American in Paris

Two Examples Showing Buy and Hold Must Not Necessarily Lose

Roger,

I have to be very cynical about your article.

You say you can think of lots of people who have beaten the market. Over time period? Were they using leverage? So did they beat the market on a risk adjusted basis?

Or did they did highly leverage themselves and catch a wave during one of the long periods of upward trend? It doesn't require any real intelligence or character to ride a long period of prosperity. In fact, it is the classic story of good luck.

And what is the relevant universe of investors? Survivor bias.

I suspect for every successful investor you know, you can name ten who failed miserably. Approximately 80% of all mutual funds fail to meet or exceed their benchmark each quarter. And the mutual funds that have good five year records? Well, those records don't have any predictive failure.

So why should I assume that these benchmark beating gentlemen or women are any other than mediocrities who got lucky?

They went to the right schools. Had the right connections. Got a Wall Street job as a trader with one of the dominant firms or market makers during the beginning of a bull market when assets are steadily rising ...

The average life span of a Wall Street trader is two years. And a Wall Street trader who last five years still has the probability of blowing up in the next five years as a newbie.

Same story with mutual fund managers. Past performance is not only not a guarantee of future results, it tells you nothing about future performance ...

Those are the hard statistical results ... not 'well, I know this great guy and he did better than the market last year ..."


On Dec 24 11:24 AM Roger Nusbaum wrote:

> Not a great title, the focus of this post is more about Passive versus
> Active investing.

International Stock Investing: Diversified Timing on Country ETFs

This is silly. First of all, it smacks of data mining. There is no logic behind 10 month moving averages. What the author did is data mine until he found a moving average that backtests well.

Unfortunately, backtesting does not lead to superior forecasting. Probably because noise is mistaked for signal.

Second of all, placing equally weight means placing big bets on small countries like Singapore and small bets on big countries.

I really want to bet a big chunk of my portfolio on Singapore - a country that has to import its drinking water ...

Seeking High-Alpha, Low-Beta Countries (Part I)

So to diversify my portfolio, I should add the low beta countries such as Egypt, Malaysia, Philippines, Japan, Morocco? The lower the beta, the more the diversification.

My portfolio is leveraged. So diversification is at the center of my concerns.

Is that correct?

Seeking High-Alpha, Low-Beta Countries (Part I)

Why such a short data period? Are the betas stable over longer periods?

Did you check the error terms to see if they were white noise?

Hint: I was a very good time series analyst in a previous life.

EFA: Diversify Your Portfolio Outside the U.S.

Where do you get the forward looking PE ratios on Yahoo? I see only trailing twelve month figures.

Diversification Isn't What It Used to Be

It is not clear that the correlations are changing rather than simply your estimates of the correlations. You're changing the data set. One would be shocked not to see the sample correlations estimates change.

You might be right, but it is not obvious.

Your data sets are very small ...

- A time series statistician.