Knowing When To Stand Still

by: Dorsey Wright Money Management

By Andy Hyer

There has been an enormous amount of commentary following the November 8th presidential election about exactly what a Trump administration will mean for the financial markets, both domestic and international. Trump's victory is being called one of the biggest political upsets in modern U.S. history. I think it is fair to say that the markets were probably expecting a Clinton victory, which may account, to some degree, for the wild swings in the performance of many relative strength strategies in the days following the election.

For example, see below for the performance of our Systematic RS International model compared to its benchmark, the Nasdaq Global ex US TR Index. In the immediate aftermath of the election, many of our Latin American holdings took it on the chin, perhaps in fears of the perceived protectionists policies that might be associated with a Trump administration. However, you'll notice that within a couple of days the performance of the model snapped back.

*Performance of the Systematic RS International model is non-inclusive of dividends or transaction costs. The performance of the Nasdaq Global ex US Index is inclusive of dividends, but does not include transaction costs. Period 11/8/16 - 11/22/16.

We received a number of panicked phone calls during the few days following the election when we were experiencing some sharp underperformance. "Is the model responding too slowly?" "Wouldn't it make sense to get out of all Latin American stocks now?" Those were some of the types of questions we were receiving. Our response was that we didn't know if the underperformance would continue or if we would see those positions snap back, but that we would stick with our relative strength discipline. Positions that deteriorated sufficiently would be removed from the model and replaced with stronger names. In other words, we were not overriding the model.

This does remind me of a NYT article I read a number of years ago on a related topic:

The soccer field has turned out to be a popular laboratory among economists, with penalty kicks a particular favorite.

Awarded after certain kinds of fouls, or sometimes to decide a championship match, a penalty kick pits one player against the goalkeeper. (Mano a pie instead of mano a mano, though, since the goalie is allowed to use his hands.)

Standing just 36 feet away, the kicker sends the ball hurtling at the goal at 60 to 80 m.p.h., giving the goalie just 0.2 to 0.3 second to respond. Given the speed, the goalkeeper has to decide what to do even before observing the direction of the kick. Stopping a penalty kick is considered one of the most difficult challenges in sports. Not surprisingly, 80 percent of all penalty kicks score.

For their study, Mr. Azar, along with Michael Bar-Eli, a sports psychologist; Ilana Ritov, a psychologist; and two graduate students, scanned the top leagues in the world, collecting data on 311 penalty kicks. Then they computed the probability of stopping different kicks (to the left, the right or center) with different actions (jumping left, right, or staying put) to see which one "maximizes his chance of stopping the ball."

According to their calculations, staying in the center gives the goalkeeper the best shot at halting a penalty kick - 33.3 percent, instead of 14.2 percent on the left and 12.6 percent on the right.

Yet when the group analyzed how the goalkeepers had actually reacted to these penalty kicks, they discovered the goalies remained in the center just 6.3 percent of the time.

The reason, Mr. Azar contends, is rooted in how the players feel after failing to block the ball.

Source: New York Times

When it comes to soccer and investing, when choosing what to do, sometimes the best thing is nothing. Overriding models may or may not work out in the short-run. In the long-run, adherence to disciplined and adaptive models makes all the difference.

Over the last 10+ years the we have been managing the Systematic RS International portfolio, it has certainly had periods of underperformance, but over the last 10 years it has outperformed its benchmark by 6.4 percent annually, net of all fees.

Click to enlarge

As of 10/31/16