World Beta Blog

(Update:  Just realized this is the engine behind Thompson’s QA Studio.  Old post on Regime Change here).

Not sure how I have missed this blog so far:

Palantir Finance

Added to blogroll under Data Resources

This book, Jackass Investing,  arrived in the mail yesterday and despite the odd title, it is a really good book.

(Note:  In an even more interesting aside, the book was simultaneously published under the title Exploiting the Myths….I would probably have done some testing ala Ferris and goog ads for the title and or cover)

Dever touches on some topics we are very familiar with, such as the  Ten Best Days Myth and the problems with the S&P managed futures index DTI.

He also outlines some of the problems with buy and hold (such as 100% loss of wealth due to hyperinflation in Wiemar Germany and Zimbabwe (also gov private property confiscation)).    Also included is a great analysis of the importance of baseline conditions (ie the US in 1900 vs. 2000).   One of the biggest risks in investing in anything is the catestrophic risk of losing all of one’s capital.  (Take a look at the situation with Full Tilt.)

Worth a read!

Full link here:

Cambria Files to Launch its Own ETFs

So I am headed to a cookout/party for the NFL opening weekend this Sunday, and I need a good recipe for food to take over…any suggestions?

I tried making buffalo burgers with a side of kale chips the other nite with this recipe combining umami dust and smashburgers (although I substituted parm cheese for the bonito flakes).  It was kind of amazing as the umami dust tasted like poo just plain but amazing when combined with the burger….was thinking of some sous vide ribs or something but nothing decided as of yet.

And for you office pick’em leagues, here is a post from last year:  I’ve used a simple betting strategy to win our office NFL pool most weeks.   It simply fades the consensus picks.  Online books and betting websites have been publishing this data since the early ’00s, and now it looks like there is some empirical evidence that backs up this supposition from the website Sports Insight.  Now, these %ages will not help you in Vegas (you need to win roughly 55% of the time to overcome the vig) but they may help give you an edge in your office pool.  Note that since your competitors are likely following the consensus, any win will likely distance you from the rest of the field as well creating an outlier that should help to separate points from the pack.

The website lets you download the data (for a $) so you can run your own quant analysis.  Report back with any interesting findings!

Nice article here from the good folks at Research Affiliates on picking managers with high active share.

 Equity Allocations: Thinking Outside of the Box

There has been a lot of research that demonstrates funds selected based on active share outperform (and one of the reasons we like funds on AlphaClone that truly pick unique stocks like Baupost and ValueAct).  (More here on how to pick mutual funds.)

Does Morningstar calculate active share for their funds?  I can’t seem to find it but will update if I do.  In the meantime, here is an Excel add-in to calculate active share on your own (I have not tried it).

https://admainnew.morningstar.com/ExcelPlugInTemplates/index.aspx

We’ve had at least one blog reader win this, let’s get another!

The National Association of Active Investment Managers (NAAIM) has issued a call for papers for the2012 Wagner Award for Advances in Active Investment Management. $10,000 will be awarded to the author of the best paper with $3,000 and $1,000 awards to the second and third place entries.

The grand prizewinner will be invited to present his / her paper at the NAAIM annual conference: “NAAIM Uncommon Knowledge 2012,” May 7-9, 2012 at the Intercontinental Buckhead Atlanta in Georgia. Free conference attendance, U.S. air travel and lodging will be provided. Top papers will be placed on the NAAIM website and promoted nationally in the investment media.

The Wagner Award is designed to promote validity of active investment management through substantive papers that cover an innovative topic in the area of active investing. This can be either a documented and justified investing approach or an exploration into the validity of active investing. Active investing topics can involve making investment decisions using technical analysis, quantitative analysis, etc. Papers can also address related topics such as position sizing techniques, money management approaches, scaling into and out of trades, exit strategies, etc.

Papers must be of practical significance to practitioners of active investing. Submissions should be up to 30 pages in length with a required 750-1000 word abstract and must be submitted electronically to: info@naaim.org by January 1, 2012 to qualify for the competition. Awards will be announced by March 1, 2012.

