Trying to get up to speed on this volatility trendfollowing paired with stop-loss provisions (S&P Index with product coming out from Direxion).
Coverage from VIX and More, SurlyTrader, S&P Fact Sheet, and Index Methodology
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A Diversified Approach to Diversification
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Gonna try my hand at these Thomas Keller brownies – but wow, 3 sticks of butter!!
Lots of chatter about Li Lu filling in when Buffett steps down. Anyone have any Himalaya Capital or LL Investment Partners letters?
From Bloomberg article:
“Li’s original fund had annual compound growth of more than 29 percent, from inception in January 1998 through the end of 2009, the manager said in Poor Charlie’s. Another fund posted an annual compound return of more than 36 percent, Li said.”
Wiki entry here, his book here: Moving the Mountain
Transcript from Columbia 2006 speech
From Tiananmen Square (Interesting fact is that he is a former Tiger Seed….)
From a recent article by Mark Hulbert titled “Track Record of the Death Cross“:
Blake LeBaron, a finance professor at Brandeis University who has extensively analyzed various technical analysis strategies including moving averages, says that what’s happened since 1990 raises the distinct possibility that something has permanently changed in the financial markets that largely eliminated moving averages’ potential as a market timing indicator.
Supporting this possibility, according to Prof. LeBaron, is that moving average systems stopped being profitable in the foreign-exchange markets at about the same time they lost their effectiveness in timing the U.S. equity market. This increases the likelihood that whatever caused moving average systems to become less profitable in the stock market was more than just a fluke.
What might that something be? Prof. LeBaron speculates that moving averages might have been sabotaged by too many investors trying to follow then.
Ownership of personal computers skyrocketed in the late 1980s and early 1990s, and coupled with cheap online databases, those PCs enabled a much larger group of investors than ever before to discover and quickly exploit the moving average. A dramatic lowering in transaction costs at about the same time made it much easier for investors to trade on signals generated by moving averages.
The bottom line? The weight you put on the stock market’s recent death cross depends on whether you think the last two decades are a mere exception to the long-term rule — or if, instead, you believe that something indeed has permanently changed.
It is fairly simple to test this thesis that “moving averages no longer work since 1990″. Below is a chart of the S&P500 total return vs a timing system that uses the simple 50/200 day SMA crossover mentioned in the article. The portfolio moves into a Vanguard Bond mutual fund when not on a buy signal. Transaction costs and taxes are ignored.
As you can see, the conclusions the professor has made are somewhat curious. It looks like timing improves every metric from CAGR to vol and maximum drawdown reduction. It also looks like the timing model did an impressive job of sidestepping two devastating bear markets and the psychological damage that causes. (If you have followed the blog for a long time you know that moving average models work to reduce vol and drawdown NOT increase returns. Other momentum methods, as well as using leverage, can accomplish increased CAGR.)
Long time readers of the blog know that these trendfollowing methods work in other asset classes as well (A Quantitative Approach To Tactical Asset Allocation). Our second paper illustrated methods that beat buy and hold in over two thirds of all years (with less volatility and drawdown as well) including 15 out of the 20 years since 1990 (Relative Strength Strategies for Investing).
More reading here:
The Death Cross – MarketSci (and more here)
The Death Cross in S&P500 – Bloomberg
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What Did Investors Learn From the 2008 Crash?
What’s the most important finding in your recent research?
For me the biggest recent issue stems from the 2008 market meltdown that defied many of the core beliefs in the financial community—the core belief that asset classes are not correlated. When stocks go down, bonds go up. So might real estate. By holding a little bit in each basket, the investor will make steadier returns and avoid losses. We found out that all of the methods based on modern portfolio theory worked within a certain range. Outside of that range, they all failed.
Ever since the collapse, there has been a fundamental question on the table, and that is do these practices, teachings, predating 2008 still hold true today? These days you can no longer afford to ignore the extraordinary volatility. Suspenders are not enough. You also have to have a belt.
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Great new paper on pension funds and how to fix them
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Nice Montier input on all the tail risk funds (HT: BA)
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WisdomTree offering a managed futures ETF based on the DTI.
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Oh nice! Dividend and net share issuance data back to the 1920s! Report back any great findings or studies you run. (HT: Sea for inspiration).
