rudi

A Simple Momentum System for Beating the Market

Besides the 8-9% that stock markets make, one can only win what others loose. So who are the loosers when everybody outperformes by 10%?

This is what EMH supporters tell hard cases.

Matt:
"Naturally all analysis is post"
You can develop a strategy with old data, say 1900 to 1980, and then validate the strategy with the data from 1980 until today. There are still some difficulties with that but you test the model on data which you didn't use to build the model, thats essential.
I can't believe I answered that seriously.

If you guys like, we can do an experiment, just say: "I'd like to".

cheers
rudi

A Simple Momentum System for Beating the Market

Ikkyu:
Ok I read the paper a second time:

If you assume a daily standard deviation of say 1%, then you get an approximate standard deviation (ignoring fat tails, using a hundret years, etc.) of sqrt(1*250*100) = 158%. If you would like to do a simple test you would compare the difference of both charts (Exhibit 2 and 3) to twice that standarddeviation. The cumulated returns of the traded series shoud be 300% larger than the buy and hold strategy to be 95% sure, not to have an incidental phenomenon.

To get the mentioned "scientific proof", a lot more would be neccesary. One thing that did never happen is a test of the hypothesis on true validation data. i.e. you apply an (appropriate) econometric test to data, that you never used for your analysis and which you don't use a second time!

"you guys act like Mr. Faber is some kinda snake-oil salesman!! "
Exactly. Because he does marketing for his book and he is unscientific.

I bet he would never put all his money in that strategy and lever. Neither would he (and wouldn't be able to) administer larger sums of money with that strategy.

I am very willing to discuss this further, if it helps to clarify!

A Simple Momentum System for Beating the Market

Those are all ex-post analysis, aren't they? Comparing winners to loosers afterwards for sure shows an outperformance ;)

You didn't reveal any scientific proof because you can't.

cheers
rudi

El-Erian's Recommended Allocation vs. Harvard, Yale

I completely agree with you, Foust. I admit, the sentence you quoted was not the best I wrote ;)
Of course most asset classes does not mean the best allocation. To be more concrete, I like the high yield bonds in the harvard portfolio, and the higher percentage of inflation-linked bonds. Also, they have less stocks then El-Erian.
All portfolios in my opinion underweight bonds drastically!

Seafarer: The domestic stocks are in ACWI (international stocks). As far as I remember they hold 40% US stocks.
To your question: I would add stocks, which are quite unrelated to S&P500 for example. This could be "defense", like LMT. Other ideas are holdings, e.g. BRK.B and shipping, e.g. OSG. Secondly, I would add carry trades to the portfolio. Check out DBV. Since DBV is too expensive, I would make the carry trades manually via forex trading. Thirdly, I would have a look at covered calls, like BEO. If you have some more ideas, please let me know, I am alway looking for some >6% return investments, which are a stand-alone asset class, to diversify with. Back to the question: I would then substract from ACWI mostly and from real estate.

By the way, I am not just guessing these numbers, I retrieve them from statistical portfolio optimization. I can for sure tell you, that >30% stocks is way too much. 10-15% is healthy.

best regards
rudi

El-Erian's Recommended Allocation vs. Harvard, Yale

I'd find it interesting to know, how these portfolios are being created. As I am involved into asset allocation a lot, I wonder why there is so little allocation into bonds. I think the difficulty is, what expected returns to assume, when optimizing the portfolio by the best sharpe ratio (or some other ratio). As you can see, all portfolios assume >10% commodities to be appropriate. I find results like that, when I imply the empirical returns of commodities for the last years. Minding the efficient market hypothesis, there is no reason to assume more than the inflation rate plus some increased demand due to worlds economic growth, as an expected return. This would be 3-4% in my opinion. This leads me to a portfolio with maximum 5% commodities.

I conclude the harvard portfolio to be defenitely the best, since they are best diversivied, i.e. they have the most asset classes. High yield bonds and inflation-linked bonds should be included in every good portfolio.
In spite of that, the harvard portfolio could be easily outperformed (risk adjusted) by a portfolio like that:

-International Stocks (weighted by marketcap) 20% (ACWI)
-International inflation-linked-bonds 30% (TIP)
-High yield bonds 3% (HYG)
-Bonds with short avg. maturity 18% (SHY)
-International Bonds 12% (BWX)
-Commodities 5% (DBC)
-Real Estate 7% (VNQ)
-Private Equity 5% (PPE?)

Keep in mind, that private equity is correlated with stocks. So there is a lot of emphasis on stocks market in all mentioned portfolios.

The idea of having hedge funds is in my opinion misleading as well, since they are either doing some similar allocation, or they apply some strategy, which includes short selling (not sticking to efficient market hypothesis), what means, you are long and short in the same assets at the same time, just wasting fees.

By the way, there are even more asset classes, that should be added to the portfolio, but I wanted to show a portfolio, which doesnt't include more than the harvard one and is already more developed.

best regards
rudi