As a judge of the 2010 and 2011 Wagner Awards, Chairman of the 2012 Wagner Award Committee Greg Morris’ advice to authors of Wagner Award submissions is to keep in mind Occam’s Razor (Occam stated that the simpler of two theories was probably the better theory), and the words of Albert Einstein, “In my view, such more complicated systems and their combinations should be considered only if there exist physical-empirical reasons to do so.”

“In my experience, complexity brings risk and higher probability of failure,” Morris explained. He is the chairman of the investment committee and chief technical analyst for Stadion Money Mangement.

2012 will be the fourth consecutive year NAAIM has offered the $10,000 Wagner Award. Previous winners include:

• 2011 – German Quantitative Trader and Software Programmer, Thomas Krawinkel for “Buying Power – The Overlooked Success Factor”
• 2010 – New Zealand statistician Tony Cooper, founder of Double-Digit Numerics, for “Alpha Generation and Risk Smoothing using Volatility of Volatility”
• 2009 – Justin Lent, an independent trader and quantitative consultant, for “Tactical Equity Allocation Model (T.E.A.M.)”

Download Call for Entries with competition rules

Read Prior Wagner Award submissions 

For more information, visit  www.naaim.org or contact NAAIM administrator Susan Truesdale atinfo@naaim.org or 888-261-0787.

I am going to be doing a bit of travel this fall, drop me a line if you’re around and want to meetup!

San Francisco, Sep 12-15

Tahoe area, Sep  15-18

Europe, mid/late Oct (Germany, plus maybe a few other stops not finalized yet)

NYC, Nov 7-11

Below is the 4th issue of Cambria Quantitative Research (I removed “monthly” from the title since the schedule is a bit erratic).  It was a fun paper to write, and goes to show there’s nothing new in investing.  As always, the most important rule is to always survive to invest another day.

I like to get these out as soon as I write them so if you find any errors or omissions let me know your thoughts!

As always, you can find my white papers for free on the SSRN and on the right hand bar on the blog.  Click the title below to download.  (And if you can’t figure out how to download it you click “one-click download” and make sure any pop up blockers are disabled.)

Abstract: 

Investment manias and financial bubbles have likely existed for as long as humans have been involved in financial markets. In this research piece we take a look at some of the more famous market bubbles in history and the extreme volatility and drawdowns they experienced. We then examine a simple trendfollowing approach investors could use to manage their risk. Across twelve market bubbles we find that a trendfollowing system would have improved return while reducing volatility. Most importantly, it would have reduced drawdowns significantly leading to the most important rule in all of investing – surviving to invest another day.

Remember back in March when everyone was talking about the US bond bubble?  Commentators like Taleb were making statements such as “every single human should short treasuries” and even the bond king Bill Gross was shorting them.    However, we did a post on how this was the largest drawdown for the US long bond EVER and historically that was a great time to buy into an asset class (When Things go on Sale, People Run out of the Store).

What has happened since the early 2011 lows?  The long bond zeros have had a stunning 50% rally.  Now who says bonds are boring?  (Here is an older post on bond math: Returns to bonds vs. changes in interest rates. )

Now many people are thinking about what to do with their bond holdings after this rally…it is instructive to take a look a Japan and how their bonds have performed as we think that is one of the best comparisions.  If you align the Japan series starting in 1990 and the US in 2000 you have a similar trend in interest rates.  The interesting thing to note is that after initally crossing below 2% JGBs have not risen above that ceiling for the past 10 years.  Nor has their yield curve ever gone negative in the past 20 years.  Japanese bonds have returned over 30% since initially crossing below 2% and Japanese stocks have had negative returns over the period…

Food for thought and a reminder that every asset class is great sometimes (gold, swiss franc and bonds recently) and horrible other times (financials, real estate and oil recently).

For more on the subject check out our recent research piece on pension funds and the endowment model in Japan:  ”What if 8% is Really 0%?”