Market wizard Marsten Parker averaged a compound annual return of 20% over 20 years trading stocks. He breaks down the quant-based investing systems he used to beat the S&P 500 for 2 decades.

  • Little-known investor Marsten Parker has been quietly beating the stock market for decades.
  • Parker is among the successful investors featured in the latest edition of “Unknown Market Wizards”.
  • Parker recently explained how he used a systematic approach to investing to dominate the market.
  • See more stories on Insider’s business page.

Marsten Parker isn’t your average investor. 

In fact, Parker beat the market for 20 out of 22 years of his investing career, often by double digits, using a systematic investment approach that he developed himself. 

But Parker didn’t spend his entire life crushing the stock market. When he graduated from high school, Parker was an accomplished violinist. He attended a conservatory in New York City in the early 1980’s, but quickly found that he would never reach the top of the pile in the classical music world.

Undeterred, Parker shifted his attention to something he found even more compelling than music: computer programming. With the personal-computing revolution just taking off, Parker moved back home to Boston, got a job at a computer store, and began writing code. 

Eventually, Parker founded his own company, which was acquired by Segue Software. Segue went public in 1996, and as Parker began watching his company’s stock every day he realized that he had money to invest, but he didn’t know how to invest it. Parker began to exchange emails with Gary B. Smith, a writer for TheStreet.com who was utilizing semi-systematic trading methods, and the two became trading partners in 1998.

The decision to become a full-time trader turned out to be a good one: Parker had no losing years between 1998 and 2012, averaging a 27% return during a period that the S&P 500 averaged only 4.42%, according to Jack Schwager’s book “Unknown Market Wizards”.

Parker’s trading approach

So what sort of systems did Parker build to beat the market so handily? 

Originally, he used a hybrid method of discretionary and systematic trading, but his programming background soon won out, and by 2000 Parker was completely systematic in his approach to trading. But he didn’t find immediate success — during a recent interview with “The AlphaMind Podcast”, Parker notes that he made plenty of rookie mistakes. 

“The first big mistake I made was when I was watching CNBC one morning and they were going on and on about what great earnings this company Miller Herman had. So I thought, oh, I better buy that. So I took probably by far the largest position I had ever taken.”

According to Parker it turned out to be a classic “sell the news scenario.” Shares of Miller Herman had already run up and the stock dropped shortly afterwards, while Parker spent several sleepless nights wondering if he should hold on to his shares for a rebound or get out while he could.

This is a familiar feeling for any new investor, and Parker decided to take the lesson to heart. Rather than trading on intuition, Parker wanted to create “some kind of a system or set of rules that I can follow” that would preclude any such mistakes in the future.

With the dot-com boom of the late 1990’s in full swing and a background in computer programming, Parker tried to find programs that allowed him to test his investing ideas. The problem was that there wasn’t any software available to help Parker build his new system, so he did what any good programmer would and created his own. 

“Back in 1998 there probably was some software, but you really could only test one symbol at a time. But it didn’t make sense to develop a system for one symbol. I basically wanted to have a trading process scan the market for different stocks each day that meets some criteria and rank them some way and take positions in some of them and have some exit rules.”

So what did Parker look for in a systematic approach to investing? For Parker, “the clearer the rules were, the more appealing it was to me. I also have a big bias towards anything that’s simple.” That was what originally attracted him to the writing of his eventual trading partner, Gary Smith, who eschewed standard technical indicators and kept his trading methods very straightforward. 

“In fact, his method didn’t use any standard indicator. It was based on simple chart patterns and breakouts. He always talked about having a really mechanical exit strategy. You would literally get in a position and then put a target and a stop. And whichever one you hit first, that was it. There was no more position management after that.”

2 keys to success

But keeping things simple can only get you so far. The true key to the success of Parker’s systematic approach was two-fold. First, Parker believes that investors have to be willing to experiment. “You just have to get in there yourself, get your hands dirty, so to speak. You have to kind of have a spirit of experimentation.” 

Parker endorses paper trading as a way to test your ideas without putting money on the line. Once you’re confident in the strategy you’ve built, establish smaller positions to test your ideas without breaking the bank. Most importantly, you have to be willing to put in the work up front in order to make sure your system won’t fall apart.

“I mean, you have to spend hours and hours and hours to try something and see how it goes and then modify it. I mean, whether you’re discretionary or systematic, it’s this feedback loop, you have to get yourself into the spirit of experimentation where you’re going to try something, see how it works.”

The second key to Parker’s success is backtesting and constant improvement. Once you’ve put together your strategy and tried it out on the open market, don’t just let it ride. Parker would constantly tweak his system by adding different parameters, comparing old strategies against new, and adjusting his methods as he went. 

“Once I got into systematic backtesting, I was like, oh, let’s add another parameter. Let’s add another parameter. You end up going through your trades, you have one losing trade. So you try to find a new rule that would have prevented that trade and add it to the system.”

While Parker’s systematic approach to investing isn’t for everyone, it is undeniably successful. Parker recognizes the value of discretionary investing, but believes that “whether you’re discretionary or systematic, you’ve got to learn some kind of a method or a process that you can repeat.”

Parker himself still invests, but these days he’s focusing on his first loves: violin and programming.

“I mean, the downside of being a software developer for me is that there’ve been many times when, rather than learning more about the markets or trying different systems, I’d rather keep improving my backtesting software because that’s actually more fun for me. Actually, I don’t even like trading that much.”

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