Would love to see an update paper with Dogs of the Dow, Net Payout Yield, and other traditional stock screens compared. Gazillion posts in the archives on the topic (one here).
I’ve already completed some really interesting research – just trying to figure out what to do with it as usual…
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Some fellow was on TV this AM making forecasts as to what the market should do. I believe that it is very difficult to forecast (at least consistently and on target) an uncertain future. That having been said, I pulled up some max and minimum Shiller PE Ratios from the past 100+ years. The minimum was around 5 (1920s and 1930s) and the maximum around 45 (1999). Currently the Ratio is around 20.
Using those PE Ratios takes the S&P500, currently at 1070ish (wrote this yesterday) to 270 (down 75%) and 2405 (up 125%).
FWIW.
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Is Today Your Lucky Day? (great safe for work video)
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Tons of chatter about black swan funds and tail risk funds out there right now (which makes me think a lot of people are going to be sorely disappointed when they lose $ in these funds). We were talking about how someone should launch an ETF on the strategy about 6 months ago. Any public funds yet?
PIMCO Launches Black Swan Protection
DB Tail Risk Hedging and DB ELVIS and DB EMERALD
I have never heard of the book but ordered it anyway (hey it’s only $10).
Story from The NYT here.
From the paper in the last post:
Last, we consider whether superior performance by other professional traders also is accompanied by market under reaction. For each month and institution, we step back and calculate abnormal returns for the previous 10 years. We then form quintile portfolios based on the rank order of those returns that mimic the holdings of institutions within those quintiles. Finally, we regress monthly mimicking portfolio returns on Carhart’s (1997) four factors. Table 7 contains our results. We observe that estimates of abnormal returns in the form of Jensen’s alpha are non-decreasing and significantly positive for quintiles 4 and 5. Not surprisingly in light of Buffett’s extraordinary performance, the magnitudes are smaller than those for portfolios mimicking Berkshire Hathaway’s holdings. However, the presence of abnormal returns for past top performing institutions suggests that the market under reaction to public disclosures by professional investors is not confined to Berkshire Hathaway. Accordingly, the same arguments for overconfidence among sophisticated market participants as a plausible explanation would seem to apply.
Another great summary from CXO, this time on a new paper on tracking Warren Buffett: Overconfidence, Under-Reaction, and Warren Buffett’s Investments.
They dispel a few Buffett truisms (like his holding period – this shows the median holding period is just one year). And, no surprise to AlphaClone subscribers, you can follow his picks quarterly and still pick up a lot of alpha (they estimate over 6% per annum). That is roughly in line with the figures from AC since ’00.
A number of real money funds report their fiscal year ending June 30th. (A day does not go by where I do not get a confused reader emailing in asking why the tables in my book look funny because they miss the June fiscal year end on some tables.)
Below are some asset classes and their returns over the past year. We found that an equally weighted 5-asset class portfolio did a pretty good job of approximating the average endowment/institutional fund performance (while the Harvard and Yales of the world did about 3-4% better per annum). The recent paper from Mladina benchmarked the returns to some more granular indices with leverage – we’ll see if we can get an estimate for his model too. It looks like the funds should be coming in around mid-teens:
CalPers 11.4%
I just returned (tired and a bit bruised but otherwise happy) from a week long mountain bike trip from Telluride, CO to Moab, UT. A few pics from the iPhone below. As I play catch up, here are some of the things I’m reading and thinking about this week.
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Klarman just had another stock get bought out yesterday (ADCT). His top 10 holdings clone on AlphaClone is beating the market by 17% YTD.
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Mauldin had a new book coming out next month – Eavesdropping on Millionaires: Secrets of the World’s Wealthiest Investors. Also on the nightstand are Top Hedge Fund Investors: Stories, Strategies, and Advice and More Money Than God: Hedge Funds and the Making of a New Elite.
Tilson also has a new book coming out – Value Investing Course: Essential Strategies for Market-beating Return.
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In Politics, Sometimes the Facts Don’t Matter
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How Tax Efficient are Passive Equity Styles?
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Sovereign Defaults (and part 1 here)
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Front porch view in Telluride…
Somewhere in the La Sal Mtns…
…and the finish line in Moab/Slickrock!
