factor Risk: Exposure to systematic factors (Value, Quality, etc.)
2. Sector Risk: Concentration in specific industries
3. Security Risk: Individual company-specific risks
4. Liquidity Risk: Ability to trade positions without market impact
5. Model Risk: Uncertainty in quantitative models
6. Tail Risk: Extreme market event scenarios

Risk Budgeting

Rather than simply minimizing risk, we allocate risk efficiently across different sources:

• Intentional Factor Risk: Deliberate exposure to factors expected to generate returns
• Unintentional Risk: Unwanted concentrations or biases that should be minimized
• Diversification Benefit: Using low-correlation assets to reduce overall portfolio risk

Technology Concepts

Machine Learning in Investing

Traditional Approach: Linear relationships and fixed rules

• "If P/E less than 15, then buy"

ML Approach: Complex, adaptive relationships

• "If P/E less than 15 AND ROE greater than 15% AND price momentum positive AND sector rotation favorable, then buy with weight X"

Alternative Data

Beyond traditional financial statements and price data, we incorporate:

• Satellite imagery: Retail foot traffic, commodity inventory levels
• Social media sentiment: Consumer and investor sentiment analysis
• Corporate communications: Automated analysis of management tone and content
• Economic indicators: Real-time economic data and nowcasting models

API-First Architecture

Our platform is designed as a set of connected services:

• Modularity: Components can be updated independently
• Scalability: Easy to add new data sources or analytical capabilities
• Integration: Seamless connection with external systems
• Reliability: If one component fails, others continue operating

Portfolio Construction Concepts

Optimization vs. Rules-Based

Rules-Based Construction:

• "Top 50 ranked stocks, equal weight"
• Simple to understand and implement
• May not be optimal from risk/return perspective

Optimization-Based Construction (Our Approach):

• Mathematical optimization considering all constraints simultaneously
• Balances return expectations, risk tolerance, and practical constraints
• More complex but typically more efficient

Factor Tilts vs. Factor Timing

Factor Tilts: Consistent overweight to attractive factors

• Always maintain exposure to Value, Quality, etc.
• Weights may vary but factors always represented

Factor Timing: Attempting to predict which factors will outperform

• Higher risk/reward approach
• Requires accurate market timing
• Can lead to concentrated bets

Parallax primarily uses factor tilts with modest tactical adjustments based on market conditions.

Quick Reference: Using Concepts in Parallax

Interpreting Your Portfolio Analysis

• High Total Score (7-10): Strong overall investment opportunity
• Conflicting Scores: Common! Example: High Value + Low Momentum = cheap but declining
• Factor Balance: Avoid extreme tilts unless intentional strategy

Building Better Portfolios

• Diversify Across Factors: Don't just buy high Value or high Quality stocks
• Consider Market Context: High Momentum works differently in bull vs. bear markets
• Risk Management: Use Defensive factor during uncertain periods

Screening for Opportunities

• Preset Strategies: Good starting point, based on factor combinations
• Custom Screens: Combine factors based on your market view
• Geographic Filters: Factor effectiveness varies by region

Performance Measurement Concepts

Understanding Investment Performance

Effective investment performance evaluation requires sophisticated measurement techniques that go beyond simple returns. Here are the essential performance concepts every investor should understand:

Core Performance Metrics

Factor Attribution Concepts

Factor Contribution Analysis: Understanding how each of the six factors (Value, Quality, Momentum, Defensive, Size, Tactical) contributes to your portfolio's total return.

Example: If your portfolio returned +12.3%, this might break down as:

• Market Factor: +8.5% (baseline market return)
• Value Factor: +1.2% (from value-oriented holdings)
• Quality Factor: +1.8% (from high-quality companies)
• Momentum Factor: +0.6% (from trending stocks)
• Defensive Factor: +0.4% (from stable holdings)
• Selection Effect: +0.5% (individual stock selection)

Risk-Adjusted Performance

Beyond Simple Returns: A portfolio returning 15% with 25% volatility (Sharpe ratio: 0.6) may be less attractive than one returning 12% with 15% volatility (Sharpe ratio: 0.8).

Downside Risk Focus: Traditional volatility treats upward and downward movements equally. Measures like the Sortino Ratio focus only on negative volatility, providing better insight for most investors.

Ready to Apply These Concepts?

• Start practicing with our Quick Start Guide
• Understand the methodology: Investment Methodology
• See concepts in action: Platform Capabilities